Private Equity Performance: What Do We Know? HARRIS, ROBERT S.; JENKINSON, TIM; KAPLAN, STEVEN N.
The Journal of finance (New York),
October 2014, Volume:
69, Issue:
5
Journal Article
Peer reviewed
Open access
We study the performance of nearly 1,400 U.S. buyout and venture capital funds using a new data set from Burgiss. We find better buyout fund performance than previously documented—performance has ...consistently exceeded that of public markets. Outperformance versus the S&P 500 averages 20% to 27% over a fund's life and more than 3% annually. Venture capital funds outperformed public equities in the 1990s, but underperformed in the 2000s. Our conclusions are robust to various indices and risk controls. Performance in Cambridge Associates and Preqin is qualitatively similar to that in Burgiss, but is lower in Venture Economics.
We explore the process of professionalization pre- and post-buyout (MBO) or buyin (MBI) of former private family firms using longitudinal evidence from six UK family firms undergoing an MBO/I in ...1998. Professionalization behaviour was monitored up to 2014. Previous studies have conceptualized professionalization as a threshold to be attained. We demonstrate that professionalization is a complex process occurring in waves, triggered by changes in firm ownership and management. Waves of professionalization converge during the MBO/I process. Buyouts provide a funnelling mechanism enabling diverse control systems to be standardized. Post-MBO/I, divergence in the professionalization process reoccurs contingent on firm-specific contexts. Professionalization focuses on operations when stewardship relationships predominate, but on agency control mechanisms when there is increased potential for agency costs. Buyout organizational form is an important transitory phase facilitating the professionalization process. Professionalization is not a once-for-all development stage.
The management buyout is an important exit strategy for small business owners. Negotiations of buyout deals have received little research attention to date. This is surprising given buyout ...negotiations' complexity giving rise to multiple issues that require consideration and often conflicting interests of deal parties. This paper examines perceived bargaining power in buyout negotiations between private equity (PE) firms and current owners who sell their business. We identify competition, expertise, and time pressure as key antecedents of PE firms' perceived bargaining power and examine the moderating effect of PE firms' industry and size specialization in buyout negotiations. We use a sample of 176 respondents who each report on a particular buyout deal for a PE firm. The majority of respondents are seasoned PE professionals who held managing director or investment director positions.
Research Question/Issue
We investigate outside director departures prior to management buyout offers (MBOs). In these transactions, managers have both an information advantage and incentives to make ...a lowball offer to shareholders. Outside directors can safeguard against managerial self‐dealing by negotiating for the best terms for public shareholders from either management or another bidder.
Research Findings/Insights
It is typical that outside directors stay on the board through an MBO offer as MBOs are less likely to have changes in directors—either joining or leaving—relative to a control sample. After controlling for endogeneity as well as firm and director characteristics, we find that outside directors are more likely to leave when the offer is later contested. We do not find any evidence that departing directors are replaced by new outside directors who ensure shareholders get a higher premium nor do we find any evidence that the board acts as a public auctioneer. We also find that outside directors are more likely to depart when the buyout contest is longer. Our findings show that outside directors provide a weak internal monitoring mechanism as they leave precisely when shareholders need their expertise the most.
Theoretical/Academic Implications
Our results contribute to research that supports the notion that outside director departures are symptomatic of board weakness. The results of our study support the contention of other researchers that outside directors often fail to monitor managers.
Practitioner/Policy Implications
Our study offers useful information to M&A investment banking advisors and leverage buyout analysts by showing the mechanisms under which director turnover can affect the value and the outcome of MBOs.
To address the question as to whether managers intending to purchase their company by means of a levered buyout transaction manipulate earnings in order to buy their firm on the cheap, we study the ...different types of earnings management prior to the transaction: accrual management, real earnings management, and asset reserves revaluation. To identify the management engagement incentives, we contrast earnings management in management buyouts (MBOs) with that in (i) institutional buyouts (IBOs) and (ii) non-buyout firms. We find: (i) strong negative earnings management via both accrual and real earnings activities in MBOs supporting the above management engagement incentive, (ii) modest negative accrual management and insignificant real earnings manipulation in IBOs, and (iii) positive earnings management in non-buyout firms. Asset revaluation in MBOs is not a frequently used channel. We do not find evidence that a high external borrowing need in the levered transactions mitigates the downward earnings manipulation in MBOs. The implementation of the revised UK Corporate Governance Code of 2003 has somewhat reduced the degree of both accrual earnings and real earnings management in MBOs, but increased the relative use of real earnings management as this may be harder to detect.
