Abstract
While the first empirical part of this study was able to establish relationships between diversification, relatedness, experience and performance, the majority of performance differences cannot be explained by looking at private equity portfolios. Instead, one is required to investigate the different management models and characteristics of private equity firms and how those differences lead to superior or inferior performance. The alchemy of the management models of private equity players is what ultimately explains the success factors of a good private equity player and will highlight what it will take for a public corporation to learn from private equity.
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Notes
- 1.
Players with both high degrees of relatedness and unrelatedness have a substantial number of investments in multiple industries; players with both low degrees of relatedness and unrelatedness are dominated by individual investments in a limited number of industry groups.
- 2.
A short profile of all firms included in the exploratory research design is attached in the appendix of this publication. The information contained in the profiles is solely based on publicly available information about the private equity players. All information gained during the exploratory research is used for aggregate research only.
- 3.
For the purpose of this study, all interview information is used on an aggregate level only. The information about each firm obtained during the interview is treated anonymously and all company data not already obtained in the study’s first empirical part or available to the public remains confidential.
- 4.
The interview guide underlying the qualitative empirical part of this study is provided in the appendix of this publication.
- 5.
The experience of the private equity firm is generally measured by the time since its inception respectively the time since the vintage of the firm’s first fund.
- 6.
The skill set of the private equity firm is assessed through the typical recruiting sources. People with financial skills generally are recruited from leading investment banks, management skills are generally found in former management consultants or seasoned managers, and deep operational knowledge typically stems from former long-term industry practitioners.
- 7.
Ten industry groups (defined on the two-digit SIC Code level) is by methodological definition the upper limit for the number of industry groups possible to be assigned to individual firms.
- 8.
Private equity firms typically can call committed capital in the first 5 years of a fund’s lifetime; after this period, funds have to negotiate new capital injections by either existing or new investors.
- 9.
Large companies historically trade at higher multiples on capital markets than small companies. Private equity firms take advantage of this phenomenon by combining companies to create larger assets.
- 10.
The influence of different management models on performance is discussed in further detail in Sect. 6.4.1 “Comparison of Management Models and Impact on Performance”.
- 11.
The private equity firm’s investment committee is generally involved in decision making if major investments or strategic shifts are up for decision that have not been part of the initial investment thesis.
- 12.
Passive investors can include other private equity firms that restrict their role in the engagement to a passive co-investment as well as investors that generally act as limited partners in PE funds but are given selective opportunities to make direct co-investments.
- 13.
The influence of different management models on performance is discussed in further detail in Sect. 6.4.1 “Comparison of Management Models and Impact on Performance”.
- 14.
The two general management models “Opportunistic Financial Investor” and “Interventionist Manager” explain 80% of the firms sampled in this study. Only the remaining 20% are represented by the hybrid models outlined in this section.
- 15.
To maintain interview confidentiality and anonymity, the performance review of permanent and transitional hybrids is combined given the small number of firms within this category.
- 16.
The influence of different management models on performance is discussed in further detail in Sect. 6.4.1 “Comparison of Management Models and Impact on Performance”.
- 17.
Given the anonymity promised to the study’s participants, the well documented example of KKR appears valuable to further illustrate the observed trends in private equity management models. All information used to highlight the transformation of KKR is based on public information and is not drawn from any interviews conducted during the exploratory research of this study.
- 18.
The 5-year period of the study’s data sample includes the years 2002–2006. The 10-year period includes the years 1997–2006.
- 19.
A large number of multi-business firms are publicly listed companies; however, the study’s propositions are supposed to be as applicable in privately held companies that are structured along the lines of traditional multi-business firms.
- 20.
A number of recent contributions such as Moon (2006), Draho (2007), or Kaplan (2007a) discussed the opportunity to encourage minority engagements of private investments in public equity, so-called PIPEs, to bring the advantages of active ownership into public equity as happened in the investment of Blackstone in Deutsche Telekom or the 25% stake of Elevation Partners in Palm Computer. While this thought is valuable for the management of the overall firm, it does not address the lack of ownership within the portfolio of a multi-business firm. In the argumentation of this study, the holding of a multi-business firm itself has to become more like a private equity firm.
- 21.
See Stewart (1990) for a description of successful examples of leveraged equity purchase plans and internal leveraged buyouts in public multi-business firms. Examples include the internal LBO of Union Texas Petroleum or the transformation of Kaydon.
- 22.
Several prior contributions such as Gupta and Rosenthal (1991), Denis (1994), Denis and Denis (1995), Peyer and Shivdasani (2000), or Shivdasani and Zak (2007) have investigated the use of leveraged recapitalizations to distribute cash to investors, to create acquisition currency for the company, and to bring the advantages of leverage to public companies. Leveraged recapitalizations however bring these advantages only to the holding level and have no direct consequence for individual businesses of a multi-business firm but have often been used as one-time defense mechanism against potential takeovers. Internal leveraged buyouts on the other hand affect the divisional level and can result in a new and permanent form of organizational architecture. Stewart (1990: 132) advocates for “the use of internal LBOs as a systematic and voluntary part of a company’s strategy – as applicable to healthy, core businesses as to underperforming, peripheral ones”.
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© 2009 Physica-Verlag Heidelberg
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Klier, D.O. (2009). Empirical Part II: Managing Diversified Portfolios. In: Managing Diversified Portfolios. Contributions to Management Science. Physica, Heidelberg. https://doi.org/10.1007/978-3-7908-2173-4_6
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