Elsevier

Journal of Business Research

Volume 66, Issue 12, December 2013, Pages 2642-2649
Journal of Business Research

Real effects of private equity investments: Evidence from European buyouts

https://doi.org/10.1016/j.jbusres.2012.06.001Get rights and content

Abstract

This study investigates the effects of buyout deals on the ex-post performance of target companies. The analysis is based on a sample of 241 private-to-private buyouts involving European companies between 1997 and 2004 and a control sample of non-buyouts selected through a propensity score matching methodology. The paper explores three different dimensions of firm performance: size, profitability and productivity. The results indicate a positive impact of buyouts on the growth of total assets and of employment in target firms in the short- and mid-term. An equivalent clear pattern cannot be identified for productivity, while we estimate a lower operating profitability for buyout companies with respect to the control group three years after a deal is made. When we restrict the analysis to the sub-sample of buyout companies, we find that generalist funds negatively and significantly impact the mean ex-post operating profitability of PE-backed firms, while turnaround specialists are positively associated with operating profitability. The evidence also highlights that target companies whose lead investor is located in the same country show relatively higher ex-post profitability performance.

Introduction

The increasing role private equity (PE) plays in firms generates a considerable interest in assessing its economic impact not only in terms of financial returns for the investing funds but also on the investee companies and on society as a whole (Palepu, 1990). The recent financial crisis has further raised relevant concerns regarding the real effects of private equity transactions, with a specific attention to buyouts, which account for the largest share of investments in private equity both in the US and in Europe (Wilson, Wright, Siegel, & Scholes, 2012).

Investments by European private equity and venture capital firms increased from €47 billion in 2005 to €72 billion in 2007, but they dropped to €54 billion in 2008 and to €24 billion in 2009 following the financial crisis of 2008. Of the €79 billion funds that the private equity industry raised in 2007, €65 billion (82%) was allocated to buyouts (EVCA, 2010).

Buyout transactions are typically accompanied by renewed mechanisms of corporate governance (Meuleman, Amess, Wright, & Scholes, 2009) that better align managers’ incentives to those of investors and shareholders. According to Jensen's (1989) theoretical framework, the change in ownership resulting from a buyout should exert a positive impact on a firm's performance because PE funds have stronger incentives and capabilities to reduce agency problems and enhance firm efficiency. The US evidence (mainly focused on the first wave of buyouts occurring in the 1980s) generally points to an enhanced profitability, growth and liquidity of target firms after the buyout, while results for Europe are more mixed and largely limited to the United Kingdom (Amess and Wright, 2007, Guo et al., 2011, Kaplan, 1989, Wilson et al., 2012).

This study investigates the effects of buyout deals on the ex-post performance of target companies. The analysis is based on a sample of 241 private-to-private buyouts involving European companies between 1997 and 2004 and a control sample of non-buyouts selected through a propensity score matching methodology. The paper explores three different dimensions of firm performance: size, profitability and productivity. The results indicate a positive impact of buyouts on the growth of total assets and of employment in target firms in the short- and mid-term. An equivalent clear pattern is unidentifiable for productivity, while we estimate a lower operating profitability for buyout companies with respect to the control group in the three years after a deal is made. When we restrict the analysis to the sub-sample of buyout companies, we find that generalist funds negatively and significantly impact the mean ex-post operating profitability of PE-backed firms, while turnaround specialists associate positively with operating profitability. The evidence also highlights that target companies whose lead investor is located in the same country show relatively higher ex-post profitability performance.

The paper is organized as follows. Section 2 introduces research hypotheses and discusses them in light of extant literature. Section 3 provides a description of the dataset and of the matching process. Section 4 presents the empirical results. Section 5 concludes.

Section snippets

Buyouts and the performance of PE-backed firms

Prior research has relied consistently on agency theory as the theoretical underpinning to explain restructuring choices generated by buyouts as well as the consequent performance outcomes of portfolio companies (Bruton et al., 2002, Palepu, 1990). Jensen (1989) recognizes that in modern corporations, the separation of ownership and managerial control generates a wide range of agency problems, such as ineffective internal oversight, managerial entrenchment and operational inefficiency. The

Data

We analyze a sample of European firms that underwent buyouts from 1997 to 2004. Data on buyouts are derived from two different commercial databases: Venture Source (from Venture One) and Venture Expert (from Thomson Financial). Both databases contain data that are largely self-reported by private equity firms and/or by the companies in which they invest. Dataset providers also receive much of their information from limited partners (Mathonet & Meyer, 2007).

The study includes analyzing only

Econometric results

In this section, we present a set of OLS model specifications used to analyze the relationship between buyout deals and the ex-post performance of target firms. We first compare the ex-post performance of buyout companies and matched controls along three dimensions: size, profitability and productivity. We then restrict the sample to buyouts and investigate the impact of the specific characteristics of the investing funds on the ex-post profitability of these companies.

Conclusion

This study investigates the extent to which private-to-private European buyout transactions impact the performance of target companies for up to three years after the deals are made. The performance metrics include size, profitability and productivity. We use a control sample based on propensity score matching and account for several features that characterize investing funds.

The results of the analysis stress that firms undergoing a buyout outperform non-buyout companies in terms of asset and

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    The authors acknowledge financial support from the STAREBEI project promoted by the European Investment Bank. They thank Monjanel Gauthier (European Investment Fund) for his helpful advice and Secondo Rolfo (CERIS-CNR) for providing Amadeus data. The authors gratefully acknowledge Federico Munari, Massimo Colombo, Giancarlo Giudici, Reinhilde Veugelers, and Luigi Buzzacchi for comments on earlier versions of the paper. The authors are indebted to two anonymous referees for detailed and helpful reports and to Teo Croce for excellent research assistance.

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