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.

Secondary Buyouts: Operating Performance and Investment Determinants

“…In particular, median sales increase by about 50%, EBIT and EBITDA increase twofold, and cash flows increase by three times, this time with significance both in means and medians. These results are strongly supportive of the arguments in Acharya et al (), Boucly et al (), and Kaplan and Stromberg () that PE investors stimulate growth in target companies through superior managerial skills.…”

“…In any of these cases, I should observe significant differences in the fund/management company characteristics. In addition, the performance of the target companies is certainly associated with some superior skills by the PE sponsor as demonstrated in Acharya et al (), Boucly et al (), and Kaplan and Stromberg (). Skills are most likely to build up over time.…”

Money secrets: How does trade secret legal protection affect firm market value? Evidence from the uniform trade secret act

“…Importantly, either the level of ex ante risk or the expected value of a target firm may correlate with the change in the target's market value or with policymakers' effort to enact UTSA—for instance, to protect riskier or more valuable businesses better. To account for such potential confounders, we reestimate the baseline specifications, while also matching the treatment and control firms on the basis of ex ante investment size, which proxies for the target's ex ante value, and industry resource–value uncertainty, which proxies for the target's business riskiness (Acharya et al , ; Castellaneta and Zollo, ; Shepherd, ). We used a coarsened exact matching (CEM) approach as developed by Iacus, King, and Porro () to perform a match between treatment and control.…”

Evidence of governance arbitrage by private equity sponsors

“…The findings within are consistent with Acharya et al . () who found that substantial private equity postacquisition value comes from improving operating performance and human skills. The results highlight that the role of current‐day private equity differs to the financial engineering emphasis of earlier leveraged buyouts of the 80s.…”

“…Acharya et al . () found that nearly one‐third of private equity's postacquisition value came from improving operating performance and human skills. An alternative way to interpret this finding is that public governance has, in certain settings, sufficient levels of inefficiency to attract private equity sponsors.…”