Working Paper: CEPR ID: DP7242
Authors: Viral V. Acharya; Moritz Hahn; Conor Kehoe
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.
Keywords: Active Ownership; Activism; Alpha; Leveraged Buyouts; LBO; Management Buyouts; MBO; Management Turnover
JEL Codes: G23; G24; G31; G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher alpha (C45) | operational outperformance (L25) |
| alpha (Y60) | improvements in EBITDA/Sales ratio (G32) |
| alpha (Y60) | growth in EBITDA multiples (O49) |
| private equity ownership (G32) | deal margin (EBITDA/Sales) (G32) |
| private equity governance (G34) | operational performance improvements (L25) |