Private Equity in Financial Institutions: Value Creation and Performance

53 Pages Posted: 16 Nov 2009

See all articles by Christian Graf

Christian Graf

Technische Universität München (TUM)

Christoph Kaserer

Technische Universität München (TUM)

Daniel Schmidt

University of Frankfurt, CEPRES Center of Private Equity Research

Date Written: November 15, 2009

Abstract

In this paper we introduce a framework to analyze the key drivers of value creation of private equity in financial institutions and the bank holding sub-segment. We estimate the influence of market-timing, take specifications of this highly regulated industry into account, and approximate the influence of leverage and operational improvement. We prove that market-timing has a positive but limited impact on value creation in financial institution and bank holding buyouts, and we find evidence that the value creation in the capital intense and highly regulated bank holding sub-segment is not diluted by financial leverage and depends to 87% on operational improvement. Moreover, we investigate the absolute and relative performance of these transactions and draw cross industry comparisons based on a unique data set of 3,296 completed buyout transactions. We show that leveraged buyouts of financial institutions generate a median gross IRR of 29% and a median PME of 1.9 compared to a public financial services benchmark index. The more capital intense bank holding sub-segment shows a median gross IRR of 23% and also outperforms the public benchmark with a median PME of 1.5. Results are controlled by DPI and Excess IRR figures, and are tested for significance. Both categories of companies are almost consistently in the upper half of our cross industry benchmarking with partially significant higher return figures than traditional buyout industries.

Keywords: Private equity, leveraged buyout, value creation, performance, financial institutions

JEL Classification: G20, G21, G34

Suggested Citation

Graf, Christian and Kaserer, Christoph and Schmidt, Daniel, Private Equity in Financial Institutions: Value Creation and Performance (November 15, 2009). Available at SSRN: https://ssrn.com/abstract=1506564 or http://dx.doi.org/10.2139/ssrn.1506564

Christian Graf (Contact Author)

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

Christoph Kaserer

Technische Universität München (TUM) ( email )

Arcisstr. 21
Munich, D-80290
Germany
+49 89 289 25489 (Phone)
+49 89 289 25488 (Fax)

HOME PAGE: http://www.cefs.de

Daniel Schmidt

University of Frankfurt, CEPRES Center of Private Equity Research ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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