The Predictors of Value Creation in Private Equity Transactions - A study on operational improvements' contribution to gross returns in the private equity industry:
Sammanfattning: We measure and describe the impact that operational improvements implemented by Private Equity firms' have on the value accretion in their portfolio companies. Our sample is composed of information on twelve deals submitted by five PE firms. We seek to analyze the value generation from enhancing sales, improving margins, reorganizing governance structures, reducing net working capital, and optimizing capital structure. The chosen proxy for value is gross IRR, and our sample includes mostly high IRRs. To ensure uniformity in measurement units between IRR and other ratio variables, we annualize sales and EBITA margin differentials, using the Compound Annual Growth Rate (CAGR) formula. We conclude that sales CAGR, target adjusted sales CAGR, and EBITA margin CAGR have a positive, and significant relationship with IRR. We also find a limited number of occurrences regarding a focus on net working capital and capital expenditures. We cannot however draw a significant conclusion if this is due to a lack of interest in these operational areas or if these areas do not lead to higher IRRs.
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