Value creation in private equity : have Norwegian private equity companies created value in their portfolio companies?

Abstract

This paper investigates value creation in 31 private equity-owned companies in Norway between 1993 and 2007. Its purpose is to find evidence on increased value capturing for these companies relative to non-private equity-owned companies. We have looked at the development of companies that have been engaged in a full leveraged buyout process with Norwegian private equity firms from entry to exit. Value creation is made through several different drivers, which are thoroughly presented in this thesis. The empirical analysis in our thesis has been focusing on value creation through direct drivers since these drivers may easily be analyzed using publicly available data. By doing statistical tests on ratios that help explaining these drivers, we were able to present evidence on whether private equity-owned companies have been able to outperform their comparables during the private equity firms’ holding period. Our results suggest that private equity firms have been successful in obtaining significant revenue expansion and cost reductions/margin improvements for their portfolio companies on an isolated basis. In terms of improved asset utilization and financial engineering we are unable to provide any adequate significant results. In addition, it seems like buyout companies do not experience any significant changes in employment or changes in levels of wage expenditures. The industry-adjusted results suggest that buyout companies do not significantly outperform their corresponding peers in regard to revenue expansion and cost reductions/margin improvements. Buyout companies seem to have a somewhat stronger improvement in capital productivity than their peers, implying an outperformance from the buyout companies. Moreover, our results do not support any significant changes in long-term debt share during the holding period of private equity firms or large differences in long-term debt levels relative to their peers at entry, exit and exit +1. Finally, industry-adjusted employment growth and changes in levels of wage expenditures do not support any categorical beliefs about massive lay-offs or drastically reduced wage expenditures during the holding period of a private equity firm.