Corporate Governance and Value Creation: Evidence from Private Equity

Abstract

We examine deal-level data on private equity transactions in the UK initiated during the period 1996 to 2004 by mature private equity houses. We un-lever the deal-level equity return and adjust for (un-levered) return to quoted peers to extract a measure of "alpha" or abnormal performance of the deal. The alpha is significantly positive on average and robust during sector downturns. In the cross-section of deals, higher alpha is related to greater improvement in EBITDA to Sales ratio (margin) and greater growth in EBITDA multiple during the private phase, relative to that of quoted peers. In particular, deals with higher alpha either grow their margins more substantially, and/or grow multiples more substantially, whilst expanding their revenues only in line with the sector. Based on interviews with general partners involved with the deals, we find that deals with higher alpha and higher margin growth are associated with greater intensity of engagement of private equity houses during the early phase of the deal, employment of value-creation initiatives for productivity and organic growth, and complementing top management with external support. Overall, our results are consistent with mature private equity houses creating value for portfolio companies through active ownership and governance.

Taxes, Ownership and Capital Structure

“…Tax savings in the Leveraged Buyout (LBO) deals contribute to value creation (Acharya et al, 2009;Kaplan, 1989;Renneboog et al, 2007), as in our results. A financial conduit appears as another ownership mutation that optimally exploits the tax bankruptcy trade-o↵.…”

A Bottom-Up Approach to the Risk-Adjusted Performance of the Buyout Fund Market

“…In comparison, the same ratio is approximately 35% for comparable publicly listed companies. Acharya et al (2013) documented an average debt-to-enterprise value of 44% at exit, a level consistent with the results of Cao and Lerner (2009) for reverse leveraged buyouts (LBOs); they found that the leverage remained elevated after the public offering (47% for reverse LBOs versus 28% for non-buyout-backed IPOs).…”

“…Axelson, Jenkinson, Strömberg, and Weisbach (2013) and Acharya, Gottschalg, Hahn, and Kehoe (2013) observed an average debt-toenterprise value of around 70% at the buyout transaction's inception. In comparison, the same ratio is approximately 35% for comparable publicly listed companies.…”

Public to private transactions, private equity and financial health in the UK: an empirical analysis of the impact of going private

“…Meuleman et al (2009) report that divisional buy-outs result in increased entrepreneurial activities compared to buyouts from other vendor sources. Acharya et al (2009) find for a sample of larger exited UK buyouts funded by more experienced PE firms, that included a small number of whole company PTPs but mainly divisional and secondary buyouts, that their alpha out-performance is related to greater improvement in EBITDA to Sales ratio during the private phase, relative to that of their quoted peers. Ernst and Young (2008) find for a sample of larger exited buyouts that average annual enterprise value grew significantly more than in public company equivalents, but that PTPs performed less well than divisional, secondary or private buyouts, while Ernst and Young (2009) for the UK find evidence of organic growth.…”