The influence of deal process characteristics on Private Equity returns

Sammanfattning: This paper examines the influence of deal process characteristics on Private Equity (PE) returns and deal sourcing in the Nordics. We conducted a quantitative survey with eight Nordic PE firms supplemented by in-depth interviews to understand what sourcing looks like today as well as identifying favorable deal process characteristics. The analysis is underpinned by a sample of 63 PE sponsored transactions in the Nordics between 1998 and 2019. In addition, four qualitative interviews have been conducted to understand sourcing strategies at greater depth. Findings from our research include: 1. Deals where the PE firms proactively followed the company prior to a formal process and when there was a pre-existing relationship with the target firms produce significantly higher returns and higher variance. 2. Deals with more bidders produce higher returns with higher variance. 3. Deals that are perceived as more complex produce higher returns with a higher variance. 4. Deals where the firms have more experience in the sector produce superior returns. 5. Deals where the firms describe themselves as being more knowledgeable in the sector produce higher returns. 6. Lastly, deals where the highest bidder did not win the deal produce superior returns. This study adds value in five ways. Firstly, it deepens our understanding of the value drivers in Private Equity from a deal process perspective. Secondly, the composition and analysis of a unique, proprietary dataset on Private Equity transactions and their deal process characteristics. Thirdly, it defines concepts and structures the field of sourcing through the proprietary framework constructed to assess beneficial deal process characteristics. Fourthly, our research challenges some common assumptions about value drivers in PE. Lastly, the results impact the strategy for PE firms, LPs, intermediaries and potential target firms. The results suggest that certain deal process characteristics may have an impact on PE returns and hence deserve more attention.