Value Creation in Middle-Market Buyouts

3 April 2009 at 7:34 am Leave a comment

| Peter Klein |

Here’s a paper by John Chapman and me, “Value Creation in Middle-Market Buyouts: A Transaction-Level Analysis,” forthcoming in Douglas J. Cumming, ed., Companion to Private Equity (New York: Wiley, 2009). Get your copy today, while they’re hot. Abstract:

Is private equity an effective governance structure, or simply a means of transferring wealth from “Main Street” to “Wall Street”? How do buyouts affect target-company organization and strategy? How do deal characteristics such as size, industry, transaction complexity, buyer characteristics, holding period, and the like affect the performance of private-equity transactions? Are revenue improvements driven primarily by changes in employment and capital expenditures, or by changes in organization and strategy? Despite a healthy literature on buyouts, little is known about the details of private equity transactions, as most studies rely on publicly available data or confidential data from a single buyout firm. This paper uses a unique sample of 288 exited transactions over a 20-year period across 19 industries from 13 buyout firm firms, based on confidential data from detailed interviews with the general partners of several leading private-equity partnerships. While prior studies have focused on whole-company, going-private buyouts, our sample includes transactions with minority stakes, syndicate deals, and consolidating roll-up or add-on strategies, and we have detailed information on internal rates of return, leverage, equity stakes, and other deal characteristics. We find that the pursuit of ancillary consolidating acquisitions is the biggest driver of post-buyout revenue and profit growth, that solo deals and deals with controlling stakes outperform syndicated or “club” deals, that rates of return have declined over time as buyout markets have become more competitive, that mitigation of agency costs is critical for deal success, and more generally, that private equity can improve the performance even of sound businesses by providing access to resources, industry-specific expertise, capital for recombining assets (most often, consolidation in a fragmented industry), or recapitalization and ownership transition. Finally, our findings suggest the potential for further research of private equity at the transaction level.

Entry filed under: - Klein -, Corporate Governance, Entrepreneurship, Strategic Management, Theory of the Firm.

Letter to Bank of America If Only the US Media Were as Clever as their British Counterparts

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Trackback this post  |  Subscribe to the comments via RSS Feed


Authors

Nicolai J. Foss | home | posts
Peter G. Klein | home | posts
Richard Langlois | home | posts
Lasse B. Lien | home | posts

Guests

Former Guests | posts

Networking

Recent Posts

Categories

Feeds

Our Recent Books

Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).