An Explorative Event Study of Listed Private Equity Vehicles

AN EXPLORATIVE EVENT STUDY OF LISTED PRIVATE EQUITY VEHICLES
- AND THEIR RETURN TO ANNOUNCEMENTS OF ACQUISITIONS
AUTHOR: LINE OF STUDY: ADVISOR: DEPARTMENT:
MATHIAS LETH NIELSEN (287766) MSC. FINANCE AND INTERNATIONAL BUSINESS PALLE NIERHOFF DEPARTMENT OF BUSINESS STUDIES
JULY 2012 BUSINESS AND SOCIAL SCIENCES, AARHUS UNIVERSITY
EXECUTIVE SUMMARY
The last decade has seen a remarkable development within private equity. Private equity funds have become a key player in the market for corporate control and now accounts for a major share of the global M&A activity. However, private equity itself has changed. Listed private equity has emerged and approximately 350 private equity vehicles are now listed worldwide. Despite the relatively small number of vehicles, the development is striking since some of the largest and most renowned private equity vehicles, such as Blackstone and KKR, have chosen to go public. From an academic point of view, the emergence of listed private equity vehicles significantly expands the opportunities for investigating an industry that is known for being notoriously private. The aim of this thesis is to fill a gap in the understanding of private equity; namely how listed private equity vehicles perform during acquisitions. Numerous researchers have investigated how listed companies perform when they announce acquisitions, but despite the fact that several authors have suggested that much of the value generation in private equity is determined during the acquisition phase, no studies have yet investigated the abnormal return to announcements of acquisitions by listed private equity vehicles. In addition to this, only a handful of studies have investigated the field of listed private equity. This presents a unique opportunity to influence the research. Based on an explorative review of the literature within M&A, private equity and listed private equity, the thesis develops 22 hypotheses. Nine of these hypotheses are selected for further analysis and tested in an event study, which consists of a battery of tests incl. parametric, nonparametric and event-induced variance tests. The sample is based on information from LPX Group and consists of 129 carefully selected deals conducted by 18 listed private equity vehicles in the period 2001-2012. The study finds an insignificant CAAR of 0.26% to the announcement of acquisitions by listed private equity vehicles. In addition to this, the study finds that the announcement returns depend on the structure and the experience of the listed private equity vehicle as well as on the period in which the deal is conducted. These results are in line with former studies within M&A and private equity. The fact that listed private equity vehicles earn non-negative abnormal returns from the announcement of acquisitions suggests that managers of listed private equity vehicles have a shareholder wealth maximizing motive in acquisitions.
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MATHIAS LETH NIELSEN
TABLE OF CONTENTS
1. Introduction .............................................................................................................. 1 1.1. 1.2. 1.3. 1.4. 1.5. 1.6. 2. Problem Statement ............................................................................................. 1 Delimitations ...................................................................................................... 2 Philosophy of Science ........................................................................................ 3 Methodology ...................................................................................................... 3 Structure ............................................................................................................. 4 Technical Issues ................................................................................................. 5
The Market for Corporate Control............................................................................ 6 2.1. 2.2. 2.3. 2.4. Introduction ........................................................................................................ 6 The Neoclassical Finance Theory ...................................................................... 6 Agency Theory .................................................................................................. 7 The Behavioural Finance Theory ...................................................................... 8
3.
Private Equity ........................................................................................................... 9 3.1. 3.2. 3.3. The Structure of a Private Equity Fund ........................................................... 10 The Lifecycle of a Private Equity Fund ........................................................... 10 Current Trends in Private Equity ..................................................................... 11
4.
Listed Private Equity .............................................................................................. 12 4.1. 4.2. 4.3. Definition of Listed Private Equity .................................................................. 12 The Diversity of Listed Private Equity Vehicles ............................................. 13 Comparison of Private Equity and Listed Private Equity ................................ 14
5.
Value Generation in Listed Private Equity ............................................................. 16 5.1. 5.2. A Three-Dimensional Framework of Value Generation ................................. 16 Levers of Value Generation ............................................................................. 17 Financial Improvements ........................................................................... 17 Operational Improvements ....................................................................... 18 Corporate Governance Improvements ...................................................... 19
5.2.1. 5.2.2. 5.2.3.
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5.3. 6.
Implications ..................................................................................................... 20
Literature Review ................................................................................................... 20 6.1. 6.2. Introduction ...................................................................................................... 20 Abnormal Returns to Listed Private Equity Vehicles ...................................... 21 Abnormal Returns to Listed Acquirers in General ................................... 22 Abnormal Returns to Acquirers in PE-Related Deals .............................. 22 Complicating Issues .................................................................................. 24 Expected Abnormal Return to Listed Private Equity Vehicles ................ 24
6.2.1. 6.2.2. 6.2.3. 6.2.4. 6.3.
Determinants of Abnormal Returns to Listed Private Equity Vehicles ........... 25 Deal Characteristics .................................................................................. 25 Target Characteristics ............................................................................... 29 Acquirer Characteristics ........................................................................... 32
6.3.1. 6.3.2. 6.3.3. 6.4. 7.
Sub Conclusion ................................................................................................ 36
Hypotheses ............................................................................................................. 36 7.1. 7.2. 7.3. Presentation and Selection of Hypotheses ....................................................... 36 Specification of Hypotheses ............................................................................ 37 Sub Conclusion ................................................................................................ 40
8.
Data and Sample ..................................................................................................... 41 8.1. 8.2. Sample Selection.............................................................................................. 41 Descriptive Statistics........................................................................................ 42
9.
Methodology........................................................................................................... 43 9.1. 9.2. 9.3. 9.4. 9.5. 9.6. Introduction ...................................................................................................... 43 Definition of the Event .................................................................................... 43 Estimation of Abnormal Return ....................................................................... 44 General Testing Procedure............................................................................... 47 Testing Procedure for Tests of Differences ..................................................... 50 Performance of Test Statistics ......................................................................... 51
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10.
Empirical Findings .............................................................................................. 52 Discussion of the Results ............................................................................. 52 Overall CAAR ...................................................................................... 52 Deal Period ........................................................................................... 53 Deal Size ............................................................................................... 54 The Industry of the Target .................................................................... 55 The Legal Origin of the Target ............................................................. 55 The Former Ownership of the Target ................................................... 56 The Structure of the LPEV ................................................................... 56 The Experience of the LPEV ................................................................ 57 The Investment Strategy of the LPEV .................................................. 58
10.1.
10.1.1. 10.1.2. 10.1.3. 10.1.4. 10.1.5. 10.1.6. 10.1.7. 10.1.8. 10.1.9. 10.2. 10.3. 11. 12. 13. 14.
Value Generating Levers .............................................................................. 58 Reliability and Validity ................................................................................ 59
Conclusion ........................................................................................................... 60 Future Research ................................................................................................... 61 List of Literature Appendices
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LIST OF EXHIBITS
Exhibit 1.1 Methodological Approach Exhibit 1.2 Structure of the Thesis Exhibit 3.1 The Structure of a Private Equity Fund Exhibit 4.1 Four Types of Listed Private Equity Vehicles Exhibit 7.1 Prioritization of Hypotheses Exhibit 10.1 CAAR to Announcements of Acquisitions by LPEVs 3 4 10 13 37 53
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1.
INTRODUCTION
The last decade has seen a remarkable development within private equity. Private equity funds have become a key player in the market for corporate control and now accounts for 12.9% of the global M&A activity measured by deal value (Mergermarket 2012). However, private equity itself has changed. Listed private equity, a contradiction in terms, has emerged and approximately 350 private equity vehicles are now listed worldwide (Talmor & Vasvari 2012). Despite the relatively small number of vehicles, the development is striking since some of the largest and most renowned private equity vehicles, such as Blackstone and KKR, have chosen to go public (Talmor & Vasvari 2012). From an academic point of view, the emergence of listed private equity vehicles significantly expands the opportunities for investigating an industry that is known for being notoriously private. The aim of this thesis is to fill a gap in the understanding of private equity; namely how listed private equity vehicles perform during acquisitions. Numerous researchers have investigated how listed companies perform when they announce acquisitions, but despite the fact that several authors (e.g. Berg & Gottschalg 2005) have suggested that much of the value generation in private equity is determined during the acquisition phase, no studies have yet investigated the abnormal return to announcements of acquisitions by listed private equity vehicles. In addition to this, only a handful of studies have investigated the field of listed private equity. This presents a unique opportunity to influence the research while contributing to a better understanding of listed private equity. This leads us to the problem statement of the thesis.
1.1.
Problem Statement
The purpose of the thesis is to investigate the performance of listed private equity vehicles in connection with their announcement of acquisitions. Through an explorative review of the literature within M&A, private equity and listed private equity, a number of hypotheses about the short run abnormal return to announcements of acquisitions by listed private equity vehicles will be developed. The most relevant of these hypotheses will be analysed using an event study and the results will be compared to previous empirical evidence. This will yield an improved understanding of listed private equity vehicles performance in acquisitions and what this performance depends on.
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In conclusion, the main research question is the following: R.Q. 1: Does announcements of acquisitions by listed private equity vehicles generate short run abnormal returns to their shareholders? Since buyout performance is likely to be context specific (Wood & Wright 2009) and depend on characteristics of the deal, the target, and the acquirer (Martynova & Renneboog 2011), a second research question is: R.Q. 2: Does the short run abnormal return to the announcement of acquisitions by listed private equity vehicles depend on certain deal, target, or acquirer characteristics? The research questions will guide the thesis and give rise to a number of hypotheses which will be tested throughout the thesis1.
1.2.
Delimitations
First of all, the term vehicle will be used to describe all of the following entities: private equity firms, private equity funds, investment companies committed to the private equity model, and private equity funds-of-funds. The focus of this thesis will be the short run abnormal return earned by the acquiring listed private equity vehicles shareholders in connection with the announcement of acquisitions. This implies that only listed private equity vehicles (LPEVs) will be studied. Secondly, the LPEVs must adhere to the traditional private equity (PE) model and be classified as buyout vehicles. Hence, as we shall see in chapter 4, the subjects of study are LPE funds, LPE firms, and listed investment companies. Consequently, venture capital funds, funds-of-funds and LPE mezzanine providers are not included in the study. Furthermore, the study will only focus on Europe and the U.S. since these areas have the most mature takeover markets and the most developed LPEVs (Talmor & Vasvari 2012). Due to the fact that the study will focus on the short run abnormal return, neither the long-run performance of PE vehicles (PEVs) nor the returns to shareholders of LPEVs in connection with the announcement of sales of portfolio companies will be examined. Since this is a master thesis, the audience is expected to be familiar with M&A and the basics of PE. Relevant definitions and further delimitations will be made throughout the thesis when deemed appropriate.
1
See chapter 6 and 7 for more information about the hypotheses.
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1.3.
