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

See all articles by Robert Clive Cressy

Robert Clive Cressy

Birmingham Business School

Federico Munari

University of Bologna - Department of Management

Alessandro Malipiero

University of Bologna - Department of Management

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

Cressy, Robert C. and Munari, Federico and Malipiero, Alessandro, Playing to their Strengths? Evidence that Specialization in the Private Equity Industry Confers Competitive Advantage (February 1, 2007). Available at SSRN: https://ssrn.com/abstract=964367 or http://dx.doi.org/10.2139/ssrn.964367

Robert C. Cressy

Birmingham Business School ( email )

Elm House
Edgbaston Park Rd
Birmingham
Great Britain
012 1414 5609 (Phone)

Federico Munari (Contact Author)

University of Bologna - Department of Management ( email )

Piazza Scaravilli 1
Bologna, Bologna 40126
ITALY
051-2093954 (Phone)
051-2093949 (Fax)

Alessandro Malipiero

University of Bologna - Department of Management ( email )

Piazza Scaravilli 1
Bologna, BO 40126
Italy

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