SUMMARY
Post-investment Value Addition To Buyouts
Degenhard Meier, RWTH Aachen, Aachen, Germany
Malte Brettel, RWTH Aachen, Aachen, Germany
Oliver Gottschalg, INSEAD, Fontainebleau, France
Principal Topic
The identification of the factors that determine success (or failure) of buyout investments has proven difficult both from a theoretical and from an empirical standpoint. The role of the investing private equity firms, especially during the post-acquisition period, has been identified as an increasingly important aspect of overall value generation in buyouts. Existing studies on the post-investment value addition by private equity firms have focused on venture capital investments, whereas little is know about whether and how private equity firms add value in buyout investments.
Method
This study takes on a system theory perspective on the relationship between private equity firm and portfolio company and identifies five distinct factors through which private equity firms can influence the performance of a buyout during the post-acquisition period: (1) the activities of private equity firms, (2) the organization of the relationship with the portfolio company, (3) the performance of information systems of the target company, (4) the experience of private equity professionals and (5) the usage of external resources.
I empirically test the performance impact of these factors using a sample of European buyouts, each of which was undertaken by a different private equity firm. The data was collected on the basis of a standardized questionnaire sent to 454 European private equity firms. More than 101 private equity firms - corresponding to a 22% response rate - agreed to participate in the survey and filled in the questionnaire for one randomly selected investment. With the help of the data obtained, a structural equation model was tested using partial least squares analysis. This powerful regression technique has the advantage over more commonly used OLS to measure unobservable variables accounting for measurement error.
Results & Implications
The results indicate that private equity firms are able to enhance the performance of their investments through hands-on involvement, high-performing information systems and qualified outside resources during their period of ownership. Contrary to common beliefs, the experience of private equity professionals was not related to post-investment value creation. In addition, the organization of the relationship with the portfolio company was not associated with value added. These findings indicate that indeed private equity firms play an important role in overall buyout value generation. This has major implications not only for our understanding of the private equity industry, but also for traditional multi-business companies who aim at creating value through non-synergistic factors. Given the similarity between LBO associations and large conglomerates, it can be argued that our findings may indicate practical ways through which conglomerates can rejuvenate their subsidiaries.
CONTACT: Degenhard Meier: Munich 80797, Germany; (T) 49-173-7133206; degenhard.meier@bain.com