Playing to their Strengths? Evidence that Specialization in the Private Equity Industry Confers Competitive Advantage
30 Pages Posted: 8 Mar 2007 Last revised: 7 May 2010
Date Written: February 1, 2007
Abstract
The paper examines whether Private Equity (PE)-backed buyouts have higher post-buyout operating profitability than comparable companies ("The Jensen hypothesis") and whether relative investment specialisation provides the PE firm with a competitive advantage over its peers ("The advantage-to-specialization hypothesis"). A sample of 122 UK buyouts over the period 1995-2000 and a matched sample of non-PE-backed UK companies are constructed to test the first hypothesis. Applying a new measure of relative PE firm specialization that identifies buyout-specialized and industry-specialised PE firms we test the second hypothesis on the subsample of PE-backed companies. We find that over the first 3 post-buyout years (i) operating profits of companies backed by PE firms are greater than those of comparable non-buyout companies by 4.5%, confirming the Jensen hypothesis; (ii) industry specialization of PE firms adds 8.5% to this profitability advantage, confirming the advantage-to-specialization hypothesis; (iii) buyout specialization has no effect on profitability but may provide a spur to growth. Finally, results show that profitability of the PE-backed company in the buyout year plays a major role in post-buyout profitability, suggesting that skill in investment selection and financial engineering techniques may play a more important role than managerial incentives in raising performance.
Published as:
Cressy, R., Malipiero, A., Munari, F. (2007), “Playing to their strengths. Evidence that specialization in the Private Equity industry confers competitive advantage”, Journal of Corporate Finance, Special Issue on “Private equity, Legeraged Buyout and Corporate Governance”,13(4): 647-669.
Keywords: Buyouts, private equity, performance, specialization
JEL Classification: G24, G34
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Steven N. Kaplan and Per Strömberg
-
By Steven N. Kaplan and Per Strömberg
-
Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets
By Ronald J. Gilson and Bernard S. Black
-
Money Chasing Deals?: The Impact of Fund Inflows on Private Equity Valuations
By Paul A. Gompers and Josh Lerner
-
Private Equity Performance: Returns, Persistence and Capital Flows
-
Private Equity Performance: Returns, Persistence and Capital
-
The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?
-
Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence
By Thomas F. Hellmann and Manju Puri