Philosophy of Science
All scientific research is likely to be influenced by the view of the researcher. Therefore it is important to describe the methodological approach, incl. the philosophy of science, which the research is based on. This can be described by its ontology and epistemology. Exhibit 1.1 Methodological Approach
Underlying Assumptions Methodological Approach Operative Paradigm
Paradigm
Study Area
Philosophy of Science Source: Adapted from Abnor & Bjerke (1997)
Methodology
Ontology concerns how the researcher perceives reality, while epistemology concerns what knowledge is and how it is created. The thesis is based on the assumption that reality is objective and that the whole is the sum of its parts. Hence it is assumed that knowledge is independent of the researcher. Knowledge is created by verifying /falsifying hypotheses about causal relationships in the real world. Based on this, the paradigm of the study is the analytical approach. This approach is rooted in positivism, which implies that knowledge comes from experience. The purpose of the analytical approach is to explain the objective reality. How this is done, is explained below.
1.4.
Methodology
Given the analytical approach, the operative paradigm can now be described. The operative paradigm aims to bridge the philosophy of science with the research area in order to produce a picture of the objective reality. The operative paradigm consists of the methods and procedures used for creating knowledge (Abnor & Bjerke, 1997). In the sections above, the problem has been identified and defined, the scope of the study has been outlined and the area of study has been presented. Therefore, what remains is to explain how the study aims to answer the research questions. First, the study will present a number of theories within the area of study. Secondly, an explorative review of the existing empirical evidence within M&A, PE, and LPE will be conducted. Based on this, hypotheses will be deducted. Third, a number of experiments will be carried out in order to test the hypotheses. The experiments will be conducted as an empirical, quantitative study using a classical event study framework as outlined by Campbell et al. (1997). The hypotheses relating to each research question will be tested
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in two parts. First, a battery of nine test statistics will be used for the analysis of the hypothesis relating to research question 1. Afterwards, the hypotheses relating to research question 2 will be tested by means of two tests for differences. In addition to this, the underlying assumptions will be tested using various statistical techniques. The experiments will lead to verification or falsification of the hypotheses. Based on this, one will be able to answer the research questions and propose areas for future research.
1.5.
Structure
The first part of the thesis consists of chapter 2-4 and will establish the theoretical framework. Chapter 2 will outline the major theories behind takeovers incl. the neoclassical finance theory, agency theory, and behavioural finance theory. Chapter 3 will then give an introduction to PE in general, while chapter 4 will go into depth with the specific characteristics of LPE. Based on this, the reader should have a solid basis for understanding LPEVs. Exhibit 1.2 Structure of the Thesis
The aim of the second part of the thesis is to explore the current state of the research and develop hypotheses about the abnormal return to LPEVs. First, chapter 5 will explain how LPEVs generate value. Then chapter 6 will explore the existing empirical evidence within M&A, PE, and LPE. This will lead to the development of 22 different hypotheses. Afterwards, chapter 7 will evaluate the proposed hypotheses and select nine of them for further analysis.
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The third part of the thesis will be the analysis, which will consist of chapter 8-10. The objectives of these chapters are to choose the proper subjects of analysis, outline the methodology and present the empirical results. First, chapter 8 will explain how the sample is selected and present various descriptive statistics. Then chapter 9 will provide an explanation of the event study methodology including the test statistics and their performance. Finally, chapter 10 will discuss the empirical findings and the reliability and the validity of the study. The fourth and final part of the thesis will provide an answer to the research questions, relate the results to the fundamental theories governing the market for corporate control, and outline future research areas. Chapter 11 will summarize the findings and provide an answer to the research questions while chapter 12 will outline future research areas.
1.6.
Technical Issues
The literature has been gathered from Aarhus Universitys article databases, incl. Business Source Complete, JSTOR, Science Direct and Wiley Online Library. The data has been gathered from Zephyr and Datastream based on information from LPX Group. The analyses have been conducted using MS Excel 2007, while the assumptions have been tested in EViews 5.0. MS Excel 2007 has been used for preparing the data for EViews 5.0. Datasets can be found on the enclosed CDROM.
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2.
THE MARKET FOR CORPORATE CONTROL
The following chapter will provide an introduction to the market for corporate control, outline three of the main theories within this area, and explain their predictions about the abnormal returns to acquirers announcing acquisitions.
2.1.
Introduction
According to Jensen and Ruback (1983), corporate control can be defined as the rights to decide the management of corporate resources. Thus, the market for corporate control can be defined as: ... an arena where managerial teams compete for the rights to manage corporate resources. (Jensen & Ruback 1983, p.1). The managerial team that acquires the rights to manage the corporate resources is called the acquirer, while the seller of the rights to manage the corporate resources is called the target. An acquisition can therefore be defined as a transaction where money flows from an acquirer to a target in exchange for the rights to control the targets corporate resources2. In order to understand acquisitions it is important to understand their corporate context. Essentially, an acquisition is an investment decision. Other corporate investments like JVs and R&D have abnormal returns of less than 1% (Andrade et al. 2001). An abnormal return of zero implies that an investment has the same risk-adjusted rate of return as the acquirer earns on the existing assets. Thus, an acquisition which yields an abnormal return of zero will have a fair rate of return from the acquiring firms point of view. The causes and consequences of acquisitions have been widely studied by academics. The empirical results have differed quite substantially and hence several theoretical explanations of acquisitions have been proposed. Yet, three main bodies of theory stand out; the neoclassical finance theory, agency theory, and the behavioural finance theory.
2.2.
The Neoclassical Finance Theory
The neoclassical finance theory is based on the efficient market hypothesis (EMH) and the law of one price (Ross 2002) and relies on the assumptions of rational expectations. Rational expectations imply that investors know the true economic model that generate future returns and incorporate all relevant information in their forecast of expected returns (Fama 1970; Cuthbertson & Nitzsche 2004). Further assumptions are that forecast errors are mean zero and unpredictable from information available at the time of the
2
As an acquisition implies that the acquirer takes control over the target, the term takeover is often used instead.
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forecast. Hence, the neoclassical finance theory implies that it is impossible to earn abnormal returns in the long run in an efficient market. According to the neoclassical finance theory the price of a security equals the present value of the expected future cash flows, given the investors information set. Furthermore, following the law of one price, the security will only have one price namely the market price. Security prices will therefore only change when new information, that changes the expected future cash flows, is available. Generally, one distinguishes between three forms of market efficiency depending on the information that is incorporated in the investors information set and hence in the security price. If the information set only incorporates information contained in past prices and returns, the market is efficient in its weak form. If security prices reflect all publicly available information, the market is efficient in its semi-strong form. If security prices reflect all information that can possibly be known, incl. insider information, the market is efficient in its strong form. In the remained of the thesis, the EMH will be referred to in its semi-strong form. The neoclassical finance theory predicts that acquisitions will occur because efficient markets will ensure that poorly performing managers are replaced. In addition to this, managers of a company will only engage in an acquisition if it maximizes shareholder value, i.e. increases the risk-adjusted expected future cash flows. Thus, the neoclassic finance theory argues that the announcement of acquisitions should lead to zero or positive abnormal returns to both the acquirer and the target.
2.3.
Agency Theory
The second main body of theory is agency theory. It is often associated with Jensen and Meckling (1976), who defined an agency relationship as: a contract under which one or more persons (the principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent. (Jensen & Meckling 1976, p. 308) Inherent in an agency relationship are certain incentive problems. The separation of ownership and control implies that there is asymmetric information since managers (agents) have better (private) information about the actual performance of the company than the owners (principals). If incentives differ between agents and principals, a probJULY 2012 MATHIAS LETH NIELSEN 7
lem might arise; namely that managers associate less utility with the maximization of profits than the shareholders. The reason is that managers derive their utility from perks such as access to a corporate jet. On the other hand, shareholders derive their utility from the profits the company generates. Since corporate jets are expensive to operate, they will, ceteris paribus, have a negative impact on the profits. However, the investment in a corporate jet could be partly disguised by the management, by e.g. not reporting the total expenses to the companys owners. When managers act in their own interest instead of in the interest of the shareholders, it is described as moral hazard. According to agency theory acquisitions can occur for two reasons. First, managements rewards often take the form of pay and recognition. Since both rewards are likely to increase with the size of the company, managers might engage in acquisitions which increase the size of the company, but do not maximize the value for the shareholders. Consequently, there should be negative abnormal returns to the announcement of acquisitions. Secondly, the motive of an acquisition might be to decrease the agency costs by taking over the company and aligning the interests between management and shareholders, as PEVs do. Such acquisitions are value maximizing and should hence result in non-negative abnormal returns3.
2.4.
The Behavioural Finance Theory
The behavioural finance theory emerged because scholars found an increasing amount of anomalies in stock prices while psychologists and sociologists argued that investors were not rational (Cuthbertson & Nitzsche 2005). Thus, they partly abandoned the EMH. The theory has mainly focused on explaining anomalies in stock returns and asset bubbles, but at least one behavioural finance theory regarding takeovers has been proposed; namely the hubris hypothesis. It was proposed by Roll (1986) and relies on the strong form of market efficiency. This means that security prices reflect all information about individual firms (incl. insider information) and that product and labour markets are efficient, i.e. there are no synergies and management talent is efficiently employed. Hence, the hubris hypothesis argues that there are no gains from takeovers. Since it is costly to perform a takeover, the hubris hypothesis suggests that the abnormal return to acquirers is negative. Since targets will only accept an offer that is above the current market price, the abnormal returns to the targets should be positive.
For more information about agency theory and private equity see chapter 5.
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If the abnormal return to takeovers is negative and financial, labour, and product markets are efficient, why do takeovers occur? The hubris hypothesis argues that the valuation of a company can be considered a random variable with a mean equal to the market price. Offers are made when the random variable is larger than the mean; otherwise they are abandoned. Hence, the takeover premium is a random error which managers of acquiring firms have failed to account for. The hubris hypothesis therefore argues that takeovers occur because managers of acquiring firms assume their valuations are correct even when they are not, i.e. managers are overconfident about their own abilities and hence infected by hubris. It is worth noting that this does not mean that managers do not intend to be wealth maximizing on the behalf of their shareholders; they might simply be unaware that their actions do not comply with this objective. Based on the main bodies of theory within the market for corporate control, the motives for engaging in acquisitions vary from shareholder wealth maximization to maximization of managements utility and management hubris. If the analysis shows nonnegative abnormal returns it will provide support for the shareholder wealth maximization motive, while negative abnormal returns will support the latter two motives. Having outlined the theories governing takeovers, the next chapter will give an introduction to PE and place it in the context of the market for corporate control.
3.
PRIVATE EQUITY
Private equity (PE) belongs to the asset management industry. Essentially, PE is a vehicle which enables investors to invest in unlisted companies that are not covered by the public equity markets. Investment occurs through PE funds (also known as buyout funds). According to Spliid (2007), Vinten and Thomsen (2008) and Talmor and Vasvari (2012) the characteristics of these funds are that they; buy, own and sell controlling positions in mature companies, finance a substantial part of their investments by debt ensure that management teams of the portfolio companies have a significant amount of equity invested in the company, pay their managers based on performance and the amount of assets under management, and have a finite life time.
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It is therefore clear that PE funds differ from other long-term investment funds as well as from venture capital funds and hedge funds. Venture capital funds invest in the early stages of a companys life cycle and tend to concentrate their investments in high-tech companies; hedge funds are short-term investors that acquire non-controlling ownership stakes and earn their profits from speculative investments (Talmor & Vasvari 2012).
3.1.
