Value Creation in Private Equity

88 Pages Posted: 24 Sep 2020 Last revised: 10 Nov 2023

See all articles by Markus Biesinger

Markus Biesinger

European Bank for Reconstruction and Development (EBRD)

Cagatay Bircan

European Bank for Reconstruction and Development (EBRD)

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR); Swedish House of Finance; European Corporate Governance Institute (ECGI)

Multiple version iconThere are 3 versions of this paper

Date Written: November 10, 2023

Abstract

We disentangle the effects of treatment, selection, and financial engineering on investor returns in private equity deals using a narrative approach for identification. Exploiting confidential textual data contained in pre-deal investment memos and value creation plans, we show that PE firms create value for investors by selecting companies that are about to outperform (akin to stock picking) and by helping portfolio companies improve production through CAPEX and acquisitions, but not by financial engineering. Tracking the post-investment implementation of value creation plans using confidential monitoring reports, we show that successful execution increases investor returns over and above the return-boosting effects of successful stock picking.

Keywords: Private equity, value creation, treatment vs. selection, investor returns

JEL Classification: G11, G24, G30, G32, L26

Suggested Citation

Biesinger, Markus and Bircan, Cagatay and Ljungqvist, Alexander and Ljungqvist, Alexander, Value Creation in Private Equity (November 10, 2023). EBRD Working Paper No. 242, Swedish House of Finance Research Paper No. 20-17, Available at SSRN: https://ssrn.com/abstract=3607996 or http://dx.doi.org/10.2139/ssrn.3607996

Markus Biesinger

European Bank for Reconstruction and Development (EBRD) ( email )

Five Bank Street
London, E14 4BG
United Kingdom

Cagatay Bircan (Contact Author)

European Bank for Reconstruction and Development (EBRD) ( email )

One Exchange Square
London, EC2A 2JN
United Kingdom
+442073388508 (Phone)
+442073386111 (Fax)

HOME PAGE: http://cagataybircan.com

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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