Value Creation of Private Equity

Table of Contents

1 Introduction

1.1 Motivation and Problem Definition

1.2 Research Objectives and Contributions

1.3 Course of Investigation

2 The Concept of Private Equity

2.1 Asset Class – Private Equity

2.2 Private Equity Backed IPOs

3 Literature Review

3.1 Value Creation of Private Equity Firms

3.2 Characteristics of Private Equity Backed IPOs

3.3 Performance of Private Equity Backed IPOs

4 First Empirical Research

4.1 Study Objectives

4.2 Research Questions and Hypotheses

4.3 Relevance and Contributions

4.4 Research Methods

4.5 Identification of Private Equity Backed IPOs

4.6 Data Sample

4.7 Limitations

4.8 Descriptive Statistics

4.8.1 Distribution by Market Value, and Timing of IPO

4.8.2 Distribution by Industry Sector

4.9 Sample Analyses

4.9.1 Unadjusted Buy-and-Hold Returns

4.9.2 Buy-and-Hold Abnormal Returns

4.9.3 Cumulative Abnormal Returns

4.9.4 Wealth Relative

4.10 Summary and Conclusion of Findings

5 Second Empirical Research

5.1 Study Objectives

5.2 Research Questions and Hypotheses

5.3 Sourcing of Data Sample

5.4 Limitations

5.5 Descriptive Statistics

5.5.1 Distribution by Offer Size

5.5.2 Distribution by Country

5.5.3 Distribution by Industry Sector

5.5.4 Distribution by Time Period

5.6 Research Methods

5.7 Sample Analyses

5.7.1 Unadjusted Buy-and-Hold Returns

5.7.2 Buy-and-Hold Abnormal Returns

5.7.3 Cumulative Abnormal Returns

5.7.4 Wealth Relative

5.8 Summary and Conclusion of Findings

6 Summary and Conclusion

6.1 Key Take-Aways

6.2 Further Research

Research Objectives and Themes

This study aims to determine whether private equity firms create value in a sustainable way by comparing the long-term stock performance of private equity backed IPOs with non-private equity backed IPOs, focusing on both the UK and the broader European market.

• Sustainability of value creation in private equity investments.
• Quantitative analysis using abnormal return metrics (BHAR, CAR, WR).
• Performance comparison against market benchmark indices.
• Distinction between UK-specific and broader European market outcomes.
• Evaluation of operational versus non-operational value drivers.

Excerpt from the Book

Summary of Chapters

1 Introduction: Defines the scientific problem of sustainable value creation in private equity and outlines the study's research objectives.

2 The Concept of Private Equity: Explains the private equity business model, the role of general and limited partners, and the specific nature of private equity backed IPOs.

3 Literature Review: Reviews existing research on value creation drivers and the historical performance of private equity backed IPOs.

4 First Empirical Research: Conducts a quantitative analysis of UK-based IPOs using various return metrics to test performance hypotheses.

5 Second Empirical Research: Extends the investigation to the European market to validate findings on a larger, regional sample size.

6 Summary and Conclusion: Consolidates all empirical findings and provides key takeaways regarding the sustainability of private equity value creation.

Keywords

Private Equity, Initial Public Offering, IPO, Value Creation, Buy-and-Hold Abnormal Return, BHAR, Cumulative Abnormal Return, CAR, Wealth Relative, WR, Leveraged Buyout, LBO, Stock Performance, Sustainable Value, Financial Sponsor.

Frequently Asked Questions

What is the primary goal of this research?

The research aims to determine whether private equity firms create sustainable value by investigating if private equity backed companies outperform non-private equity backed peers in the long term.

Which regions does the study examine?

The study performs two separate empirical analyses: one focusing on the UK private equity market and another on the broader European market.

What methodology is used to evaluate performance?

The study employs quantitative analysis of secondary stock price data, utilizing metrics such as Buy-and-Hold Abnormal Returns (BHAR), Cumulative Abnormal Returns (CAR), and Wealth Relative (WR).

Are private equity backed firms found to be sustainable value creators?

Generally, the study indicates that while some private equity backed firms perform well, the majority do not significantly outperform market benchmarks in the long run.

What are the core thematic areas discussed?

Key themes include the impact of leverage, the importance of reputation, the influence of IPO timing, and the differences between various industry sectors.

What characterizes the identified "key takeaways"?

The study concludes that private equity firms do not generate sustainable value, despite achieving high returns for some individual companies due to specific market conditions.

How does the study identify private equity backed IPOs?

A two-step approach was used: scanning IPO prospectuses to identify private equity involvement and cross-checking data via the Bloomberg terminal.

Does the study account for the financial crisis?

Yes, the study notes that periods such as the dotcom crisis and the financial crisis of 2007-2009 significantly influenced IPO activity and performance outcomes.

Why are CAR and BHAR both used?

Researchers use both methods because they provide different attributes; BHAR reflects the long-term investor perspective, while CAR helps visualize distributional properties over time.