Corporate Governance and Value Creation: Evidence from Private Equity

Finance

IFA Working Paper

2008

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 out-performance of the deal. The alpha out-performance is significant on average and robust during sector downturns. In the cross-section of deals, alpha is related to enterprise-level operating performance, especially to greater improvement in EBITDA to Sales ratio (margin) during the private phase, relative to that of quoted peers. In particular, out-performing deals either grow their margins substantially, or grow margins somewhat whilst expanding their revenues substantially. A significant portion of the margin improvement is realized in the early phase of out-performing deals. Based on interviews with general partners involved with the deals, we find that out-performing deals are associated with top mangement turnover during the early phase of the deal, employment of value-creation initiatives for productivity and organic growth, high intensity of engagement of private equity houses, and compementing top mangement with external support. Overall, our results are consistent with mature private equity houses creating productive growth for portfolio companies through active ownership and governance.

leveraged buyouts (LBO); management buyouts (MBO); active ownership; activism; management turnover; alpha

Institute of Finance and Accounting

FIN 482

IFA Working Paper

No