The Structure of a Private Equity Fund
In order to understand how a PE fund works and how it creates value, it is essential to understand its structure. The typical structure of a PE fund is depicted in exhibit 3.1. Exhibit 3.1 The Structure of a Private Equity Fund
Source: Adapted from Talmor and Vasvari (2012)
Generally, a PE fund is controlled by a PE firm (a management company) which manages one or more funds. Each fund consists of a number of portfolio companies. The PE funds are organized as partnerships with general partners (GPs) and limited partners (LPs). The GPs own and run the PE firm and invest personally in the funds as minority investors. The majority investors in the PE funds are the LPs which commit a certain amount of capital. The committed capital is drawn upon as the PE firm finds attractive companies to acquire. As the portfolio companies are exited, capital flows back to the investors. This will be explained in further details below.
3.2.
The Lifecycle of a Private Equity Fund
The major tasks of the PE firm are closely related to the lifecycle of a PE fund. The first period of a PE funds lifecycle is the fundraising period, which can take up to 18
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months (Talmor & Vasvari 2012). Here, the PE firm negotiates with potential investors in order to raise capital for their fund. When a fund has been raised, the next step is to invest the capital in portfolio companies. The second period is therefore called the investment period. Here, investment managers of the PE firm screen and identify potential targets. When they find an interesting target they initiate a bidding process. If the PE firm and the targets owners can agree on a price, the PE firm establishes an acquisition company. The new management team of the target is then asked to invest a considerable amount of their personal wealth in the acquisition company as LPs, in order to ensure that they have the same interests as the owners. Occasionally, LPs are invited to join a deal as co-investors which imply that they can invest directly in the target and hence avoid the management fees. Subsequently, the deal is announced and the acquisition company buys the target. The acquisition company is financed with debt from banks and credit institutions and equity from the PE fund and co-investors such as LPs and the new management team. The process in repeated until all the committed capital is invested. When this is the case, the PE firm earns a yearly fee of 2% of the assets under management4 (Talmor & Vasvari 2012). After having invested the capital, the PE firm cooperates closely with the management teams of the portfolio companies to improve the performance. Due a PE funds limited life time of approximately 10 years (Kaplan & Strmberg 2009), the expected holding period for portfolio companies is between three and seven years (Talmor & Vasvari 2012). After the holding period, the portfolio companies are exited (sold) through either an IPO, a sale to a strategic buyer (an industrial sale), or a sale to another PE fund (a secondary sale). This is known as the harvesting period. When portfolio companies are exited, proceeds flow back to the LPs. The LPs receive their invested capital plus any return up to a hurdle rate of typically 8% (Talmor & Vasvari 2012). For the return above the hurdle rate, the LPs pay 20% to the GPs in carried interest5 and receive the remaining 80% (Talmor & Vasvari 2012).
3.3.
Current Trends in Private Equity
The credit crisis had a major impact on the PE business. This is reflected in the current trends among PE funds. First of all, tough market conditions, lower degrees of leverage
4 5
The management fee is 2% of the committed capital during the investment period. Hence, the fee structure in PE is normally referred to as 2/20.
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and increased competition have led PEVs to focus on operational improvements (BCG 2008; Kaplan 2009; Bain & Co. 2012; Talmor & Vasvari 2012). Since operational improvements often require industry specific knowledge PE funds are specializing within specific industries or niches. Finally, as mentioned in the introduction, an increasing number of PEVs have been listed during the last couple of years. This has raised serious concerns among scholars who fear that the interests of managers and investors in LPEVs can diverge (Jensen 2007; Sloan & Benner 2008). Jensen (2007) argues that since LPEVs receive permanent capital, they do not need to show superior performance to the same extent as PEVs, which have to raise capital for new funds on a frequent basis. In addition to this, Lerner (in Sloan & Benner 2008) argues that managers become more short-termed as they aim to please the stock market, whereas investors bought the stock in order to benefit from the long term perspective PE have on their investments. Based on the information provided in this chapter, it is clear that PEVs are a key player in the market for corporate control. Their performance has, however, been difficult to evaluate due to their private nature.
4.
LISTED PRIVATE EQUITY
PEVs have historically been privately held entities. Interestingly, an increasing number of LPEVs have emerged during the last two decades, going from around 75 vehicles in 1990 to approximately 350 vehicles by the end of 2009 (Talmor & Vasvari 2012). Despite the fact that LPEVs have been around since the early 1960s, LPE is therefore a relatively new asset class (Lahr & Herschke 2009).
4.1.
Definition of Listed Private Equity
The term listed private equity is the most common name for the asset class and will be used throughout the study, although it is also known as publicly traded private equity and quoted private equity. The asset class consists of various LPEVs which are defined as PEVs that are listed on a stock exchange and offer investors the opportunity to participate either directly or indirectly in PE investments. Furthermore, the vehicles pursue a clear PE strategy, commit to the PE investment process, and primarily invest in private companies (Bilo et al., 2005; Lahr & Herschke, 2009; Talmor & Vasvari, 2012).
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4.2.
The Diversity of Listed Private Equity Vehicles
LPEVs are more diverse than traditional PEVs and can be divided into four different types as shown in exhibit 4.16. Exhibit 4.1 Four Types of Listed Private Equity Vehicles
Sources: Adapted from Lahr and Herschke (2009), Talmor and Vasvari (2012) and LPX Group (2012c)
Investment companies are managed by internal investment professionals and invest directly in portfolio companies. Thus, they offer diversification at portfolio company level, but not at fund level. Besides the fact that they are committed to the PE business model, they look like ordinary holding companies. LPE funds receive investment management from an external management company and invest directly in portfolio companies. Thus, they offer diversification at portfolio company level. Investors in LPE funds essentially invest in the limited partnership stake. Therefore LPE funds are very similar to traditional PE funds. However, LPE funds are often allowed to invest in other assets. LPE firms are essentially listed management firms. This implies that they are internally managed and that they invest in the general partners funds. LPE firms therefore offer
6
Section 4.2 is inspired by Talmor and Vasvari (2012).
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investors diversification at both fund and portfolio company level. In addition to this, investors in LPE firms get a share of the management fees and the carried interests. LPE funds of funds are externally managed and invest in PE funds. This implies that LPE funds of funds act as limited partners in several PE funds. Investors are therefore only indirectly exposed to PE, but in return they get diversification at both fund and portfolio level. Since LPE funds of funds differ significantly from traditional PE firms, they will be excluded from the remainder of the study. The majority of the LPEVs are LPE funds and investment companies, whereas LPE firms account for a minor share (LPX Group 2012d). However, LPE firms are relevant to include in the study since they represent a significant proportion when measured by their market capitalization7 (Talmor & Vasvari, 2012). Geographically, the LPEVs are concentrated in the U.S. and Europe, which account for 94% of all LPEVs (LPX Group 2012b). Therefore, these will be the geographical focus areas of the study.
4.3.
Comparison of Private Equity and Listed Private Equity
Listed private equity differs from unlisted private equity in a number of ways 8. First of all, shares in LPEVs are listed and hence more liquid. This makes it easy to trade shares in LPEVs. A sale of shares in a PEV is difficult and time consuming since secondary transactions between limited partners have to be approved by the general partner. Furthermore, the transaction costs are high due to illiquidity. The only transaction cost in LPE is the bid-ask spread (Bergmann et al. 2009; Talmor & Vasvari 2012). Secondly, PE funds have high minimum investment requirements whereas there is no minimum investment requirement in LPE. Hence LPE provides better access for retail investors. The combination of no minimum investment and liquidity implies that it is easier for investors to diversify their investments in LPE than in PE. Furthermore, PE requires investors to have a fixed investment horizon of 7-10 years, whereas LPE allows for a flexible investment horizon (Bergmann et al., 2009; Talmor & Vasvari, 2012). Third, PE and LPE differ on a number of structural parameters. PEVs are often large, have a limited life, return realized proceeds to investors and raise capital for each new fund. LPEVs, on the other hand, are typically small, have an unlimited life, often retain
7 8
The Blackstone Group, Partners Group, Onex Corp., American Capital, and Intermediate Capital Corp. See appendix 1 for a tabular overview of the differences
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and reinvest realized proceeds, and have a fixed pool of capital (Brown & Krussl 2010; Jegadeesh et al. 2010; Goldman 2011). Therefore, LPEVs do not have to raise new funds to the same extent as unlisted PEVs. Some scholars have argued that this causes LPEVs to care less about their returns (Sloan & Benner 2008). However, investors in LPE avoid the J-curve effect, which is predominant in PE. Thus, they gain immediate exposure to PE and the underlying portfolio companies (Cumming et al. 2011; Talmor & Vasvari 2012). However, LPEVs often invest in other assets than PE, while PEVs typically stick to PE-related assets (Goldman 2011; Talmor & Vasvari 2012). Further structural differences include that LPEVs do not offer co-investments to their investors and trade at a discount relative to their net asset value (NAV) (Brown & Krussl 2010). Finally, LPE is easier and more transparent than PE, since LPEVs handle cash management, charge lower fees and allow for easy performance evaluation due to the fact that prices are quoted (Brown & Krussl 2010; LPEQ 2012; Talmor & Vasvari 2012) The differences between LPEVs and PEVs complicate direct comparison. However, Bergmann et al. (2009) finds that listed and unlisted PEVs behave similar with respect to their risk and return patterns. This limits the problem of comparability. To summarize, part 1 has given a number of valuable insights. Chapter 2 showed that the market for corporate control can be explained by the neoclassical finance theory, the agency theory and the behavioural finance theory, while Chapter 3 gave an introduction to PE and explained how a PE fund works. Furthermore, it argued that the current trends in PE are an increasing focus on operational improvements, specialization within specific industries or niches, and a movement towards listed private equity. Finally, chapter 4 showed that LPEVs are more diverse than PEVs and can be structured as: investment companies, LPE funds, LPE firms or LPE funds of funds. The major differences between PE and LPE are that LPE is more liquid, provide better access for retail investors, and is easier and more transparent. In addition to this, PE and LPE differ on a number of structural parameters such as lifetime and size.
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5.
VALUE GENERATION IN LISTED PRIVATE EQUITY
Having explained what LPE is, the next step is to outline how LPEVs generate value at the portfolio company level. This will provide a solid basis for developing hypotheses and explaining the empirical results.
5.1.
A Three-Dimensional Framework of Value Generation
Berg and Gottschalg (2005) argue that value generation in PE depends on a number of levers and can be analysed along three dimensions; phases, causes, and sources. The phases of value generation can be divided into the acquisition phase, the holding phase, and the divestment phase9. Value generation in the acquisition phase is determined by the acquisition price. In addition to this, the initial business plan and the structure of the buyout are determined. The value generation in the holding phase is determined by the success of implementing and continuously adjusting the business plan. This includes implementing the necessary strategic, operational, and organizational changes. The divestment price determines the value generated in the divestment phase. In addition to this, the mode of divestment is determined in this phase. The second dimension is the causes of value generation. Essentially, value is generated by increasing the equity value of the portfolio company. The equity value of a company can be described by the following equation: (5.1) One can therefore distinguish between two causes of value generation; value capturing and value creation. Value capturing is value generation caused by increasing the valuation multiple while value creation is value generation caused by increasing revenues, improving margins, or decreasing net debt. Value capturing occurs without changing the underlying financial performance of the company and is therefore also known as financial arbitrage. It is achieved by selling a company at a higher valuation multiple than it was bought at and is thus determined during the acquisition and divestment phase. Value creation occurs when the underlying financial performance of the company is improved. This can be achieved through both direct and indirect means. Direct value creation arises through improved financial engineering, operational effectiveness and/or strategic distinctiveness, i.e. things that directly impact the bottom line. Such levers are
9
The first two phases relate to the investment period in the PE fund lifecycle while the last phase relates to the harvesting period.
