Working Paper: CEPR ID: DP14676
Authors: Cagatay Bircan; Markus Biesinger; Alexander Ljungqvist
Abstract: We open up the black box of value creation in private equity with the help of confidential information on value creation plans and their execution. Plans are tailored to each portfolio company’s needs and circumstances, have become more hands-on, and vary with deal type, ownership, growth strategy, and geographic focus. Successful execution is subject to resource constraints, economies of specialization, and diminishing returns, and varies systematically across funds. Successful execution is a key driver of investor returns, especially in growth, buyout, and secondary deals. Company operations and profitability improve in ways consistent with successful execution, even beyond PE funds’ exit.
Keywords: private equity; venture capital; growth investing; secondaries; value creation; financial returns; machine learning
JEL Codes: G11; G24; G30; G32; L26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| successful execution of VCPs (P11) | company operations (L21) |
| company operations (L21) | higher investor returns (G11) |
| successful execution of VCPs (P11) | higher investor returns (G11) |
| execution of strategies (L21) | higher returns (G12) |
| operational improvements (L23) | higher investor returns (G11) |
| combination of strategies (C73) | higher returns (G12) |
| portfolio companies (G32) | lasting improvements in operational metrics (L25) |