Return Attribution in Mid-Market Buy-Out Transactions – New Evidence from Europe

Abstract

In this study we use a sample of 332 European mid-market buy-out transactions initiated by private equity firms over the period 1990 to 2011. The focus of this research is to identify and quantify the value creation drivers in buy-out transactions. For that purpose we use a novel methodology for decomposing the returns into a fraction driven by earnings enhancement, by multiple enhancement and by the leverage effect. Our results support the view that returns in buy-out transactions for the largest part originate from strategic and operational activities increasing the target firm’s earnings. In fact, we estimate that about two third of the overall deal IRR is due to these earnings enhancement activities. Moreover, we find the impact of sales growth on deal returns to be not only economically but also statistically highly significant. The return contribution stemming from multiple enhancement is negligible. For the leverage effect the results are rather inconclusive. Even though we estimate that on aver- age about one third of the deal IRR may be contributed by the leverage effect, we do not find statistically robust evidence that deal returns are effectively increased by the leverage. This finding is in accordance with the view that if there is any benefit to leverage, it may be reaped by the seller instead of the buyer in a buy-out transaction.

Keywords: earnings enhancement, leveraged buy-out, leverage effect, multiple enhancement, private equity, return decomposition

JEL Classification: G34