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called primary levers. The primary levers are influenced by secondary levers such as agency costs, which only have indirect bottom line impact. The third dimension is the sources of value generation, which can be either intrinsic or extrinsic (Berg & Gottschalg 2005). Intrinsic value generation occurs without any form of knowledge transfer from the LPEV to the portfolio company, while extrinsic value generation occurs due to knowledge transfer from the LPEV.
5.2.
Levers of Value Generation
The levers of value generation are usually split into three groups; financial improvements, operational improvements, and governance improvements (Jensen et al. 2006; Kaplan & Strmberg 2009). 5.2.1. Financial Improvements Financial improvements can stem from financial arbitrage and financial engineering. Financial arbitrage is widely recognized by practitioners, but has received surprisingly little attention by academics (Berg & Gottschalg 2005; Loos 2005). It is also known as multiple riding and concerns the value generated from selling at a higher valuation multiple than the portfolio company was acquired at. Financial arbitrage can be based on the following five factors; changing market valuation multiples, private information about the portfolio company (MBO), superior market information (proprietary deal flows and industry expertise), superior deal making capabilities, and conglomerate discounts (Kaplan 1989; Palepu 1990; Singh 1990; Baker & Smith 1998; Berg & Gottschalg 2005; Kaplan & Strmberg 2009)10. It is a case of value capturing, which occurs during the acquisition and the divestment phases. In addition to this, it is extrinsic, since it depends on characteristics of the LPEV. Financial engineering includes levers such as improved capital structure and lower taxes (Berg & Gottschalg 2005). Several authors have argued that an improved capital structure in the form of increased leverage is one of the key levers of value generation in PE, e.g. Kaplan and Strmberg (2009). Since LPEVs are repeat borrowers they have a good reputation with lenders. Thus, they face less strict covenants, higher availability of debt financing and lower interest rates (Berg & Gottschalg 2005; Kaplan & Strmberg 2009). A high level of debt leads to higher interest payments, but due to tax deductibil10
One should, however, be aware that the EMH in its semi-strong form implies that it is impossible to consistently generate value through financial arbitrage (Talmor & Vasvari 2012).
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ity of interests it can also result in significant corporate tax savings (Berg & Gottschalg 2005). In addition to lower taxes, increased debt has disciplining effects on managers. This will be explained in more detail in section 5.2.3. An improved capital structure and a reduction of taxes are primary levers of value creation since they directly affect the bottom line. In addition to this, they depend on the equity investors and are hence extrinsic sources of value generation. Finally, the capital structure is usually determined during the acquisition phase and continually adjusted during the holding phase. 5.2.2. Operational Improvements Operational improvements include both increased operational effectiveness and improved strategic distinctiveness. Increased operational effectiveness can stem from three levers: cost cutting and margin improvements, lower capital requirements, and removal of managerial inefficiencies (Berg & Gottschalg 2005). Cost cutting and margin improvements occur by means of initiating cost reduction programmes and improving productivity through outsourcing activities and decreasing overhead costs (Berg & Gottschalg 2005). Capital requirements are decreased by improving the management of working capital and introducing investment practices that ensure divestment of unnecessary assets and rejection of projects with negative NPVs (Magowan 1989). Finally, the market of corporate control will remove managerial inefficiencies by replacing poorly performing management teams with better and more efficient ones as explained in section 2.2. The three levers of increased operational effectiveness are all primary levers of value creation, since they directly influence the bottom line. They mainly occur during the holding phase and are to a large extent intrinsic as they can occur without interaction with the equity investor. However, removal of managerial inefficiencies requires interaction by the equity investor and can thus be categorized as extrinsic. Increased strategic distinctiveness is a result of refocusing the business. This is done by making a clear prioritization of strategic issues such as markets and products, and outsourcing non-core activities (Muscarella & Vetsuypens 1990). The portfolio company therefore determines which markets and customers to serve, what products and service level to offer, and which distribution channels to use (Berg & Gottschalg 2005). By updating and prioritising key strategic variables, the company is able to refocus its business and leverage its core competencies. This leads to higher profits due to higher revenues, lower costs, or a combination of the two. Since the lever has direct bottom line impact it qualifies as a primary lever of value creation. The lever is partly dependent on
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the equity investors and partly dependent on the portfolio company. Therefore, it is partly extrinsic and partly intrinsic. Finally, the plan for increasing the strategic distinctiveness is created during the acquisition phase, while the implementation of it occurs during the holding phase. From the discussion above, it is clear that LPE ownership has the potential to create value through a number of levers. It is, however, unclear why the portfolio companies have not been able to create this value under other types of ownership. This leads us to the secondary levers of value creation, which emphasise the importance of the active ownership pursued by the LPEVs. 5.2.3. Corporate Governance Improvements LPEVs pursue active ownership through various levers, which all improve the corporate governance of the portfolio companies. None of the levers have any direct bottom line impact; instead they reduce the agency costs and thereby ensure that management takes the necessary actions to improve the financial performance11. Agency costs can be reduced through three levers; reducing the agency costs of free cash flows, aligning incentives, and improving monitoring and control (Berg & Gottschalg 2005). The agency costs of free cash flows are reduced since management has to run the company very efficiently in order to be able to service the increased level of debt (Jensen 1986). Furthermore, the increased debt implies that some of the governance is outsourced from the equity investors to the lenders (Berg & Gottschalg 2005). Due to the high level of debt lenders have a large incentive to monitor managements behaviour. Therefore, they impose strict debt covenants which limit managements nonvalue maximizing behaviour (Lichtenberg & Siegel 1990). The second way in which LPE ownership reduces agency costs is by means of increasing the alignment between shareholders and managers (Jensen 1989). PEVs usually make managements pay more performance based and require the management team to invest a significant amount of their wealth in the company (Fox & Marcus 1992). Managers thereby become co-owners of the company and enjoy incentives similar to those of the other investors. This significantly reduces the agency conflict (Bull 1989; Jensen 1989). However, while LPEVs have diversified their investments, managements finan11
Some have proposed that PE funds also improve the corporate governance by mentoring the portfolio companies. However, no compelling empirical evidence has yet been presented cf. Berg and Gottschalg (2005) and Vinten and Thomsen (2008).
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cial and human capital is tied up in the company. Therefore, managers are likely to be more risk averse than the LPEV. This might have a negative effect on financial performance, but it might also imply that managers avoid taking unnecessary risks. A third way in which LPE ownership reduces agency costs is by means of improving monitoring and control. LPEVs place their own people at the boards of the portfolio companies and are more experienced in monitoring management than other investors. Finally, the concentrated ownership eliminates the free-rider problem. Hence, LPEVs have a strong incentive to monitor and control management (Mishkin & Eakins 2003). The three levers of corporate governance improvements are strongly dependent upon the PE funds and are thus extrinsic sources of value generation. They are determined during the acquisition phase and implemented during the holding phase.
5.3.
Implications
From the discussions of this chapter it is evident that value generation in LPE can stem from numerous levers. The three-dimensional framework proposed by Berg and Gottschalg (2005) provides a basis for analysing the levers and hence improves the understanding of value generation in LPE. Going forward, the levers of value generation will serve as a theoretical basis for developing hypotheses and explaining the results.
6.
LITERATURE REVIEW
Having outlined the basics about LPEVs and how they generate value, this chapter will review the existing literature about the abnormal returns to acquirers in M&A, as well as the long-run abnormal performance of PE funds and their portfolio firms. This is done in order to develop a number of hypotheses about the abnormal return to LPEVs when they announce acquisitions. The first part of the literature review will investigate whether we can expect LPEVs to generate positive abnormal returns to their shareholders when they announce acquisitions, while the second part will identify and discuss 21 hypotheses about the determinants of the abnormal return to LPEVs. The review of existing literature will primarily focus on previous studies within M&A, PE and LPE. In addition to this, the chapter will rely on the information presented in chapter 2-5.
6.1.
Introduction
The abnormal return to the announcement of an acquisition by a LPEV should equal the change in expected future profits cf. the EMH. The expected future profits depend on
the value that the LPEV is able to generate from the acquisition. Hence, the abnormal return to LPEVs can be explained by the factors influencing the value generation in their portfolio companies. This will prove useful in section 6.2. Before proceeding, it is necessary to clarify a couple of issues about PE returns. First of all, some authors (e.g. Gottschalg et al. 2010) have suggested that PE acquirers have higher returns because they are exposed to significantly more risk than other acquirers. Therefore, several PE studies have investigated the beta of PE funds. The beta ranges from 0.66 (Kaplan & Schoar 2005) to 1.12 (Ljungqvist & Richardson 2003), with most studies finding a beta around 1 (e.g. Phalippou 2010). Hence, PE acquirers do not seem to be exposed to more undiversifiable risk than the market in general12. Secondly, some scholars argue that PE targets are more risky and have a higher postdeal risk of bankruptcy due to the increased leverage cf. e.g. Kaplan and Schoar (2005). However, Bargeron et al. (2008) and Kaplan and Strmberg (2009) find that targets of PE acquirers have a bankruptcy rate that is lower than or equal to that of other targets. In addition to this, Officer et al. (2010) show that PE targets are less risky than the overall stock market. Thus, targets of PE acquirers do not seem to exhibit higher risk than other targets, neither before nor after the deal. Besides risk, a number of potential problems regarding the measurement of PE performance exist. First of all, since poor PE investments have longer duration than good PE investments, the use of average IRRs imposes an upwards bias on performance (Phalippou & Gottschalg 2009). Secondly, it is unknown what the current return is, as all investments have to be exited in order to calculate the return to a PE fund, (Phalippou 2010). Third, it is difficult to compare the performance of PE funds to market indices as there are differences in e.g. liquidity and investment horizons (Gottschalg et al. 2010).
6.2.
Abnormal Returns to Listed Private Equity Vehicles
In order to draw a reasonable inference about the expected abnormal return to LPEVs, a three-step approach is applied. First, the abnormal returns to listed acquirers are investigated in order to establish a baseline. Secondly, the performance of acquirers in PErelated deals is investigated. Third, a couple of complicating issues are discussed. Based on this, we can state a hypothesis about the expected abnormal return to LPEVs.
12
Besides this, the issue is irrelevant wrt. abnormal retunrs because the expected returns are risk-adjusted.
