Reiner Braun

Value Creation Drivers in Private Equity Buyouts: Empirical Evidence from Europe

Most of the existing research on value creation drivers in private equity buyouts is restricted to the U.S. and the U.K. In addition, most of the generally applied methods for measuring the importance of different value creation drivers do not comprehensively account for all relevant aspects, such as a clear separation between operating and financial risk. This article tries to fill these research gaps and analyzes value creation drivers in European (continental Europe and U.K.) buyouts from the perspective of private equity sponsors using a unique dataset of 206 realized transactions. The methodology used allows the authors to separate the value contribution of leverage on private equity sponsors’ returns from operational improvements and market effects. The results of the empirical analysis show that one-third of the private equity sponsors’ returns can be attributed to the use of leverage, whereas two-thirds are due to operational and market effects. Moreover, value creation drivers are analyzed with respect to different time periods, transaction sizes, and general market conditions. The results provide important insights into the private equity business model in Europe.

How Persistent is Private Equity Performance? Evidence from Deal-Level Data

The persistence of returns is a critical issue for investors in their choice of private equity managers. In this paper we analyse buyout performance persistence in new ways, using a unique database containing cash-flow data on 13,523 portfolio company investments by 865 buyout funds. We focus on unique realized deals and find that persistence of fund managers has substantially declined as the private equity sector has matured and become more competitive. Private equity has, therefore, largely conformed to the pattern found in most other asset classes in which past performance is a poor predictor of the future.

Does Charter Competition Foster Entrepreneurship? A Difference-in-Difference Approach to European Company Law Reforms

We study how company law reforms, particularly the reduction or abolition of minimum capital requirements, in various European jurisdictions affect the decision of entrepreneurs to incorporate by means of a private limited liability company (LLC). Since the landmark rulings of the European Court of Justice (ECJ) in the years 1999, 2002 and 2003, entrepreneurs in the European Union (EU) have been able to choose the country of incorporation independently of their real seat. As a result, the proliferation of the UK private company limited by shares has posed a competitive threat to many European legislators. We analyze whether the reforms adopted in Spain, France, Hungary, Germany and Poland have promoted the popularity of domestic legal forms and encouraged entrepreneurship more generally. Using a difference-in-difference approach, we record a strong impact in both respects, especially if the minimum capital requirement was reduced or abolished.

The Cost of Private Equity Investing and the Impact of Dry Powder

Private equity (PE) has developed into a well-established asset class with strong growth in capital commitments over the last decades. Consequently, fund returns have decreased over time and investors have become more cost conscious. We analyze whether the maturing PE asset class has become less costly over time. Costs are defined as the difference between gross and net returns (return spread) and provide a spread benchmark useful for investors to evaluate a fund’s costliness. Althoug return spreads have decreased over time, when controlling for falling gross returns causing lower performance-based fees, the cost of PE investing has increased. The higher costs are related to increased levels of unused capital (dry powder) because of swelling capital flows into the industry. The PE industry is thus a victim of its own success, suggesting that investors in the asset class should consider a more anti-cyclical investment approach.

Venture Capital Firm Returns from Acquisition Exits

In this paper we investigate the returns to venture capital firms from acquisition exits. Starting from M&A literature, we develop three detailed categorizations of acquisitions based on the acquirer’s motive and related agency issues. We use a proprietary data set of 2,356 venture capital-backed transactions from North America and Europe exited between 1982 and 2008 to assess our hypotheses. First, we show that returns from financial buyers are not statistically different from strategic acquirers. In addition, we show that synergy gains and low informational asymmetries in horizontal integrations result in similar venture capital firm returns such as the strategic premium paid by acquirers for diversifications. Both aforementioned acquisition clusters outperform vertical integrations. Further, due to the more severe agency conflict between management and shareholders, public acquirers pay higher prices. Finally, comparing acquisition cluster performance to initial public offerings reveals that based on cash multiples initial public offerings consistently outperform. However, if time is considered (by computing internal rate of returns) horizontal integration acquisitions and those purchased by public acquirers yield comparable venture capital firm returns.

