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Alternative Investments

Sarah Kumpf

Listed Private Equity: Investment Strategies and Returns

ISBN: 978-3-8428-8948-4

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Produktart: Buch
Verlag: Diplomica Verlag
Erscheinungsdatum: 01.2013
AuflagenNr.: 1
Seiten: 92
Abb.: 18
Sprache: Englisch
Einband: Paperback

Inhalt

The increasing popularity of private equity (‘PE’), and especially leveraged buyouts in the late 1980s, established a novel area of research in these investments. First, research concentrated on the taking private of large corporations in the US. In his most significant paper, Jensen (1989) claimed that PE firms which function as activist investors incentivize the management of their portfolio companies to maximize value, and concluded that in the long run, private companies, owned by PE firms, would outperform firms under public ownership. Others argued that PE firms simply buy companies at a discount by exploiting private information about the takeover targets, or reduce tax spending by highly leveraging the portfolio companies. Today, many PE firms are publicly listed, and the greater transparency and availability of information about these listed PE firms, offers a unique basis to conduct research. Current research in the field of PE, and buyout investments leads to the question, in how far PE firms generate value by means of an investment into a portfolio company. Usually, drivers of value generation are classified into governance, financial and operational capabilities of PE firms. In addition to these direct drivers of value, investment and portfolio management strategies differ with respect to the ways of acquiring and divesting a portfolio company, and these different entry, and exit channels can in turn, offer distinct potential for value generation. Therefore, this paper first presents the investment and portfolio management strategies of PE firms. The strategies include different types of acquisitions, and exits, as well as the associated drivers of value creation. The second objective is to establish a link between different investment strategies, and the expected returns generated on the investor level. Listed PE allows analyzing the market’s reaction to the announcement of investments, and divestments within an event study, and hypotheses were derived for both of these types of events. Thereupon, subsamples of announcements are constructed, dependent on the way of entry and exit announced as well as on strategic decisions implemented in the portfolio company that is to be disposed.

Leseprobe

Textprobe: Chapter 2.5.3, Strategic decisions: Finally, exit success and thus returns to investors might only be indirectly associated with the exit channel but the strategic decisions made during the holding period rather influence the exit success. Strategic decisions are in the following defined as either growth strategies or strategies of refocusing on core products or divisions. Growth strategies can be subdivided into organic and inorganic, transactional growth (‘buy-and-build’) strategies. In an early study, Singh (1990) notices that portfolio companies exited via an IPO had shown high sales growth suggesting that growth strategies create more value if IPOs are the preferred exit channel. Especially buy-and-build strategies might offer high returns in fragmented industries, where potential for synergies exists. In accordance, Chapman and Klein (2010) find add-on acquisitions to specifically enhance investor IRR. However, a buy-and-build strategy is also the most complex, as acquired companies have to be integrated into an already existing company. Organic growth strategies often entail expansion into new markets or innovation of new products. This diversification over different products and markets reduces risk. PE backed firms have also shown to successfully encourage innovation. Moreover, according to the findings of Acharya et al. (2010) active corporate governance measures are more often present in organic strategies. Refocusing strategies aim to establish a competitive advantage within one product market and thus, often lead to the sale of non-core divisions. The portfolio company can concentrate on its strengths and does not waste resources on less profitable units despite possibly accepting higher risk as it gives up on diversification benefits. It might additionally be easier to find a buyer for a company with a limited product offering than for a more diversified one. It can be assumed that any of the described strategies can create substantial value as long as the strategy is clearly defined and elaborated. In the case of BOs, however, portfolio firms are mostly highly levered and have to pay down debt, which potentially limits the flexibility to make further investments for growth. Therefore, refocusing strategies might be more appropriate as the cash generated through the sale of divisions can be used to pay down debt. Long and Ravenscraft (1993) do not find divestments aiming at greater focus to influence performance. One reason might be that cash flows become more volatile when focusing on a narrow product range and debt capacity is thus limited. While offering similar potential for value creation before considering the high debt level, organic growth strategies might be most appropriate for BO investments: they are less risky than inorganic or refocusing strategies, necessary investments might be not as high as in a buy-and-build strategy and should generate enough cash flows through growth to service debt. 3, Empirical analysis: The hypotheses derived in Section 2 concerning the market’s reaction to acquisition and exit announcements in general as well as the expectations about the value generation potential of different investment strategies are tested in the empirical part of the paper. First, the data sample for the event study is described in detail. Second, the event study is conducted and a discussion about the results is provided. 3.1, Data sample and descriptive statistics: For the empirical analysis, a first assessment of the investment strategies of German LPE entities was performed to arrive at an understanding of the investment and portfolio management strategies of LPE entities and their representativeness for the PE market in general. The data sample was then extended and further LPE entities were included so that the final sample for the event study was more internationally diversified.

Über den Autor

Sarah Kumpf, M.Sc., was born in Olpe, Germany in 1987. After her bachelor studies in business administration at the University of Mannheim, she specialised in finance and banking in her master studies at the same alma mater. Currently, she works in a renowned investment bank, where she advises inter alia specialised private equity funds, mainly infrastructure funds, in their investment decisions.

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