Does the Value-Added by PE Investors to portfolio firms persist over time? Antonio Meles Vincenzo Verdoliva

Transcription

1 Does the Value-Added by PE Investors to portfolio firms persist over time? Antonio Meles Vincenzo Verdoliva

2 Agenda Introduction Literature Review Research hypotheses Data and sample Variables description Preliminary findings Conclusion and next steps

3 Introduction Over the last decade billions of euros have been invested by global Private Equity industry and both the amount of investments and fundraising activities are considerably grown (i.e., in Europe the amount of investments was 27,6 billions of euros in the 2002 and 45,5 billions of euros in the 2011, while the amount of fund raised was 27,5 billions of euros in the 2002 and 39,8 billions of euros in the Sources of data: EVCA) Despite: - the negative effects of the financial crises; - and the unfavorable public reputation that PE investors have recently acquired (Boston Consulting Group, 2008; Morris, 2010).

4 Introduction Over the years scholars and practitioners have emphasized the positive impact of PE activity on firm-level and macroeconomic indicators (Lerner (1995); EVCA, Coopers & Lybrand (1996); Hellmann e Puri (2002); AIFI e PriceWaterhouseCoopers, 2006), but several drawbacks have been recently associated to private equity investments, particularly buy-outs: - the excessive use of debt; - the widely practice to strip the assets of the backed companies; - the practice to mislead the evaluations of some portfolio companies. As a consequence: - there has been a remarkable attention on the importance to regulate/police the area); - renewed emphasis has been given about whether and how PE investments create value for investing firms.

5 Literature review Do PE investors create value for investing firms? (1) Numerous papers provide evidence supporting the ability of PE investors to growing up productivity and profitability of their portfolio companies (e.g., Davis et al., 2008, or Harris et al., 2005). Previous studies have also discussed why the PE backed firms are more likely to exhibit better/higher operating performance: - Various papers (e.g. Gompers and Lerner, 2001) support the screening role hypothesis, according to which PE investors are able to select better quality firms to back; - Hsu, 2006; Lindsey, 2008; Kaplan and Strömberg, 2003 support the value creation hypothesis focusing on the PE investors attitude to provide portfolio firms with better governance models, professionalizing (coaching), effective monitoring, and valuable contracts with suppliers and customers.

6 Literature review Do PE investors create value for investing firms? (2) - Some papers investigating the PE investor s ability to solve asymmetric information problems (certification role) with the banks (Berger and Udell, 1998) and the market, appear consistent with the value creation hypothesis (Lee and Wahal, 2004; Ferretti and Meles, 2011). - Other papers (e.g. Guo et al., 2011) focusing on buyouts investments, point out that PE investors rather transfer value from other stakeholders (such as taxpayers, employees) than create it. - Extensive literature investigates (e.g. Dushnitsky, and Lenox, 2006) whether or not all PE investors play their role with the same effectiveness (High or Low Reputation, Syndication or not, Bankbased or Independent).

7 Literature review Characteristics and drawbacks of this field of research - The need to distinguish buy-out investments from other PE investments. - The difficulties to build high quality dataset, as it is necessary to match data on PE deals with accounting data, mainly of private companies. - Selection bias problems: Most of U.S. studies suffer from selection bias because they only foucs on public firms (Kaplan and Stromberg 2009,Tyknova, 2012). - Endogeneity issue: Are better firm s performance related to PE backing or vice versa? Literature gaps: - What is the impact of PE backing on portfolio firm s level of risk? (there is only a working paper discussing this issue (Tyknova and Borell, 2012). - What is the impact of the crisis on the PE portfolio firms performance and risk? - Few studies investigate whether the favorable effect on portfolio firms persists over time or fades away after the PE investors way-out.

8 Literature review Does the Value-Added by PE Investors to portfolio firms persist over time? (1) The issue is particularly interesting because: - the support provided by PE investors during the holding period should continue to benefit the backed firm, even after their exit. - conversely, as PE investors have a limited time horizon, they should take appropriate actions to increase the performance in the medium-term (until the disinvestment period), but ignoring the potential unfavorable effects on the long-term performance (after the disinvestment period); As result, empirical analyses on the performance of PE backed firms after the PE investors exit paint a mixed picture (Jain and Kini, 1995: Journal of Finance; Coaekley et al., 2007: Journal of Business and Accounting Finance).

9 Literature review Does the Value-Added by PE Investors to portfolio firms persist over time? (2) Literature gaps Prior studies suffer from selection bias problems, because they only look at investments sold with the IPOs Does the way-out strategy affect the PE backed firms performance? Prior studies do not investigate the firms risk after the PE investors exit

10 Research hypotheses Hypothesis 1: Do performance and productivity of PE backed firms change after the PE investors exit? Still looking at the period after the PE investors exit: Sub-hypotheses 1.a, 1.b, 1.c: Is the growth of these indicators associated to the characteristics of PE investment, (length investment, type investment, % shareholding), the type of PE investors (type, numerousness, reputation), and the way-out strategy? Hypothesis 2: Does the risk of PE backed firms show change in value after the PE investors exit? Sub-hypotheses 2.a, 2.b, 2.c: Is this change in value associated to the characteristics of PE investment, the type of PE investors, and the way-out strategy?

