Value creation in private equity backed companies: European evidence over the last private equity boom

Abstract

I examine deal-level data on 135 private equity transactions completed in Europe during the period from 2003 to 2012. By deploying a proprietary dataset combining cash flow data exchanged between a prominent limited partner and private equity funds with deal-level data the thesis assesses the determinants of value creation in the period over and after the leverage buyout boom.

The evidence suggests that sales growth and margin improvements over the holding period have been significant positive drivers of the equity returns in 2003-2012, while no evidence for leverage effects over the same period is found. The thesis focuses on applied means of value creation during the holding period without controlling for pre-transaction performance. Therefore based on the provided evidence limited partners can be encouraged to focus on PE funds that are able to generate operational improvements in their portfolio companies.

Moreover, the evidence suggests that entry transaction type has a significant effect on the realised returns, namely corporate spin-offs have significantly outperformed other entry transaction types for the full sample. Weak evidence for negative association between holding period and equity returns is found for post-recession sub-sample. Furthermore, assessment of transactions exited in the pre- and post-recession periods reveals that explanatory variables have statistically significant explanatory power only for post-recession sub-sample indicating that different means for value creation may function and be applied in different economic cycles.

While providing new recent evidence on the different means of value creation in European private equity transactions the thesis also addresses the large variance in the scope and way of reporting to limited partners by the PE funds. Given the highly significant evidence on the importance of some value drivers over others, limited partners and other stakeholders are encouraged to enhance the level and scope of PE fund reporting as well as make it more uniform in order to enable more reliable and efficient performance measurement across transactions undertaken by different PE funds to ultimately generate efficient performance measures that support re-investment decisions.