The Levered Returns of Leveraged Buyouts: The Impact of Competition

This paper investigates the relationship between leverage and returns in private equity buyout transactions. In contrast to the predictions of traditional capital structure theory, we find that transactions financed with large amounts of debt are associated higher transaction prices and lower returns to private equity sponsors. Consistent with the view that easy credit amplifies the intensity of bidding for deals, these relationships hold only when private equity buyers face competition from other funds, such as in deals sourced from investment bank auctions. Our results are distinct from changes in deal prices driven by private equity fundraising and the results are robust to alternative, plausibly exogenous, proxies for the competitiveness of deals. Finally, we show that the choice to pursue auction deals in particularly loose credit markets, when expected returns are low, is positively related to proxies for agency conflicts between fund managers and fund investors.

Adverse Selection and the Performance of Private Equity Co-Investments

Investors increasingly look for private equity funds to provide opportunities for co-investing outside the fund structure, thereby saving fees and carried interest payments. In this paper we use a large sample of buyout and venture capital co-investments to test how such deals compare with the remaining fund investments. In contrast to Fang et al. (2015) we find no evidence of adverse selection. Gross return distributions of co-investments and other deals are similar. Co-investments generally have lower costs to investors. We simulate net returns to investors and demonstrate how reasonably sized portfolios of co-investments have significantly out-performed fund returns.

The Cost of Private Equity

Private equity (PE) has developed into a well-established asset class with strong growth in capital commitments over the last decades. Consequently, fund returns have decreased over time and investors have become more cost conscious. Based on a unique data set of 358 PE buyout funds with vintage years between 1983 and 2007, we analyze whether the maturing PE asset class has become less costly over time. We define costs as the difference between gross and net returns (return spread) and provide a spread benchmark useful for investors to evaluate a fund’s costliness. Next, we show that, in line with our expectations, return spreads have decreased over time. However, when we control for falling gross returns causing lower performance-based fees, surprisingly, the cost of PE investing has increased. We relate the higher costs to increased levels of dry powder due to swelling capital flows into the industry. We conclude that the PE industry is a victim of its own success, suggesting that investors in the asset class should consider a more anti-cyclical investment approach.

Buyout Transactions in the German-speaking Region: Determinants of Abnormal Performance and Unlevered Returns

This is one of the first comprehensive studies of drivers of private equity performance in the German‐speaking region known as the DACH, made up of Germany, Austria, and Switzerland. It contributes three things to private equity research: First, it explains how operational value drivers affect operational performance (operational alpha) and unlevered rates of return. Second, it whether the same relationships hold across different kinds of private equity business models (those with either organic or inorganic growth strategies; or whether PE investments are small‐cap or mid‐to‐large‐cap). Third, it distinguished between the periods before and after the global financial crisis of 2008. The authors found that (1) annualised benchmark‐adjusted EBITDA margin growth (i.e. improvement in EBITDA margin) is the most significant determinant in abnormal operational performance and unlevered returns, regardless of the business model; (2) private equity firms executing a buy‐and‐build strategy generate lower unlevered returns than those executing an organic growth strategy when the benchmark company is clearly outperformed, most likely because of limited PE managerial resources; (3) mid‐to‐large‐cap private equity firms generate higher unlevered returns and operational alphas than small‐cap private equity firms when the benchmark company is clearly outperformed, because, we believe, larger companies have a higher fixed cost leverage than smaller ones; and we have found that (4) buyout transactions exited during or after the financial crisis yield higher operational alphas but lower unlevered returns compared to buyout transactions exited before the crisis, when the portfolio company underperforms its benchmark company.

Corporate Raiders at the Gates of Germany? Value Drivers in Buyout Transactions

In this article, the German-speaking countries in Europe (DACH) are treated as a distinct economic region. We analyze a proprietary sample of deal level data for 123 leveraged buyout transactions in the DACH countries between 1995 and 2010. By distinguishing between financial and operational value drivers through unlevering the overall times money multiple, we find that two-thirds of generated value stems from EBITDA growth, excess cash generation, and multiple expansion, while one-third of value generated stems from leverage. Buyouts are found to yield abnormal returns compared with public benchmarks. The overall average (median) operational alpha is 11.6ppts (5.7ppts) in our sample. Buyouts before the global financial crisis in 2008 show better performance, while post-crisis exits have a significantly higher operational alpha.