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6.2.1. Abnormal Returns to Listed Acquirers in General The total abnormal return to an acquisition consists of two parts: the return to the target and the return to the acquirer. The general consensus is that targets get most of the abnormal return. In European takeovers, the abnormal returns to targets have been 9%16% (Andrade et al. 2001; Martynova & Renneboog 2006, 2011). This is considerably lower than in U.S. takeovers, where the abnormal returns to targets have been 16%-27% (Andrade et al. 2001; Bargeron et al. 2008). When investigating PE-related deals, such as public-to-private LBOs, in the U.S. from 1973 to 1996, Renneboog and Simons (2005) find abnormal returns to targets between 13% and 22%. In a comparable U.K. study, Renneboog et al. (2007) find abnormal returns to targets of approximately 23%. It is thus clear that targets shareholders gain considerably from being involved in takeovers, incl. PE-related deals. With respect to acquirers, results do not seem to differ between Europe and the U.K. Scholars disagree about the sign of the abnormal return, but agree that it is fairly low, ranging from negative (-0.7%) and insignificant (Andrade et al. 2001) to positive (0.7%) and significant (Martynova & Renneboog 2011) in Europe. These results are in line with findings in U.S. studies, where reported abnormal returns range from insignificant -0.7% to significant 1.2% (Andrade et al. 2001; Moeller et al. 2005). It can therefore be concluded that the gain to acquiring firms shareholders seems to be small. 6.2.2. Abnormal Returns to Acquirers in PE-Related Deals Naturally, the abnormal returns to shareholders of target firms in PE buyouts have been of great interest (DeAngelo et al. 1984; Kaplan 1989; Lee et al. 1992; Renneboog et al. 2007). However, due to PEVs unlisted nature, it has historically been impossible to directly study their abnormal returns to acquisitions. Furthermore, despite the development within LPE, no studies have yet investigated the abnormal returns to announcement of acquisitions by LPEVs13. Fortunately, the abnormal return to PEVs can be studied indirectly due to the factors it is dependent upon. Essentially, the abnormal return to an acquirer depends on the value which the acquirer is able to generate from the acquisition. The value generation depends on two things: 1) the combined gain from the takeover and 2) the share of the combined gain, which the acquirer is able to capture.
13
A working paper by Gianfrate (2009) investigates the abnormal return to announcement of acquisitions by LPEVs and finds a CAAR of 1.09%. However, the working papers academic quality is questionable due to e.g. a limited number of tests and a large amount of typos and grammatical errors.
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The combined gain depends on the value which the acquisition is expected to create. This is proved by Stotz (2011) who finds that improvements in operating performance are signalled by higher announcement CAARs to the targets shareholders. Berg and Gottschalg (2005) review the empirical literature and find that all studies uniformly agree that PE ownership increases the efficiency of the target. Loos (2005), Achleitner et al. (2009, 2010) and Gottschalg et al. (2010) support this by finding that PE portfolio companies have a significantly better operating performance than their peers. Even Gou et al. (2011), although critical to PE, find that the operating performance of PE portfolio firms is higher than or on par with benchmark firms. Based on these findings, it seems that PE acquirers create more value in acquisitions than other acquirers. Consequently, the combined gain to PE takeovers is most likely larger than that of other takeovers. The share of the combined gain which the acquirer is able to capture depends on the bargaining power of the acquirer vis-a-vis the target. PE acquirers are experienced, tough and excellent negotiators (Berg & Gottschalg 2005). This decreases the bargaining power of the targets shareholders. Thus, more of the combined gain will accrue to the PE acquirer. Kaplan and Strmberg (2009) support this by showing that PEVs are able to acquire targets cheaper than other acquirers. Furthermore, Renneboog et al. (2007) find that PEVs try to avoid hostile takeovers due to the loss of information and skills if management leaves. Since hostile bids result in higher premiums to the targets (Sudarsanam 2003), the lower percentage of hostile takeovers suggests that PE acquirers are able to capture more of the combined gain than acquirers in general. This is supported by previous empirical evidence. Bargeron et al. (2008) find that PEVs pay significantly lower premiums than other private and public acquirers. Assuming that the combined gain is constant, a lower target gain will be offset by a higher acquirer gain. Since the combined gain is expected to be larger in PE takeovers, it is interesting to see how target gains differ between PE takeovers and other takeovers. Interestingly, Bargeron et al. (2008) and Officer et al. (2010) find that PE targets experience significantly lower CAARs than targets of other types of acquirers. Hence, the gains to PEVs must be larger than the gains to other acquirers. Stotz (2011) supports this by finding that targets in PE takeover have CAARs of only 1.57%. This is very low compared to the 9%-27% found for targets in general. Based on the discussion above, it is thus fair to conclude that PEVs seem to capture a larger share of the combined gain than other acquirers.
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6.2.3. Complicating Issues Several complications exist with respect to calculating LPEVs announcement return. First and foremost, LPEVs announcement returns are influenced by partial anticipation, as they are expected to conduct acquisitions on a frequent basis due to their business model. Thus, the expected future profits from engaging in acquisitions should be incorporated in the stock price (Schipper & Thompson 1983; Malatesta & Thompson 1985; Montgomery 1994). An abnormal return will therefore be triggered whenever the expected future profits from an acquisition differ from that of the average acquisition (Montgomery 1994). Consequently, the abnormal return to LPEVs will not perfectly reflect the value generated in acquisitions; it will only reflect the deviation from the average expected value generation (Schipper & Thompson 1983). This implies that the stock price reaction to the announcement of acquisitions by LPEVs is likely to underestimate the actual value generated from these acquisitions. Secondly, Phalippou (2010) argues that large investors invest in unlisted PE, whereas small investors invest in LPE. Small investors are not necessarily able to come up with reasonable market prices due to their limited knowledge of this quite complex asset class. Thus, LPEVs might not be efficiently priced14. Based on these complications, the abnormal return to LPEVs is likely to be smaller than that of other listed acquirers and more uncertain. 6.2.4. Expected Abnormal Return to Listed Private Equity Vehicles Based on the three sections above, one is able to draw an inference about the expected abnormal return to LPEVs. First of all, previous studies found that listed acquirers in general earn insignificant or small positive abnormal announcement returns. Secondly, they showed that the combined gains are not only larger in PE takeovers; PEVs are also able to capture a larger share of the combined gains than other acquirers. This suggests that LPEVs should earn higher abnormal returns than other acquirers. On the other hand, announcements by LPEVs are partially anticipated. This suggests that the abnormal returns are likely to be lower than that of other acquirers. Consequently, LPEVs are expected to earn abnormal returns to the announcement of acquisitions which are larger than or similar to those of other acquirers, i.e. larger than or equal to zero. H1: CAAR to the announcement of acquisitions by LPEVs 0
14
This is not an issue in this study since LPEVs must fulfill strict requirements about e.g. trading volume and market value to be included. For more information about the selection criteria please see section 8.1 and appendix 3.
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6.3.
Determinants of Abnormal Returns to LPEVs
Since Wood and Wright (2009) find that buyout performance is context specific, it makes sense to investigate which contexts that are the most favourable for buyout performance. According to Martynova and Renneboog (2011), the context can be described by characteristics of the deal, the target, and the acquirer. Hence, the hypotheses will be divided into these three categories in following sections. 6.3.1. Deal Characteristics
6.3.1.1. Deal Period Several authors have highlighted the importance of the timing of deals (Andrade et al. 2001; Gottschalg et al. 2010; Acharya et al. 2011). The reasoning behind the importance of timing is that abnormal PE returns and combined abnormal returns in M&As have been declining over time (Martynova & Renneboog 2008; Acharya et al. 2011). In addition to this, booms result in increasing prices of targets (Gou et al. 2011) and increasing risk of managerial hubris for acquirers (Martynova & Renneboog 2006, 2008). The empirical evidence of a timing effect is quite conclusive. Several authors find that PE funds are good at timing their investments (Vinten & Thomsen 2008; Kaplan & Strmberg 2009) and Gottschalg et al. (2010) show that 7% of the value generation in PE can be attributed to market timing. Besides the fact that returns decrease over time, academics find mixed results of an economic cycle effect. A number of studies find that PEVs and their portfolio firms perform better during busts than during booms (Kaplan & Schoar 2005; Achleitner et al. 2009, 2010), whereas other studies find the opposite effect (Acharya et al. 2011; Martynova & Renneboog 2011). Only one study (Gou et al. 2011) finds that the year has no impact on returns. Based on the discussion above, LPEVs are expected to experience declining announcement returns over time, but the announcement returns are not expected to depend on the economic cycle. H2: CAAR to LPE acquirers in 2001-2003 > CAAR to LPE acquirers in 2004-2008 > CAAR to LPE acquirers in 2009-2012 6.3.1.2. Deal Size The deal size has been increasing over time (Wright et al. 2006; Kaplan & Strmberg 2009; Gou et al. 2011) and has been suggested to influence the return to PE acquirers (Cumming et al. 2007; Wood & Wright 2009). The reason is that large targets provide a larger potential for corporate governance improvements since they have a more dispersed ownership structure (Faccio & Lang 2002), more complex management strucJULY 2012 MATHIAS LETH NIELSEN 25
tures (Martynova & Renneboog 2011) and can bear more debt due to lower risk (Achleitner et al. 2009). Furthermore, large portfolio firms are likely to receive more attention from investment managers since they make up a larger share of the portfolio. In addition to this, more information is available about large targets (Feito-Ruiz & Menndez-Requejo 2011). Thus valuation errors are smaller. The empirical evidence provides significant support; large deals lead to lower abnormal returns to targets (Bargeron et al. 2008; Officer et al. 2010), better operating performance (Martynova et al. 2006), and higher PE returns (Loos 2005; Wright et al. 2006). Several studies find that deal size does not matter or have a negative impact on announcement returns to non-PE acquirers (Goergen & Renneboog 2004; Martynova et al. 2006; Feito-Ruiz & Menndez-Requejo 2011). However, this can most likely be attributed to their lower ability to create corporate governance improvements. Only one PE study finds that value generation is independent of the deal size (Achleitner et al. 2009). Therefore, the LPEVs are expected to earn higher abnormal returns in large deals than in small deals. H3: CAAR to large acquisitions by LPEVs > CAAR to small acquisitions by LPEVs 6.3.1.3. Geographical Scope With regards to the geographical scope we distinguish between domestic and crossborder deals, where the former accounts for approximately 70% (Martynova & Renneboog 2006, 2011; Humphery-Jenner et al. 2012), The geographical scope of a deal can influence the abnormal return to the acquirer because it is easier to monitor and control the target if the acquirer is located close to it and knows the local legislation (Stotz 2011). In addition to this, the acquiring firm is likely to have a better domestic network and have more information about domestic targets. This can lead to more precise valuations. The empirical evidence of the effect of geographical scope is ambiguous. Some studies find that it has no impact on operating performance and abnormal return to acquirers (Martynova et al. 2006; Martynova & Renneboog 2006; Feito-Ruiz & Menndez-Requejo 2011). Other studies find significantly higher returns to both acquirers and targets in domestic deals (Conn et al. 2005; Francis et al. 2008; Martynova & Renneboog 2011; Stotz 2011). Finally, Humphery-Jenner et al. (2012) study more recent data and find that returns to acquirers are significantly higher in cross-border deals. Based on this, the geographical scope is expected to have an impact of the abnormal return to LPEVs, although the direction is hard to predict. H4: CAAR to LPEVs in domestic deals CAAR to LPEVs in cross-border deals
