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Can Private Equity Create Value

Olsson, Richard LU and Alexander, Jovanovic (2013) NEKN02 20131
Department of Economics
Abstract (Swedish)
This thesis proposes an alternative way of comparing the performance of private equity funds and testing if they through active involvement can increase the value of their investments.
Resent studies has shown that the true performance of Private Equity funds are about the same as the markets return so by measuring the performance of the companies that most resemble the private equity firms actual targets, we should be able to see if private equity funds actually create value, or, if they are simply picking targets from the right “pond”.
The research resulted in two different portfolios containing the stocks of companies calculated to be the most likely takeover targets. The portfolios were created by matching observed takeover targets... (More)
This thesis proposes an alternative way of comparing the performance of private equity funds and testing if they through active involvement can increase the value of their investments.
Resent studies has shown that the true performance of Private Equity funds are about the same as the markets return so by measuring the performance of the companies that most resemble the private equity firms actual targets, we should be able to see if private equity funds actually create value, or, if they are simply picking targets from the right “pond”.
The research resulted in two different portfolios containing the stocks of companies calculated to be the most likely takeover targets. The portfolios were created by matching observed takeover targets to all companies in the market that were not targeted. From parameters in a logistical regression we could see which variables included that did not fit the data and used these to restrict the model in order to test if our variables would lead to higher returns even though they did not statistically fit the data.
The empirical findings showed that both portfolios had indeed outperformed the comparable market index. Returns in our portfolios under the holding period was 13,15% and 23,72% better than the index for the logistic and matched samples portfolios respectively. The findings also showed that the volatility in our portfolios where lower compared to the European markets.
This study has also shown that the Private Equity industry as a whole are good at picking targets that will eventually increase in value without active involvement from the Private Equity fund managers. By comparing these results to studies that show how Private Equity returns are approximately the same as the market index we can deduce that Private Equity funds do not (on an aggregated level) create value in Public Buyouts. Parallel to this we have also found a rather interesting strategy for other investors in the public markets to invest. (Less)
Please use this url to cite or link to this publication:
author
Olsson, Richard LU and Alexander, Jovanovic
supervisor
organization
alternative title
A study of Private Equity Firms ability to create value in public buyouts
course
NEKN02 20131
year
type
H1 - Master's Degree (One Year)
subject
language
English
id
3812971
date added to LUP
2013-06-14 13:40:26
date last changed
2013-06-14 13:40:26
@misc{3812971,
  abstract     = {This thesis proposes an alternative way of comparing the performance of private equity funds and testing if they through active involvement can increase the value of their investments.
Resent studies has shown that the true performance of Private Equity funds are about the same as the markets return so by measuring the performance of the companies that most resemble the private equity firms actual targets, we should be able to see if private equity funds actually create value, or, if they are simply picking targets from the right “pond”.
The research resulted in two different portfolios containing the stocks of companies calculated to be the most likely takeover targets. The portfolios were created by matching observed takeover targets to all companies in the market that were not targeted. From parameters in a logistical regression we could see which variables included that did not fit the data and used these to restrict the model in order to test if our variables would lead to higher returns even though they did not statistically fit the data.
The empirical findings showed that both portfolios had indeed outperformed the comparable market index. Returns in our portfolios under the holding period was 13,15% and 23,72% better than the index for the logistic and matched samples portfolios respectively. The findings also showed that the volatility in our portfolios where lower compared to the European markets.
This study has also shown that the Private Equity industry as a whole are good at picking targets that will eventually increase in value without active involvement from the Private Equity fund managers. By comparing these results to studies that show how Private Equity returns are approximately the same as the market index we can deduce that Private Equity funds do not (on an aggregated level) create value in Public Buyouts. Parallel to this we have also found a rather interesting strategy for other investors in the public markets to invest.},
  author       = {Olsson, Richard and Alexander, Jovanovic},
  language     = {eng},
  note         = {Student Paper},
  title        = {Can Private Equity Create Value},
  year         = {2013},
}