•Prior to an MBO, negative earnings management (understating earnings prior to the deal) occurs.•MBOs are subject to more negative manipulation than institutional buyouts (IBOs).•Earnings manipulation occurs both by accrual and real earnings management.•In non-buyout firms, positive earnings management happens because it affects managers' bonuses.•Competing incentives affecting degree and size of earnings manipulation are studied via an IV approach.
A long-standing controversy is whether leveraged buyouts (LBOs) relieve managers from short-term pressures from public shareholders, or whether LBO funds themselves sacrifice long-term growth to ...boost short-term performance. We examine one form of long-run activity, namely, investments in innovation as measured by patenting activity. Based on 472 LBO transactions, we find no evidence that LBOs sacrifice long-term investments. LBO firm patents are more cited (a proxy for economic importance), show no shifts in the fundamental nature of the research, and become more concentrated in important areas of companies' innovative portfolios.
Do Buyouts (Still) Create Value? GUO, SHOURUN; HOTCHKISS, EDITH S.; SONG, WEIHONG
The Journal of finance (New York),
April 2011, Volume:
66, Issue:
2
Journal Article
Peer reviewed
Open access
We examine how leveraged buyouts from the most recent wave of public to private transactions created value. Buyouts completed between 1990 and 2006 are more conservatively priced and less levered ...than their predecessors from the 1980s. For deals with post-buyout data available, median market- and risk-adjusted returns to pre-(post-) buyout capital invested are 72.5% (40.9%). In contrast, gains in operating performance are either comparable to or slightly exceed those observed for benchmark firms. Increases in industry valuation multiples and realized tax benefits from increasing leverage, while private, are each economically as important as operating gains in explaining realized returns.
Management buyouts (MBOs) and buyins (MBIs) are an alternative solution to the private family firm ownership succession issue. It is typically assumed that MBO/MBIs of private family firms progress ...more smoothly than other types of MBO/MBI, due to fewer information asymmetries and closer relationships between the parties involved. This study provides novel evidence from eight private family firms that had selected an MBO or an MBI. The myths surrounding the succession issues of family firms who have selected an MBO/MBI are specifically explored. The MBO/MBI process is examined within an agency theory framework with particular emphasis on the balance of information and the relationships between vendors and purchasers. Complementary theoretical frameworks relating to trust and negotiation behavior are utilized. Interviews were held with former family owners as well as the current members of the MBO/MBI teams. Triangulation of opinions was considered, thus strengthening the validity of presented results. The case studies confirmed that information asymmetries were widespread, providing opportunities for the parties with more information to negotiate a price and structure the deal to their advantage. Good relationships and trust between the vendor and MBO/MBI team mitigated information asymmetries. Where the MBO/MBI was part of the family firm's long-term strategy, there were fewer information asymmetries, and knowledge transfer was facilitated.
•Management buyouts are more likely to occur if economic policy uncertainty increases.•Economic policy uncertainty provides an opportunity for insiders to capitalize on private ...information.•Management buyouts are associated with more favorable buyout prices as well as greater post-buyout operating improvements than institutional buyouts during times of high economic policy uncertainty.
Using a sample of 18,225 global buyouts, we find that management buyouts (MBOs) are significantly more likely to occur if economic policy uncertainty (EPU) increases. This finding is consistent with the idea that EPU provides an opportunity for insiders to capitalize on private information and time the market. Further results suggest that market timing pays off on average. We find that MBOs achieve more favorable buyout prices and greater post-buyout operating improvements than institutional buyouts during times of high EPU. Our results hold when exploiting close national election races as a quasi-natural experiment for EPU.
Critics claim that short-term profit orientation and high deal price strategies of private equity (PE) firms can negatively affect the ability of management buyouts to initiate and sustain ...entrepreneurial management. This study investigates this claim by comparing effects of majority PE backed and other buy-outs at different levels of financial leverage on post buy-out increases in entrepreneurial management. We propose that PE can be used as an organizational refocusing device that simultaneously increases entrepreneurial and administrative management. We find that majority PE-backed buy-outs significantly increase entrepreneurial management practices. Furthermore, the increased financial leverage positively affects administrative management in management buy-outs. However, the effect of high financial leverage is larger for majority PE-backed buy-outs. These results support the notion that PE firms help buy-out companies develop ambidextrous organizational change: i.e. simultaneously develop entrepreneurial and administrative management practices. The findings have important implications for practitioners and policy makers.
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