11 Dataset and Sample PE Monitor provides the list of Italian PE investments starting from the 2000, and the list of VC investiments starting from We select deals closed between the and disinvested in subsequent years (no later than 2008): We obtain a list of 242 deals We use AIDA and Telemaco to collect accounting and financial data on the firms selected. The number of deals decreases to 204 Zephyr Baureau Van Djik provides the list of PE and VC investments starting from the 1997 (we obtain a list of around 200 deals ). We are going to expand our sample by using Zephyr data.

12 Dataset and Sample

13 Dataset and Sample Through AIDA, we select for each PE backed sample firm a matching company, by using accounting data of the year before the disinvestment. The matching company has : - the same three-digit ATECO 2007 code; - sales within 75% 125% of the PE backed firm; - the closest Sales margin (Ebitda/Sales) to the PE backed firm. Example Panaria Industrie ceramiche Florim Ceramiche Spa Year of disinvestment ATECO Cod. Sales 2003 Sales Margin , 3 mln 18,07% , 3 mln 16,94%

14 Variables description Dependent variables: simple indicators and adjusted indicators Growth Growth Growth = Sales t+ 3 t 1 1 Sales = Sales t+ 1; t+ 3 t 1 2 Sales Performance Perf Perf 1 = Perf t+ 3 Perf t 1 2 = Perf t+ 1; t+ 3 Perf t 1 Where Perf is, ROA, ROE, Sales Margin, Profit Margin. Productivity Prod Prod 1 = Prod t+ 3 Prod t 1 2 = Prod t+ 1; t+ 3 Prod t 1 Where Prod is measured as Capital Productivity and Labour productivity Risk Risk Risk 1 = Risk t+ 3 Risk t 1 2 = Risk t+ 1 ; t+ 3 Risk t 1 Where Risk is measured as Z-Score and Equity ratio

15 Variables description Variables Symbol Description Independent variables Age L_Age The natural log of the firm s age Equity ratio E/TA Book value of total equity divided by book value of total assets Size L_TA The natural log of the book value of total assets Geographical area D_Geo Dummy takes value 1 if the firm has its registered office in the regions of Northern Italy, 0 otherwise Buy-out D_BO Dummy is set at 1 for buy-out investments and 0 otherwise PE Syndication D_SPE Dummy is set at 1 when companies are backed by PE syndication and 0 otherwise Type PE investors D_BPE Dummy is set at 1 when companies are backed by bank-based PE investors and 0 otherwise Investment Period IP The number of years between the time of investment and the time of disinvestment Buy back D_BB Dummy is set at 1 when PE investors sell their shareholding to old entrepreneurs and 0 otherwise Secondary Buy-out D_SBO Dummy is set at 1 when PE investors sell their shareholding to other PE investors and 0 otherwise Trade Sale D_TS Dummy is set at 1 when PE investors sell their shareholding to a new entrepreneurs and 0 otherwise IPO D_IPO Dummy is set at 1 when PE investors sell their shareholding to the market (IPO) and 0 otherwise Crisis CR Time dummy is set at 1 when PE investors sell their shareholding in or after the 2007 and 0 otherwise

16 Preliminary findings Table 1 - Descriptive statistics on simple indicators. Variable Obs Mean Std. Dev. Min Max Growth Sales *** Sales *** Performance ROA *** ROA *** Sales Margin *** Sales Margin *** Profit Margin *** Profit Margin *** Productivity Capital Productivity * Capital Productivity ** Labour Productibity *** Labour Productivitiy ***

17 Preliminary findings Table 2 - Descriptive statistics on adjusted indicators. Variable Obs Mean Std. Dev. Min Max Growth Sales *** Sales *** Performance ROA *** ROA *** Sales Margin ** Sales Margin *** Profit Margin * Profit Margin ** Productivity Capital Productivity * Capital Productivity ** Labour Productibity ** Labour Productivitiy **

18 Preliminary findings Table 3 - Ordinary Least Squares Regression (1) (2) (3) (4) Growth 1 Perf 1 Prod 1 Prod 2 Sales ROA Capital productivity Labor productivity L_Age *** ** *** *** E/TA *** * *** L_TA *** * D_BB ** ** *** *** D_Geo *** ** D_SBO *** * D_TS *** ** D_BO ** ** IP ** * ** *** D_SPE * CR *** _cons *** R 2 47,78% 14,54% 23,37% 24,86%

19 Prelimanary findings Table 4 - Ordinary Least Squares Regression (1) (2) (3) (4) Growth2 Perf 2 Prod2 Prod2 Sales ROA Capital productivity Labor productivity L_age *** * *** ** E/TA *** ** L_TA *** ** D_BB *** ** *** *** D_Geo ** * * D_SBO *** ** ** D_TS *** D_BO ** * IP ** ** *** D_SPE * CR *** ** * _cons *** R % 20,39% 22,81% 21,59%

20 Conclusion and next steps PE backed firms show higher sales growth but worse performance due to the reduction of capital productivity. Buy-out backed firms show a greater decline in performance and productivity. PE investors work better when the lenght of the investiment period is higher. PE Syndications seem to work better than Individual PE investors. The way-out strategy seems to affect our key variables.

21 Conclusion and next steps In order to improve our contribution and obtain more interesting and robust findings, we are going to: Collect accounting data starting from the year before the PE investment until the three years after the disinvestment Collect data on European PE investments (by using Zephyr)