6.3.1.4. Type of Buyout A buyout can be either insider driven (management buyouts) or outsider driven (management buy-ins and institutional buyouts). According to Wood and Wright (2009) the return to PEVs differs significantly between different types of buyouts. The reason is that insider driven buyouts might be able to exploit private information about the target (Renneboog & Simons 2005). The empirical evidence is, however, mixed. Renneboog and Simons (2005) find that acquirers pay lower premiums in insider driven buyouts. This is supported by Loos (2005) who finds higher return to PEVs involved in insider driven buyouts. In contrast, Berg and Gottschalg (2005) find no evidence of value generation from having inside information about the target and Renneboog et al. (2007) find an insignificant difference in premiums across buyout structures. Based on this, LPEVs involved in insider driven buyouts are expected to earn abnormal returns which are larger than or equal to LPEVs involved in outsider driven buyouts. H5: CAAR to insider driven LPEV buyouts CAAR to outsider driven LPEV buyouts 6.3.1.5. Degree of Control The degree of control acquired in a deal determines the potential influence the acquirer can exercise over the target. In order to exercise active ownership the LPEV needs a certain control over the target. This can be accomplished by either acquiring the majority control alone or by teaming up with other PEVs in a club deal and acquiring a minority share. The issue has received little attention in literature since minority and partial majority acquisitions are very uncommon in the U.K. and in the U.S. (Martynova & Renneboog 2011). However, there has been a trend towards more club deals recently (Officer et al. 2010). Empirical evidence shows that large majority investments (+75%) and small minority investments (up to 25%) yield higher returns than partial majority investments (Loos 2005; Martynova & Renneboog 2011). This is most likely caused by a positive effect of club deals; Gou et al. (2011) find that club deals have higher returns than other PE deals while Officer et al. (2010) find that targets earn lower abnormal returns in club deals. Based on this discussion, LPEVs are expected to earn the same average abnormal return to announcement of majority investments in targets as they are to announcement of minority investments in targets. H6: CAAR to majority investments by LPEVs = CAAR to minority investments by LPEVs
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6.3.1.6. Type of Bid A bid can either be made to the targets management or board of directors or directly to the shareholders of the target. The former is known as a friendly bid whereas the latter is known as a hostile bid. Since friendly bids are perceived positively by the target, they are likely to result in higher abnormal returns to acquirers than hostile bids (Feito-Ruiz & Menndez-Requejo 2011; Martynova & Renneboog 2011). Interestingly, Bargeron et al. (2008) find that PE firms avoid hostile bids and argue that this could explain their good performance. The empirical evidence about the type of bid is unambiguous. Friendly bids result in significant positive abnormal returns to acquirers (Goergen & Renneboog 2004; Feito-Ruiz & Menndez-Requejo 2011), whereas hostile bids result in either insignificant or significantly negative abnormal returns to acquirers (Goergen & Renneboog 2004; Martynova & Renneboog 2011; Feito-Ruiz & Menndez-Requejo 2011). Consequently, LPEVs are expected to earn higher abnormal returns when they use friendly bids than when they use hostile bids. H7: CAAR to friendly bids by LPEVs > CAAR to hostile bids by LPEVs 6.3.1.7. Means of Payment Broadly speaking, a deal can either be paid with cash or equity. The means of payment is likely to have an impact on the abnormal return due to signalling. Paying with equity sends a negative signal to investors, since management will only pay with equity if it believes that the companys shares are overvalued (Martynova & Renneboog 2011). The abnormal return to acquirers in an all-equity bid is therefore a mix of two adjustments: one based on the negative signal of paying with equity and one based on the announcement of the acquisition. All-cash deals send the opposite signal and are thus expected to yield higher abnormal returns to acquirers than all-equity deals. This is supported by empirical evidence, which finds that all-cash deals yield positive abnormal returns to acquirers, which are significantly higher than all-equity deals (Andrade et al. 2001; Martynova & Renneboog 2006, 2008, 2011). However, PEVs usually pay with cash15. Nonetheless, all-cash deals by LPEVs are expected to have higher abnormal returns than all-equity deals. H8: CAAR to all-cash deals by LPEVs > CAAR all-equity deals by LPEVs
15
Although LPEVs have the opportunity to pay with equity none has done so yet (Cheffins & Armour 2007).
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6.3.2.
Target Characteristics
6.3.2.1. Industry According to Andrade et al. (2001) and Vinten and Thomsen (2008) M&As and PE activity tend to cluster in different industries in different periods. This suggests that abnormal returns to acquirers might depend on the industry of the target. In addition to this, leverage and ownership concentration differ across industries (Faccio & Lang 2002). This implies that the potential for corporate governance improvements differs across industries. The empirical evidence provides significant support for the importance of the targets industry. Loos (2005) finds large variations in PE returns across industries, while Cumming et al. (2007) show that PEVs perform better when targets belong to industries with low operating risk. Furthermore, Gottschalg et al. (2010) find that 31% of the return to PEVs stem from industry selection. Based on this, LPEVs are expected to earn different abnormal returns depending on the industry of the target. H9: The CAAR to LPE acquirers depends on the industry of the target 6.3.2.2. Legal Origin The legal origin of the target refers to the legal system of the country of the target and can be seen as a proxy for the corporate governance structure of the target. Legal systems originating in the U.K. are known as common law systems, whereas those originating in the Roman Empire are known as civil law systems (La Porta et al. 1998). The U.K. and the U.S. have common law systems while Continental European countries have civil law systems. Common law countries are characterized by more mature and competitive takeover markets (Feito-Ruiz & Menndez-Requejo 2011), more developed capital markets (Wright et al. 2006) and a stronger legal protection of shareholders (La Porta et al. 1998, 2008). Therefore, targets from common law countries are likely to be more expensive. On the other hand, firms in common law countries are widely held, whereas firms in civil law countries are usually family held (Faccio & Lang 2002). Thus, the potential for corporate governance improvements is larger for targets in common law countries. However, the differences are likely to be decreasing due to the emergence of pan-European merger laws (Renneboog & Simons 2005). The empirical evidence is scarce. Martynova and Renneboog (2006) find that acquirers pay lower premiums for Continental European targets than for U.S. and U.K. targets. Furthermore, Humphery-Jenner et al. (2012) find that PE-related acquirers earn higher returns if the target is located in a country with poor corporate governance. In contrast, Phalippou and
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Gottschalg (2009) find that U.S.-focused PEVs show significantly higher performance than EU-focused PEVs. Due to the ambiguity, emphasis is placed on the results from Humphery-Jenner et al. (2012) as it comes closest to a study of LPE acquirers. Thus, acquisitions of targets located in civil law countries are expected to yield higher abnormal returns to LPEVs than acquisitions of targets located in common law countries. H10: CAAR to acquisitions of targets from civil law countries by LPEVs > CAAR to acquisitions of targets from common law countries by LPEVs 6.3.2.3. Former Ownership The former ownership of the target is likely to have an impact on the abnormal return since public and private targets differ on a number of parameters. Due to their more concentrated ownership structure private targets provide less potential for corporate governance improvements than public targets (Martynova & Renneboog 2005; Vinten & Thomsen 2008). On the other hand, shares in private targets are illiquid and trade at a liquidity discount (Martynova & Renneboog 2011). Furthermore, public targets are likely to be more expensive since they receive more bids than private targets .The empirical evidence uniformly favours private targets, although it suffers from a lack of PE studies. Acquirers of private targets earn significant positive abnormal returns in the range 0.8% to 1.48% (Martynova & Renneboog 2006; Faccio & Masulis 2006; Masulis, Wang & Xie 2007), while acquisitions of public targets lead to insignificant returns (Faccio & Lang 2002; Martynova & Renneboog 2006; Faccio & Masulis, 2005; Feito-Ruiz & Menndez-Requejo 2011). The difference is found to be statistically significant by all reviewed studies. Therefore, LPEVs are expected to earn higher abnormal returns in acquisitions of private targets than in acquisitions of public targets. H11: CAAR to acquisitions of private targets by LPEVs > CAAR to acquisitions of public targets by LPEVs 6.3.2.4. Leverage As explained in chapter 5, leverage reduces agency costs and corporate taxes and is a cornerstone in the PE model accounting for approximately 39% of the value generation (Gottschalg et al. 2010). Since leverage increases to 60%-90% after the takeover (Fox & Marcus 1992; Kaplan & Strmberg 2009; Talmor & Vasvari 2012), the pre-deal leverage of the target is likely to affect the value that an LPE acquirer is able to generate. However, the level of leverage used by PEVs has decreased since the 1980s (Gou et al. 2011). The empirical evidence of the leverage effect is mixed. Several studies find no
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effect of pre-deal leverage on abnormal returns to targets (Marais et al. 1989; Bargeron et al. 2008; Officer et al. 2010). On the other hand, Carow and Roden (1997) find that highly leveraged targets earn lower abnormal returns in takeovers, while Gou et al. (2011) find that targets with large increases in leverage after the takeover exhibit significantly better cash flow performance. However, PE acquirers seem to be paying a premium for less leveraged targets (Renneboog et al. 2007). Based on this, LPEVs are expected to earn abnormal returns in acquisitions of moderately leveraged targets that are larger than or similar to those for acquisitions of highly leveraged targets. H12: CAAR to acquisitions of moderately leveraged targets by LPEVs CAAR to acquisitions of highly leveraged targets by LPEVs 6.3.2.5. Ownership Concentration LPEVs improve monitoring and control of their portfolio companies through increasing the concentration of ownership. Therefore, a low pre-deal ownership concentration will imply a higher potential for value generation. Thus, targets with a dispersed ownership structure are expected to yield higher returns to acquirers than targets with a concentrated ownership structure. The empirical evidence is rather limited. Wruck (1989) finds that the value of the target increases with the concentration of ownership, given a certain threshold level, whereas Loos (2005) rejects that the pre-deal ownership concentration has any impact on returns. Therefore, the level of pre-deal ownership concentration is not expected to have an impact on the abnormal return to LPEVs. H13: The level of pre-deal ownership concentration does not affect the CAAR to LPEVs 6.3.2.6. Managements Ownership As explained in chapter 5, LPEVs generate value by e.g. improving the alignment of interests between managers and owners. This is, among others, done by increasing managements share of ownership in the firm. A low pre-deal management ownership will therefore imply a higher potential for improving the alignment of incentives. The empirical evidence is very unambiguous. Carow and Roden (1997) find that premiums increase with pre-deal management ownership, while Renneboog et al. (2007) find that PEVs pay higher premiums for targets with lower levels of management ownership and Bargeron et al. (2008) find that premiums do not depend on pre-deal management ownership. To complete the ambiguity, Martynova and Renneboog (2006) find that acquirers earn higher abnormal returns when targets management has a high level of owner-
