Operating performance in private equity : is private equity a superior ownership model in creating operational value in Norway?

Abstract

While the net returns provided by Private Equity (PE) funds to its investors is a debated topic in relation to diminishing alpha and justification of fees and other fund expenses, we seek to determine if PE ownership has a positive impact on the operating performance of Norwegian portfolio companies. Additionally, we seek to identify potential operating performance differences between industry specialized and generalist PE managers and between deal types (source of entry). By applying an extensive and unique dataset consisting of 214 Norwegian buyouts occurring between 2000-2015, we find that PE in Norway generates a significantly higher growth in sales and EBITDA compared to companies not backed by PE. We also identify improvements in working capital efficiency. However, we find no evidence of improvements in operating profitability (ROA). Examining the subcomponents of ROA provides some evidence of improvements in asset turnover which are offset by a negative development in margins. Our findings do not support a positive industry specialization effect. Examining deal types, we find evidence of improvements in margins and operating profitability for public buyouts, also relative to private-to-private buyouts. In contrast, private-to-private buyouts appear to be more growth-oriented, clearly outperforming their benchmark in sales growth. The overall findings imply that revenue and EBITDA growth appears to be the main focus and driver behind value creation in Norwegian portfolio companies, rather than cutting costs and focusing on margins. Our findings also suggest that PE ownership provides advantageous differentiated support for growth and expansion buyout candidates (typically private companies) and for margin improvement buyout candidates (typically public companies).