In general, the authors wrote, companies subject to buyouts enjoy a “vast improvement in operational efficiency,” although the “gains vary considerably.” In addition to strong management incentives, the authors found that better-performing portfolio companies often had experienced sponsors at the helm employing a very hands-on style of ownership featuring “tight monitoring.” Such companies also tended to make frequent add-on acquisitions. At the same time, the authors found that “financial leverage has no influence on operational performance.”
All told the authors looked at six possible factors behind performance, including replacement of managers. In comparing the U.S. and European buyout markets, the authors found that, while U.S. companies backed by sponsors employ “significantly higher” leverage, they still manage to outperform European companies, as measured by operational results.
Of course, determining the operating performance of portfolio companies is a notoriously tricky problem. Buyout shops don’t often volunteer such information. The approach to solving it taken by the authors was to zero in on portfolio companies that were eventually taken public. They then looked at public filings for evidence of how the company had performed in prior years, along with any significant acquisitions and related events undertaken by their sponsors.
All told the authors looked at more than 300 LBOs around the world that took place in the last 30 years. Of those, 214 of the target companies are based in the United States, 85 in Western Europe, three in Australia and one in New Zealand. The most common industries in the sample: manufacturing (134), followed by services (55), and retail (34).
The paper, “Insight Private Equity,” dated June 18 and posted on the Social Science Research Network, is written by Andrej Gill and Nikolai Visnjic, both researchers in the department of economics at Goethe University Frankfurt. It was published as part of a working paper series by the Center of Excellence SAFE Sustainable Architecture for Finance in Europe, a partnership between the Center for Financial Studies and the university.