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ship. To summarize, it seems like the level of managements ownership in the target has an effect on the abnormal return to LPEVs, but the direction is unclear. H14: The level of managements ownership in the target has an effect on the CAAR to LPE acquirers 6.3.2.7. Type of Firm The market-to-book ratio of the target is an indicator of whether the firm is a growth firm or a value firm. Growth firms have market-to-book ratios above one, while value firms have market-to-book ratios below one. The ratio might be an indicator of whether a stock is overvalued. Since LPEVs generate value from e.g. financial arbitrage and operational improvements, they are likely to perform better when they acquire value firms. This is supported by the empirical evidence. PEVs seem to favour value firms, since LBO targets have low market-to-book ratios (Renneboog & Simons 2005). Besides this, acquisitions of value firms result in positive and significantly higher abnormal returns to acquirers than acquisitions of growth firms (Goergen & Renneboog 2004; Martynova & Renneboog 2006). Finally, Andrade et al. (2001) show that acquirers of value firms perform significantly better in the three years following the announcement. Therefore, LPEVs are expected to earn higher abnormal returns from acquisitions of value firms than from acquisitions of growth firms. H15: CAAR to LPE acquirers of value firms > CAAR to LPE acquirers of growth firms 6.3.3. Acquirer Characteristics
6.3.3.1. Structure The structure of LPEVs was described in chapter 4. The structure determines how the LPEVs are managed, how they invest, and what their cash flow structure looks like. Therefore, the structure of the LPEVs is likely to have an impact on the abnormal returns they earn to announcements of acquisitions. Unfortunately, the effect of the LPEV structure on announcement returns has not been investigated yet. Thus, the hypothesis will rely on information from chapter 3 and 4 along with empirical evidence about the performance of PEVs. Empirical evidence suggests that the value generated in PE goes to the management firm and not to the LPs (Kaplan & Schoar 2005; Phalippou & Gottschalg 2009; Phalippou 2010). Hence, the abnormal returns are likely to be larger for internally managed LPEVs. In addition to this, abnormal returns only occur when acquisitions are signifiJULY 2012 MATHIAS LETH NIELSEN 32
cantly better or worse than the average acquisition. Due to the fee structure, LPE firms will gain from acquisitions which are significantly better than average, while they will not suffer that much when the acquisitions are significantly worse than average, since they would not get a share of the first 8% of the return16. On the other hand, the effect of an announcement of an acquisition is likely to be larger for directly exposed LPEVs than for indirectly exposed LPEVs, since the performance of directly exposed LPEVs depends more on the performance of the portfolio companies. Based on the discussion above, it is therefore clear that the abnormal returns are expected to differ depending on the LPEV structure, but it is unclear which structure that is superior. H16: The structure of the LPEV has an effect on the CAAR to announcements of acquisitions 6.3.3.2. Experience As argued earlier, LPEVs are likely to outperform other types of acquirers due to their experience in conducting acquisitions17. Berg and Gottschalg (2005) suggest that value generation in PE could stem from superior deal making capabilities and proprietary deal flows due to their extensive networks. This is supported by Kaplan and Schoar (2005) who find that established GPs have access to proprietary deal flows. The empirical evidence uniformly supports experienced PEVs. Kaplan and Schoar (2005) show that older and larger PEVs are less affected than young PEVs by new entrants, while other studies find that older and experienced PEVs have higher returns than younger and inexperienced PEVs (Gottschalg & Wright 2008; Phalippou & Gottschalg 2009; Acharya et al. 2011). Furthermore, PEVs raised in the 1980s have higher returns than PEVs raised in the 1990s (Wood & Wright 2009). Finally, access to a proprietary deal flow and the number of deals conducted has a positive impact on PE performance (Loos 2005). Based on this, experienced LPEVs are expected to earn higher abnormal returns to the announcement of acquisitions than inexperienced LPEVs. H17: CAAR to experienced LPE acquirers > CAAR to inexperienced LPE acquirers 6.3.3.3. Investment Strategy The investment strategy of a LPEV can either be specialization or diversification. Since a LPEV can specialize within several areas, e.g. industry, size of the target, geography, and buyout structure, and all of these areas are covered elsewhere, the investment strat16 17
See chapter 3 for more information about the fee structure in PE. See chapter 5 for more information about how LPEVs generate value in acquisitions.
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egy will only be examined on an overall level. The reasoning behind the effect of the investment strategy is that specialization should enable the LPEV to generate more value, especially from operational improvements18. Previous empirical M&A studies find mixed results (Martynova et al. 2006; Martynova & Renneboog 2006, 2008, 2011; Feito-Ruiz & Menndez-Requejo 2011), while PE studies are relatively conclusive. Loos (2005) and Peer and Gottschalg (2011) find that geographical specialization yields higher returns to PEVs, while industry specialization has a negative impact on returns (Loos 2005). Furthermore, both Cressy et al. (2007) and Kaplan and Strmberg (2009) find that specialization increases operational performance and profitability of LPEVs targets. Hence, specialized LPEVs are expected to earn higher abnormal returns in acquisitions than diversified LPEVs. H18: CAAR to acquisitions by specialized LPEVs > CAAR to acquisitions by diversified LPEVs 6.3.3.4. Size The size of the LPEV at the time of the acquisition can be a proxy for skills and hence have an impact on the abnormal returns (Phalippou & Gottschalg 2009). In addition to this, Martynova and Renneboog (2011) argue that size can be a proxy for the risk of management hubris. It is, however, unlikely that LPEVs are exposed to the risk of managerial hubris since their managers essentially own of the management firm. The empirical evidence of the effect of size is inconclusive. Lerner (2007) and Gottschalg et al. (2010) find that smaller funds outperform larger funds. However, a number of studies find that PE performance increases with fund size (until a certain point) and that larger PEVs have better returns than smaller PEVs (Kaplan & Schoar 2005; Loos 2005; Phalippou & Gottschalg 2009; Acharya et al. 2011). Consequently, the size of the LPEV at the time of the announcement of an acquisition is expected to have an impact on the abnormal return, although the direction of the impact is unclear. H19: The size of the LPEV at the time of the acquisition has an effect on the CAAR 6.3.3.5. Geographical Origin The geographical origin of the LPEV might have an impact on its announcement return due to differences in terms of e.g. legal origin19, industries, taxation, M&A activity or PE maturity. Especially the PE maturity is interesting, as more experienced LPEVs are
18 19
See section 5.2.2 for more information about operational improvements. Due to the similarities in the governance structures of LPEVs, the literature regarding the legal origin of acquirers has not been reviewed.
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expected to earn higher abnormal returns. It is reasonable to expect that LPEVs in mature PE markets have been established earlier than LPEVs in immature PE markets. Hence, we expect LPE acquirers in countries with mature PE markets, such as the U.S. and the U.K., to earn higher CAARs than LPE acquirers in countries with less mature PE markets, such as Continental European countries. The empirical evidence is fairly inconclusive. Early studies find that U.S. PEVs outperform U.K. PEVs (Cumming & Walz 2004) or that there are insignificant differences in returns to PEVs in different regions (Loos 2005; Martynova & Renneboog 2006). More recent studies find that Scandinavian acquirers earn CAARs which are significantly higher than that of acquirers from other regions (Martynova & Renneboog 2011; Humphery-Jenner et al. 2012). Based on the mixed empirical evidence, it is expected that the geographical location of the LPEV has an effect on the abnormal return it earns in acquisitions, and that Scandinavian LPE acquirers earn higher CAARs than LPE acquirers from other regions. H20: CAAR to Scandinavian LPEVs > CAAR to non-Scandinavian LPEVs 6.3.3.6. Managements Background As mentioned in chapter 4 one of the trends in PE is that PEVs are adding former executives and management consultants to their teams (Kehoe & Palter 2009; Bain & Co. 2012). Furthermore, both Loos (2005) and Acharya et al. (2011) suggest that the background of management has an impact on PE returns. The empirical evidence reveals several interesting findings. First of all, Loos (2005) finds that investment managers with a background in PE, banking, or corporate management perform well on an individual basis, and that a higher share of PE and corporate management backgrounds in a team also has a positive impact. Secondly, Acharya et al. (2011) find that partners with operational backgrounds outperform partners with financial backgrounds in organic deals and vice versa in inorganic deals. Thus, the background of management is expected to have an effect on the abnormal return to acquisitions by the LPEVs. H21: The professional background of the management of a LPEV has an effect on the CAAR it earns in acquisitions 6.3.3.7. Managements Experience Since the experience of the LPEV is expected to have a positive impact on abnormal returns, the experience of the LPEVs management is likely to have a similar impact. More experienced managers have larger networks and more deal experience, but none of these factors has an impact on PE returns (Loos 2005). In addition to this, Loos
(2005) finds that more experience20 in general leads to lower returns. Likewise, Acharya et al. (2011) find no difference in PE returns between experienced and inexperienced partners. Based on this, the experience of a LPEVs management is not expected to have an impact on the abnormal return it earns to the announcement of acquisitions. H22: The experience of the LPEVs management has no effect on the CAAR it earns in acquisitions
6.4.
Sub Conclusion
Summing up, this chapter has developed 22 hypotheses about the abnormal return to announcement of acquisitions by LPEVs. Based on this, we expect that LPEVs generate non-negative abnormal returns to their shareholders upon the announcement of acquisitions, and that these returns depend on certain deal, target, and acquirer characteristics.
7.
HYPOTHESES
Since it is outside the scope of the thesis to test all of the 22 hypotheses, this chapter will prioritize them, in order to end up with a limited number of highly relevant hypotheses. In addition to this, the measurement of the selected hypotheses will be discussed in order to ensure their validity.
7.1.
Presentation and Selection of Hypotheses
The hypotheses have been evaluated against three criteria. The first criterion is that the hypothesis is relevant in an LPE perspective (C1). Secondly, previous studies need to provide fairly conclusive results (C2). Third, it is a requirement that the hypotheses can be tested based on the available dataset (C3). If a hypothesis satisfies all three requirements it is selected for further analysis (S). The evaluation can be seen from exhibit 7.1. From the literature review it was evident that LPEVs avoid hostile bids and primarily use cash as the means of payment. H7: Type of Bid and H8: Means of payment are therefore eliminated based on the first criterion. The second criterion is evaluated based on the findings in the literature review. Previous empirical evidence provides fairly conclusive results for 11 of the 20 remaining hypotheses. Thus, nine of the hypotheses are eliminated based on the second criterion. Next, the 11 hypotheses are evaluated against the third criterion, i.e. that they are testable based on the available dataset. The dataset is described in detail in chapter 8, so for now we will only focus on the information con20
Measured by the average of age, tenure and PE experience.
