International Evidence on Value Creation in Private Equity Transactions

• Author: Reiner Braun,Ann‐Kristin Achleitner,Benjamin Puche
• Published date: 01 December 2015
• DOI: http://doi.org/10.1111/jacf.12152
• Date: 01 December 2015

In This Issue: German Capital Markets and Corporate Governance

Law and Corporate Governance: Germany within Europe 8Klaus J. Hopt, Max Planck Institute for Comparative and

International Private Law, Hamburg, Germany

Corporate Governance in Germany: Recent Developments and Challenges 16 Marc Steffen Rapp, Philipps Universität Marburg,

and Christian Strenger, HHL Leipzig Graduate

School of Management

The Survival of the Weakest: Flourishing Family Firms in Germany 35 Julian Franks, London Business School, Colin Mayer,

Saïd Business School, University of Oxford,

Hannes F. Wagner, Bocconi University

The Bug At Volkswagen: Lessons in Co-Determination, Ownership, and

Board Structure

27 Charles M. Elson, University of Delaware, Craig K. Ferrere,

Harvard Law School, and Nicholas J. Goossen,

University of Delaware

Corporate Finance in Germany: Structural Adjustments and Current Developments 44 Wolfgang Bessler, Justus-Liebig University Giessen and

Wolfgang Drobetz, Hamburg University

The Cross-Listing and Cross-Trading of German Companies in the U.S. and

of Foreign Companies in Germany

58 Wolfgang Bessler, Justus-Liebig University Giessen,

Fred R. Kaen, University of New Hampshire, and

Colin Schneck, Justus-Liebig University Giessen

Stock Liquidity and the Cost of Equity Capital in Global Markets 68 Yakov Amihud, New York University, Allaudeen Hameed,

National University of Singapore, Wenjin Kang, Renmin

University of China, and Huiping Zhang, JCU Singapore

Cash Equity Markets in Germany 75 Peter Gomber, Goethe University

Bund for Glory, or It’s a Long Way to Tip a Market 81 Craig Pirrong, University of Houston

Derivatives and Repurchase Markets in Germany 88 Thomas Book, CEO, Eurex Clearing

Transaction Costs for German Institutional Investors:

Empirical Evidence from Stock Markets

96 Lutz Johanning, WHU—Otto Beisheim School of Management,

and Marc Becker and Arndt Völkle, XTP GmbH

International Evidence on Value Creation in Private Equity Transactions 105 Benjamin Puche, Reiner Braun, and Ann-Kristin Achleitner,

Technische Universität München, Center for Entrepreneurial

and Financial Studies

VOLUME 27 | NUMBER 4 | FALL 2015

APPLIED CORPORATE FINANCE

Journal of

Journal of Applied Corporate Finance • Volume 27 Number 4 Fall 2015 105

International Evidence on Value Creation in

Private Equity Transactions

* Contact information: benjamin.puche@tum.de, reiner.braun@tum.de, ann-kristin.

achleitner@wi.tum.de

1. Ulf Axelson, et al., “Borrow Cheap, Buy High? The Determinants of Leverage and

Pricing in Buyouts,” The Journal of Finance, Vol. 68, (2013); Shourun Guo, et al., “Do

buyouts (still) create value?,” The Journal of Finance, Vol. 66, (2011); Josh Lerner, “The

future of private equity,” European Financial Management, Vol. 17, (2011); Steven N.

Kaplan and Antoinette Schoar, “Private Equity Performance: Returns, Persistence and

Capital Flows,” The Journal of Finance, Vol. 60, (2005).

2. See Reiner Braun, et al., “How Persistent is Private Equity Performance? Evidence

from Deal-Level Data,” working paper, (2015); Kaplan and Schoar (2005), cited earlier

for evidence on fund performance and Viral V. Acharya, et al., “Corporate Governance

and Value Creation: Evidence from Private Equity,” The Review of Financial Studies, Vol.

26, (2013); Ann-Kristin Achleitner, et al., “Value creation and pricing in buyouts: Em-

pirical evidence from Europe and North America,” Review of Financial Economics, Vol.

