Ownership, governance, & firm performance
Chapman, John Laurance
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In conjunction with the explosion of buyouts in recent years, financial economists have renewed their interest in empirical research on private equity. Because the vast majority of private equity investments are made by highly secretive private investment partnerships in a heretofore largely unregulated sector with no disclosure requirements, research has often been limited to information obtained through market research entities who collect macro financial data, or to fund-level analysis of investment performance. Further, most prior work on buyouts has of necessity focused on just that - buyouts, usually leveraged and usually going-private, of whole companies or conglomerate divisions which form new stand-alone firms. This study extends previous analysis via a unique, detailed, hand-collected data sample of 288 exited transactions, provided on a confidential basis by 13 private equity firms. In this unique format we are able to evaluate these investments at the detailed transaction-level, from the vantage point of the investor, and hence the capital efficiency of equity investment in all its varieties, including minority stakes. Further, for decent-sized subsets of the 288 transactions we are afforded a unique window into what happened to the target firm after PE firm investment, in terms of changes in revenues, EBITDA, employment, and capital expenditures. After reporting out detailed descriptive statistics on the sample, we employ correlation analysis, regression modeling, and chop-shop benchmarking to examine returns to private equity, and how the governance and oversight of PE firms impacted their portfolio firms’ performance. Our proprietary data sample and detailed practitioner interviews also allow us to compare differing investing strategies among PE firms, who now compete for investor capital and scarce high-IRR transactions in a very efficient market, thus requiring their differentiation. More broadly, we also summarize the growth and development of the private equity sector in the last 25 years, highlighting its impact on the market for corporate control, governance, institutional investing, entrepreneurship, and ultimately, economic growth. The next phase of this extended research project is also described.