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
Date Written: February 1, 2007
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.
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: Suggested Citation