20, (2011); Guo, et al. (2011), cited before; Ann-Kristin Achleitner, et al., “Value Cre-

ation Drivers in Private Equity Buyouts: Empirical Evidence from Europe,” The Journal of

Private Equity, Vol. 13, (2010); Erkki Nikoskelainen and Mike Wright, “The impact of

corporate governance mechanisms on value increase in leveraged buyouts,” Journal of

Corporate Finance, Vol. 13, (2007) or Steven N. Kaplan, “The Effects of Management

Buyouts on Operating Performance and Value,” Journal of Financial Economics, Vol. 24,

(1989) for deal-level evidence on value creation.

3. See Robert Harris, et al., “Are Too Many Private Equity Funds Top Quartile?,” Jour-

nal of Applied Corporate Finance, Vol. 24, (2012) on the difculty of collecting data.

P

rivate equity (PE) has become a major focus of

nancial research since the late 1980s.1 One of

the main outputs of such resea rch is a large body

of evidence on the performance of PE funds.

But to understand the per formance of such fund s and the

returns they have provided their li mited partners, one must

understand how value is created in the individual portfolio

companies acquired by the f unds. And since Steven Kaplan’s

study of the rst wave of large ($100 million or greater) U.S.

LBOs in the late 1980s, there have been remarkably few

studies of the value created by individua l transactions and

portfolio companies. Wh at studies of this kind that we have

focus mainly on speci c segments of the leveraged buyout

(LBO) market, such as par ticular geographic regions (such

as the U.S. or North America) or tran saction sizes.2 In addi-

tion, we also know little about the ee cts of the nancial crisis

on the performance of PE portfolio companies. Bot h of these

gaps in the research c an be attributed to the scarcity of data

and the resulting lim ited sample sizes available for research.3

In this art icle, we present the methods and nding s of

our recent analysis of va lue creation in a sample of over 2,000

LBOs that includes deals of a ll sizes that were transac ted in 45

dierent countries on six continents. For each of these t rans-

actions, we provide estimates of the va lue created, the split of

this value creation into various na ncial, market, and opera-

tional eects, a nd the relative contribution of these eects to

the total value created. Our a nalysis also takes into account

dierences bet ween regions, industries, transaction siz es, and,

most importantly, periods of time.

In so doing, we use a simple methodology to model value

creation that is commonly used a mong general partners (GPs)

and limited partners (LPs) in the industry. Our proprietary

sample of 2,029 private equity investments executed bet ween

1984 and 2013 includes complete data on key na ncial infor-

mation both at the time of the acquisition by the private

equity rm (entry) and at the sale of the company (exit). e

sample also includes monthly gross ca sh ows to the private

equity rms before ca rried interest and fees, which en ables

us to compute precise gross returns for each investment and

to capture additional capita l injections as well as d ividend

payments during the holding period.

In addition, we use a widely accepted methodology th at

divides the total va lue created as a percentage of total capital

invested into the following four components: (1) the contri-

bution from leverage (or “nancial risk”); (2) increases in

operating cash ow (as measured by increa ses in EBITDA);

(3) growth in the transac tion multiple; and (4) a Free Cash

Flow (FCF) eect that is est imated by the reduction in net

debt over the holding period. EBITDA is further split into

sales and marg in contribution. For each of these four sources

of value creation, we calculate both absolute numbers (again,

in terms of either a percentage or multiple of invested capital)

and their relative contribution to total value created.

With the help of this unique large-sca le data set with

such detailed information, we were able to gain insig hts

into the value creation of buyout transactions a fter sorting

them in four dierent ways: (1) by region of the investment;

(2) by industry; (3) by transaction size; and (4) by year of

exit. Analy zing the sample across these market segments

gives us a more detailed understanding of the underlying

drivers of value creation. e regional view allows explo-

ration of whether the dierently developed PE markets in

North America, Europe, a nd Asia display dierent levels

and sources of value creation in the tra nsactions. e target

company’s industry also has t he potential to aect va lue

creation since the prevalent business models a nd the nature

by Benjamin Puche, Reiner Braun, and Ann-Kristin Achleitner, Technische Universität München,

Center for Entrepreneurial and Financial Studies