TECHNISCHE UNIVERSITAT MUNCHEN Lehrstuhl fur Betriebswirtschaftslehre - Finanzmanagement und Kapitalmarkte (Univ.-Prof. Dr. Christoph Kaserer) Buyout and Distressed Private Equity: Performance and Value Creation Christian H. H. Graf Vollstandiger Abdruck der von der Fakultat fur Wirtschaftswissenschaften der Technischen Universitat Munchen zur Eriangung des akademischen Grades eines Doktors der Wirtschaftswissenschaften (Dr. rer. pol.) genehmigten Dissertation. Vorsitzender: Prufer der Dissertation: Univ.-Prof. Dr. Dr. Holger Patzelt 1. Univ.-Prof. Dr. Christoph Kaserer 2. Univ.-Prof. Dr. Dr. Ann-Kristin Achleitner Die Dissertation wurde am 13.10.2010 bei der Technischen Universitat Munchen eingereicht und durch die Fakultat fur Wirtschaftswissenschaften am 15.12.2010 angenommen.
Contents Abstract List of Figures List of Tables List of Abbreviations List of Symbols vi viii ix xi xiv 1. Introduction 1 1.1 Motivation and relevance of topic 1 1.2 Research question and contribution 4 1.3 Structure of analyses 6 2. Background and existing literature 6 2.1 Background on private equity 7 2.1.1 Definition of private equity and buyouts 7 2.1.2 Functionality of buyouts 9 2.2 Performance of private equity 11 2.2.1 Returns based on absolute performance measures 11 2.2.1.1 Internal rate of return 11 2.2.1.2 Transaction multiples 14 2.2.2 Returns based on relative performance measures 17 2.2.2.1 Excess internal rate of return 17 2.2.2.2 Public market equivalent 19 2.2.3 Existing performance findings 20 2.3 Sources of performance 24 2.3.1 Value creation framework 24
2.3.2 Existing value creation findings 26 2.4 Consideration of risk-return aspects 29 2.4.1 Interlink between performance and risk 29 2.4.2 Existing findings and risk adjustment frameworks 30 2.5 Delimitation of distressed private equity.-. 33 2.5.1 Definition and causes of distressed investing 34 2.5.2 Overview of distressed market and bankruptcy process 36 2.5.3 Predominant distressed private equity strategies 41 2.5.3.1 Passive non-control trading 44 2.5.3.2 Active non-control investing 44 2.5.3.3 Active control investing 46 2.5.3.4 Special situations investing 47 2.5.4 Distressed private equity investors 48 2.5.5 Existing findings on performance of distressed investing 49 2.6 Synopsis 53 3. Performance and value creation 54 3.1 Motivation 54 3.2 Data and implementation 55 3.2.1 Characteristics 55 3.2.2 Implementation of financial institutions 59 3.3 Model setup 61 3.3.1 Performance measurement 61 3.3.2 Value creation model 63 3.3.2.1 Influence of market-timing 63 3.3.2.2 Leverage and operational improvement analyses... 65 3.4 Results 67 3.4.1 Absolute performance of private equity 68 3.4.2 Relative performance of private equity 75 3.4.3 Value creation decomposition 80 in
3.5 Robustness 94 3.5.1 Robustness: Geographic regions 94 3.5.2 Robustness: Market abnormalities 96 3.6 Synopsis 97 4. Risk adjusted performance 98 4.1 Motivation 98 4.2 Add-on data and implementation 99 4.3 Model setup 101 4.3.1 Unlevering beta factors of benchmarks 101 4.3.2 Relevering to buyout level 102 4.3.3 Calculating mimicked benchmarks 103 4.4 Fee structure framework 104 4.5 Results: risk adjusted performance of buyouts 106 4.6 Robustness 108 4.6.1 Robustness: Debt-to-equity ratio 108 4.6.2 Robustness: Debt beta factor 110 4.6.3 Robustness: Geographic regions 112 4.6.4 Robustness: Market abnormalities 114 4.7 Synopsis 118 5. Performance of distressed private equity 119 5.1 Motivation 119 5.2 Data and implementation 120 5.2.1 Characteristics 120 5.2.2 Cash-flow based correction procedure 123 5.3 Model setup 124 5.3.1 Performance measurement 124 5.3.2 Scenario analyses 125 5.3.3 J-Curve analyses 127 IV
5.4 Results 128 5.4.1 Absolute performance of distressed private equity 128 5.4.2 Relative performance of distressed private equity 130 5.4.3 Performance comparison to buyouts 133 5.4.3.1 Cross comparison of absolute performance 133 5.4.3.2 Cross comparison of relative performance 138 5.4.4 Investment pattern and comparison to buyouts 143 5.4.5 Distribution pattern and comparison to buyouts 148 5.5 Synopsis 153 6. Conclusion 154 6.1 Summary and implications 154 6.2 Outlook 158 Bibliography 160