The Specialization Effect in Private Equity : an empirical analysis

Abstract

The objective of this thesis is primarily to document the effects of specialization on the success of private equity(PE) funds through an empirical approach. We ex- amine the relationship between a PE-fund's degree of specialization, measured by the Herfindahl-Hirschman Index, and the fund's success measured by the portion of portfolio companies that go public through an initial public offering(IPO) or a trade sale. We find that degree of industrial specialization has a statistically and economically significant positive effect on a fund's IPO share, especially for funds that have experienced at least one IPO exit. This provides evidence strengthen- ing the specialization hypothesis. We find that one of the key drivers to achieve positive IPO share in the first place is fund size. We also find a non-linear relation- ship between geographical specialization and divestments through M&As. We find no significant differences of the specialization effect between Venture Capital and Buyout funds. Neither do we find that funds with higher IPO share are related to more risk through higher failure rate. This supports the belief that the degree of specialization can be used to control portfolio risk.