Corporate Governance and Value Creation: Evidence from Private Equity

Acharya, V V and Kehoe, C (2008) Corporate Governance and Value Creation: Evidence from Private Equity. Working Paper. London Business School IFA Working Paper.

Abstract

We examine deallevel data on private equity transactions in the UK initiated during the period 1996 to 2004 by mature private equity houses. We unlever the deallevel equity return and adjust for (unlevered) return to quoted peers to extract a measure of "alpha" or outperformance of the deal. The alpha outperformance is significant on average and robust during sector downturns. In the crosssection of deals, alpha is related to enterpriselevel operating performance, especially to greater improvement in EBITDA to Sales ratio (margin) during the private phase, relative to that of quoted peers. In particular, outperforming deals either grow their margins substantially, or grow margins somewhat whilst expanding their revenues substantially. A significant portion of the margin improvement is realized in the early phase of outperforming deals. Based on interviews with general partners involved with the deals, we find that outperforming deals are associated with top mangement turnover during the early phase of the deal, employment of valuecreation initiatives for productivity and organic growth, high intensity of engagement of private equity houses, and compementing top mangement with external support. Overall, our results are consistent with mature private equity houses creating productive growth for portfolio companies through active ownership and goverce.