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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Measuring value creation in private equity investments: an empirical analysis of deal-level data |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 67 |
| Date | 2019 |
| Abstract Text | Using a unique, hand-collected data set of 347 realised leveraged buyouts completed between 1989 and 2019, this thesis deconstructs the value creation mechanism by PE firms on the level of individual deals into three main value creation drivers and examines those in relation to the returns generated to private equity investors. We find that profitability improvements on portfolio companies, were they the core focus for PE managers during the holding period, would lead to substantially higher returns on investment. Nonetheless, we find multiple expansion to be a fundamental factor in explaining PE returns from our data set. Furthermore, our study suggests the largest contributor to operational improvements in LBOs remains sales growth, which is likely a result of increased M&A activity as opposed to organic growth. PE-backed companies in fact appear to be more highly leveraged and enjoy far thinner margins relative to their peers in the industry. With regard to operational improvements, we find a strong influence of assuming a controlling stake in the portfolio company on its sales growth during the holdin period. Interestingly, the same could not be concluded for margin growth, which we believe is likely due to the complexity and higher risk involved in improving profitability. In terms of valuation multiple expansion, our findings contradict the assertion that PE firms are prone to overpay for deals amid increasing competition and dry powder. We find entry multiples for PE-backed companies to be significantly lower than the trading multiples of their industry peers. In addition, we provide evidence that availability of cheap debt increases entry multiples for PE funds, which is to be anticipated given the current environment. |
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