Working Paper: NBER ID: w21133
Authors: Paul Gompers; Steven N. Kaplan; Vladimir Mukharlyamov
Abstract: We survey 79 private equity investors with combined AUM of over $750B about their practices in firm valuation, capital structure, governance, and value creation. Investors rely primarily on IRR and multiples to evaluate investments. Their LPs focus more on absolute performance. Capital structure choice is based equally on optimal trade-off and market timing considerations. PE investors anticipate adding value to portfolio companies, with a greater focus on increasing growth than on reducing costs. We also explore how the actions that PE managers say they take group into specific firm strategies and how those strategies are related to firm founder characteristics.
Keywords: Private Equity; Firm Valuation; Capital Structure; Governance; Value Creation
JEL Codes: G24; G31; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| internal rates of return (IRR) and multiples (G31) | investment performance (G11) |
| evaluation criteria used by LPs (C52) | investment decisions (G11) |
| strategies employed by PE firms (G34) | outcomes in portfolio company performance (L25) |
| categories of actions (financial engineering, governance engineering, operational engineering) (G39) | value creation processes (O36) |
| firm founder characteristics (L26) | strategies employed by PE firms (G34) |