Oliver Gottschalg

Understanding Value Generation in Buyouts

Buyouts have been described as a specific form of financial acquisition that leads to potentially substantial, but also highly volatile returns to equity investors. Previous research has illustrated a number of mechanisms through which buyouts cause increases or decreases in company value. Besides the traditional mechanisms like improved governance or incentive systems, more innovative and entrepreneurial levers like increasing strategic distinctiveness and mentoring are examined. While it is important to understand the performance impact of each of these levers individually, we are still missing a comprehensive framework that captures the full complexity of the buyout value generation process and recognizes interdependences between various factors. In this paper, we develop a three-dimensional conceptual framework for value generation in buyouts that categorizes and links the different levers of buyouts value generation. This framework provides the basis to take a look beyond individual value levers and sheds light on the underlying strategic logic of buyouts. We then review the literature on buyouts and categorize previously identified levers of value generation according to our framework. At the same time, we identify a number of levers that have received little attention in the academic literature so far or still lack convincing empirical support for their performance impact. Building upon this assessment of the status quo in research in buyout value generation, we outline an agenda for future research.

Giants at the Gate: Investment Returns and Diseconomies of Scale in Private Equity

We examine the determinants of private equity returns using a newly constructed database of 7,500investments worldwide over forty years. The median investment IRR (PME) is 21% (1.3), gross offees. One in ten investments goes bankrupt, whereas one in four has an IRR above 50%. Only one ineight investments is held for less than 2 years, but such investments have the highest returns. Thescale of private equity firms is a significant driver of returns: investments held at times of a highnumber of simultaneous investments underperform substantially. The median IRR is 36% in thelowest scale decile and 16% in the highest. Results survive robustness tests. Diseconomies of scaleare linked to firm structure: independent firms, less hierarchical firms, and those with managers ofsimilar professional backgrounds exhibit smaller diseconomies of scale.

Replicating the Investment Strategy of Buyout Funds Based in the United Kingdom with Public-Market Investments

This article assesses whether it is possible to emulate the risk-return profile of buyout funds with comparable public market investments, and concludes that the buyout fund sample used demonstrates a “performance delta” over mimicked public market investment. The performance of a sample of buyout funds is replicated by mimicking the risk characteristics of their transactions with public index data by precisely timing the funds’ cash inflows and outflows net of fees and carry, matching the investments by industry sector, and taking into account the effect of additional leverage replicating the typical financial risk of buyout transactions. The authors measure returns of four investment strategies: the buy-and-hold return on the broad public stock market index; the return on the broad public stock market index based on matched investment timing; the return on the broad public stock market index based on matched investment timing and with additional superimposed financial leverage; and the return on industry-matched public stock market indexes based on matched investment timing and with additional superimposed financial leverage. The authors compare the returns on these four investment strategies with the actual IRR performance of the buyout funds in our sample, which invested predominantly across Europe and through both rising and falling markets. They select sample funds that were raised before 2001 to minimize the measurement error associated with residual NAVs. This research shows that the mimicked public market investments fail to generate the same level of performance as the buyout funds in our sample. The buyout funds achieve performance 11.51% higher than the mimicked public market investments—a gap the authors call “performance delta.”