Release of two working papers by Ph.D. Frederik Vinten and professor Steen Thomsen
We examine sources of value creation in the 2005 buyout of the Danish cleaning firm ISS by EQT and Goldman Sachs Capital Partners – a case which is still in the making since the company has not yet been divested. We find evidence of value creation related to previous undervaluation and financial leverage as well as less easily quantifiable gains of changes in corporate governance: avoidance of stock market bureaucracy, ownership concentration, changing board composition, management replacement and incentive based pay. In contrast, we find no evidence of advantages in terms of restructuring, strategy change and expropriation of employees, but bondholders have suffered a loss because of increased leverage. Corporate strategy seems not to have changed much, but acquisition growth has become more focused on marginal (bolt-on) investments. Growth has accelerated and profit margins have remained constant.
We survey the private equity literature with a view to answering the following questions: 1) What is private equity and what is it not? We stress the distinction between private equity, hedge funds and venture capital. 2) What is the extent of private equity investment? We find that private equity accounts for a substantial share of company acquisitions activity in Europe and the US, but only control a few percent of GDP. Probably investment levels were at an all time high in 2006. 3) How do equity funds create (or destroy) value? We stress expertise in valuation, financial engineering and corporate governance against the risk that pension funds over-invest in private equity, bid up prices and lower returns. 4) Do firms benefit from private equity ownership? We find that most empirical studies indicate a positive effect on firm performance. 5) Do private equity funds create value for their investors? This is more problematic, but a good first cut approximation is that the returns are no different from those of similar asset classes like common stock. 6) Is there a case for government regulation of private equity? We review the arguments and find no convincing case for intervention. It is not clear that private equity creates net costs for society. Listed companies, banks and other market participants have both the ability and the incentives to protect against managerial conflicts of interest, excessive debt and other maladies. Politicians do not have sufficient information to fine tune activity in this area. Finally, policy changes can cause significant harm by creating uncertainty concerning basic institutional framework.