Interest alignment and firm performance

This study derives testable hypotheses from their framework and thus provides an empirical test of interest alignment theory based on a sample of 69 management buyouts in the UK. The results of the multivariate regression model suggest that in this setting, interest alignment does have a significant influence on firm performance.competitive advantage; interest alignment; motivation; buyouts

The risk-adjusted performance of US buyouts

This paper assesses the risk-adjusted performance of US buyouts.risk-adjusted performance; US buyouts; risk; investment

Motivation and the theory of the firm

This paper proposes to revisit the debate on the theory of the firm using motivation theory as the primary analytical tool.theory of the firm; motivation theory

Understanding value generation in buyouts

In this paper, the authors develop a three-dimensional conceptual framework for value generation in buyouts that categorizes and links the different levers of buyouts value generation. This framework provides the basis to take a look beyond individual value levers and shed light on the underlying strategic logic of buyouts.private equity; buyout; value generation

The performance of private equity funds

Using a unique and comprehensive dataset, the authors show that the sample of mature private equity funds used in previous research and as an industry benchmark is biased towards better performing funds. They also show that accounting values reported by these mature funds for non exited investments are substantial and they provide evidence that they mostly represent living dead investments. After correcting for sample bias and overstated accounting values, average fund performance changes from slight over performance to substantial underperformance of -3.83% per year with respect to the S&P 500. Assuming a typical fee structure, they find that gross-of-fees these funds outperform by 2.96% per year. The authors conclude that the stunning growth in the amount allocated to this asset class cannot be attributed to genuinely high past performance. They discuss several potentially misleading aspects of standard performance reporting and discuss some of the added benefits of investing in private equity funds as a first step towards an explanation for our results.Private equity funds; performance

The opportunity cost of capital of US buyouts

This paper addresses the problem of accurately determining buyout opportunity cost of capital for performance analyses. It draws on a unique and proprietary set of data on 133 United States buyouts between 1984 and 2004. For each buyout, we determine a public market equivalent that matches the buyout in timing and systematic risk. We show that under realistic mimicking conditions, the average opportunity cost of capital is below the commonly used benchmark S&P 500. The surprising result has a simple explanation: ex post, many of the transactions mimicking the buyouts would have defaulted in the public market. Only under relaxed assumptions, is the average opportunity cost of capital close to the average index return. Our sensitivity analyses highlight the need for a comprehensive risk adjustment that considers both operating risk and leverage risk for an accurate assessment of buyout performance. This finding is particularly important as existing literature on this topic tends to rely on benchmarks without a proper risk adjustment.Private Equity; Risk-Adjusted Performance; Buyout; Benchmarking Alternative Assets;

Measuring idiosyncratic risks in leveraged buyout transactions

The authors use a contingent claims analysis model to calculate the idiosyncratic risks in Leveraged Buyout transactions.Idiosyncratic Risk; LBO; Private Equity; Benchmarking; CCA

Measuring idiosyncratic risks in leveraged buyout transactions

We use a CCA model to calculate implied idiosyncratic risks of LBO transactions. A decisive model feature is the consideration of amortization. From the model, the asset value volatility and the equity value volatility can be derived via a numerical procedure. For a sample of 40 LBO transactions we determine the necessary model parameters and calculate the transactions' implied idiosyncratic risks. We discuss the expected model sensitivities and verify them by variation of the input parameters. With the knowledge of the returns to the equity investors of the LBOs we are able to calculate Sharpe Ratios on individual transaction levels for the first time, thereby fully incorporating the superimposed leverage risks.Idiosyncratic Risk; Private Equity; Benchmarking;

The Opportunity Cost of Capital of US Buyouts

This paper measures the risk-adjusted performance of US buyouts. It draws on a unique and proprietary set of data on 133 US buyouts between 1984 and 2004. For each of them we determine a public market equivalent that matches it with respect to its timing and its systematic risk. After a correction for selection bias in our data, the regression of the buyout internal rates of return on the internal rates of return of the mimicking portfolio yields a positive and statistically significant alpha. Our sensitivity analyses highlight the necessity of a comprehensive risk-adjustment that considers both operating risk and leverage risk for an accurate assessment of buyout performance. This finding is particularly important as existing literature on that topic tends to rely on performance measures without a proper risk-adjustment.