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tained in the dataset. From the dataset information about the necessary inputs is available for nine of the 11 hypotheses. Unfortunately, there is no information about the inputs for H15: Type of Firm and H22: Managements Experience. Based on the three-step procedure nine hypotheses are therefore selected for further research. Exhibit 7.1 - Prioritization of Hypotheses
No. Type H1 H2 H3 H4 H5 H6 H7 H8 H9 H10 H11 H12 H13 H14 H15 H16 H17 H18 H19 H20 H21 H22 Overall Deal Deal Deal Deal Deal Deal Deal Target Target Target Target Target Target Target Acquirer Acquirer Acquirer Acquirer Acquirer Acquirer Acquirer Name Overall Period Size Geographical Scope Type of Buyout Degree of Control Type of Bid Means of Payment Industry Legal Origin Former Ownership Leverage Hypothesis about CAAR CAAR 0 2001-2003 > 2004-2008 > 2009-2012 Large acquisitions > Small acquisitions Domestic deals Cross-border deals Insider driven buyouts Outsider driven buyouts Majority investments = Minority investments Friendly bids > Hostile bids All-cash deals > All-equity deals The industry of the target has an effect Civil law targets > Common law targets Private targets > Public targets C1 Yes Yes Yes Yes Yes Yes No No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes C2 Yes Yes Yes No No No Yes Yes Yes Yes Yes No No No Yes Yes Yes No No No Yes C3 Yes Yes Yes Yes No Yes No No Yes Yes Yes No No No No Yes Yes Yes Yes Yes No No S Yes Yes Yes No No No No No Yes Yes Yes No No No No Yes Yes Yes No No No No
Moderately leveraged targets Highly leveraged targets Ownership Concentration The level of pre-deal ownership concentration does not have an effect Managements Ownership The level of managements ownership in the target has an effect Type of Firm Value firms > Growth firms Structure* Experience Investment Strategy Size Geographical Origin The LPEV structure has an effect Experienced LPEVs > Inexperienced LPEVs Specialized LPEVs > Diversified LPEVs The size of LPEVs has an effect
Scandinavian LPEVs > Non-Scandinavian LPEVs Managements BackThe background of the LPEVs management ground has an effect Managements Experience The experience of the LPEVs management has no effect
Notes: CAAR is the CAAR to LPE acquirers. C1 means criterion 1 (the hypothesis is relevant in an LPE perspective), C2 means criterion 2 (previous literature provides clear results), and C3 means criterion 3 (the hypothesis is testable based on the dataset). S. means that the hypothesis is selected for further analysis. *No studies have been conducted within the impact of LPEV structure on the CAAR. Hypotheses in italics are the ones chosen for further analysis.
7.2.
Specification of Hypotheses
In order to test the selected hypotheses, one needs to specify how they will be measured and assess whether the measures are valid, i.e. whether they measure what they are supposed to measure. To simplify the notation, the hypotheses have been renumbered as H1-H9.
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H1: Overall CAAR is measured as the cumulative average abnormal return (CAAR), which is the predominant measure of abnormal returns to announcement of acquisitions in literature. CAAR is a measure of the announcement return and hence a measure of the change in investors expectations regarding the LPEVs future profits21. As explained in section 6.2.3., the CAAR of LPEVs is not directly comparable to that of other listed acquirers, mainly due to partial anticipation. Furthermore, for other listed acquirers, the means of payment in an acquisition provides a signal about their view of their stock price. Since LPEVs almost always pay with cash, and never with shares, their CAARs are not biased by signalling. Based on the above, CAAR seems to measure what it is supposed to measure; namely the change in investors expectations about the LPEVs profits as a result of announcements of acquisitions. H2: Deal Period is measured by the year in which the deal is announced. The years are divided into three periods: 2001-2003, 2004-2008, and 2009-2012. The periods are divided in this way due to the fact that there was a boom in PE buyouts from 2004 to 2008 (Talmor & Vasvari 2012)22. The aim of this measure is to measure whether CAAR is declining over time. However, some studies argue that the return depends on the economic cycle. Thus, deal period is potentially not just a measure of time, but also of the economic cycle. Fortunately, one will be able to get an idea about the impact of the economic cycle due to the three-period division outlined above; 2004-2008 is a period of economic boom, while the other two are periods with modest economic growth. H3: Deal Size is measured as the ratio of deal value to the market value of the LPEV at the announcement date. Usually the maximum of a PE funds committed capital that can be invested in a single portfolio company is 15% (Talmor & Vasvari 2012). The fund size is approximated by the market value (MV) of the LPEV. Therefore deals that account for more than 10% of the LPEVs MV are categorized as large deals, whereas deals that account for 10% or less of the LPEVs MV are categorized as small deals. The MV of LPEVs is not a perfect approximation of the fund size, since a) LPEVs usually trade at a NAV discount (Phalippou 2010), b) sometimes only part of the underlying PEV is listed (Cheffins & Armour 2007), and c) LPEVs can have investments in several funds. Thus, the MV of a LPEV provides only a rough estimate of the fund size.
21 22
The measurement of CAAR is explained in detail in chapter 9. See appendix 2 for an overview of the M&A activity from 2002 to 2012.
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Alternatively, the LPEVs assets under management could have been used, but such information was unfortunately not available from the dataset. H4: Target Industry is measured by the targets two-digit U.S. SIC code. The two-digit U.S. SIC code provides the most overall industry classification. Based on this, the sample is divided into the following categories: Mining & Construction, Manufacturing, Transportation, Communications, Electric, Gas and Sanitary Services, Wholesale & Retail Trade, Finance, Insurance & Real Estate, and Services23. Since U.S. SIC codes are a common measure for industry in the reviewed studies (e.g. Gou et al. 2011), and since they are provided by the U.S. government, the measure is evaluated to have a satisfactory validity. H5: Target Legal Origin is measured by the country of the target. Following La Porta et al. (1998), Continental European countries are classified as civil law countries, while the U.S. and the U.K. are classified as common law countries. The legal origin is a measure of the corporate governance system in the country of the target common law countries generally have a stronger corporate governance system than civil law countries (La Porta et al. 1998, 2008). However, countries might differ on other parameters than the corporate governance system, e.g. the major industries might differ. Hence, the country of the target might potentially be a measure of more than just the corporate governance system. H6: Target Former Ownership is measured by whether the target was listed or unlisted. Listed targets are classified as public, while unlisted targets are classified private. It is therefore an unbiased measure of former ownership. However, former ownership is a proxy for the ownership concentration (Vinten & Thomsen 2008) and, hence, a proxy for the governance structure. Thus, one cannot say whether a potential effect is due to the pre-deal ownership concentration or due to the pre-deal governance structure. H7: LPEV Structure is measured by the PE category. LPEVs categorized as Direct private equity are classified as direct, whereas LPEVs categorized as Private equity fund managers are classified as indirect. Thus, the LPEV structure is a measure of the degree of diversification offered by the LPEV (cf. section 4.2). It is noteworthy that scholars are not consistent in their classification of the LPEVs; e.g. Apollo Investment
23
The reader might notice that some of the industry categories differ slightly from the ones provided by the US Government. The reason is that some of the categories have been merged in order to obtain a meaningful sample size.
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Corp. is classified as a LPE fund by Lahr and Herschke (2009), but as an investment company by Talmor and Vasvari (2012). Therefore, the classification in this study is based on LPX Group (2012c), which classifies the LPEVs based on a thorough and continuous review of their activities. This ensures a high validity of the measurement. H8: LPEV Experience is measured by the date of incorporation of the vehicle underlying the LPEV. These dates are provided by Zephyr. Based on Wood and Wright (2009), vehicles incorporated before 1990 are classified as experienced, while vehicles incorporated from 1990 and onwards are classified as inexperienced. However, as older LPEVs are more likely to have access to proprietary deal flows (Kaplan & Schoar 2005), the date of incorporation is also a measure of the access to a proprietary deal flow. Alternatively, the experience of the LPEVs could have been measured by the number of deals they have conducted or by their age at the announcement date. However, the former would be a biased measure of experience since larger LPEVs are likely to conduct more acquisitions and the latter is complicated by wide dispersion of the age of the vehicles. H9: LPEV Investment Strategy is measured by the industry focus. LPEVs are classified as specialized if they focus on specific industries such as IT or Cleantech. Otherwise they are classified as diversified. The investment strategy is only measured on the industry dimension and not on other dimensions such as geography, deal size or the type of firms. Thus, the industry focus is not a complete measure of the LPEVs investment strategy. It is, however, one of the most popular measures of investment strategy (see e.g. Cressy et al. 2007). Hence, it has a satisfactory validity.
7.3.
Sub Conclusion
To summarize, part 2 has investigated how LPEVs generate value in acquisitions and reviewed the relevant literature within M&A, PE and LPE. On the basis of this, 22 hypotheses were developed, of which nine were selected for further analysis. The nine hypotheses concern; 1) the overall abnormal return, 2) the deal period, 3) the deal size, 4) the industry of the target, 5) the legal origin of the target, 6) the former ownership of the target, 7) the structure of the LPEV, 8) the experience of the LPEV and 9) the investment strategy of the LPEV. These hypotheses will be tested in part 3, which consists of chapter 8-10. Chapter 8 will outline the sample selection and present descriptive statistics, while chapter 9 will discuss the methodology used for testing the hypotheses. Finally, chapter 10 will discuss the empirical findings.
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8.
DATA AND SAMPLE
The sample selection process is a vital part of the study, since the quality of the data is a key determinant of the validity of the results. This chapter will therefore outline the selection process and present descriptive statistics of the sample.
8.1.
Sample Selection
The LPEVs are identified based on the LPX Composite as of May 20th 2012 (LPX Group 2012c)24. Only LPEVs which are based in Europe or the U.S., are categorized as either Direct private equity or Private equity fund manager, and have an investment style categorized as either Buyout or Growth are included in the sample. This gives a list of 41 LPEVs. Information about their announcement of deals is obtained from Zephyr, while information about security prices and market indexes is obtained from Datastream. This procedure yields an initial sample of 495 deals. The use of the LPX Composite and Zephyr might bias the sample towards a higher share of European deals, since both data providers (the LPX Group and Bureau van Dijk) are from Europe. Instead one could have used U.S.-based sources such as the S&Ps Listed Private Equity Index, VentureXpert and Dealogic. However, both the LPX Composite and Zephyr are widely used in LPE studies (see e.g. Bilo et al. (2005), Bergmann et al. (2009), and Mller and Vasconcelos (2010)). Thus, it is not expected to impose a significant bias. The next step in the selection process is to impose a number of requirements25 which the deals have to satisfy in order to guarantee a high quality of the data. The focus of the study is European and U.S. deals. Hence, targets and LPEVs must be located in Europe or the U.S. Besides this, one must ensure that the effect of the announcement is not diluted. Therefore, only completed deals where the rumour date is the same as the announcement date, and where the LPEV is stated as the primary acquirer, are included. Furthermore, deals must have an ISIN number and a deal value of more than USD 1 million. Finally, daily returns need to be available from Datastream for the market index during the entire period this excludes deals announced earlier than December 31 2001. To ensure that the sample provides the necessary inputs for the hypotheses, we only include deals where the target has a U.S. SIC code and where the former ownership of the target is known. Secondly, deals are excluded when the LPEVs date of incorpora24
LPXs requirements for including a LPEV are that a) minimum 50% of the net assets are invested in PE and b) that the LPEV must be listed. In addition to this, a number of liquidity requirements must be satisfied (LPX Group 2011). 25 See exhibit A.3 in appendix 3 for an overview of the sample selection process.
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tion is unknown and when the vehicle was not listed at the time of the announcement. Third, in order to ensure unbiased event windows, only one announcement is allowed in the event window and the LPEVs are only allowed to invest in the target once. To comply with other LPE studies, the liquidity requirements suggested by Bilo et al. (2005) are imposed on the sample when they are relevant. Bilo et al. (2005) recommend that LPEVs must have a minimum average trading volume26 of 0.1% per week. However, this requirement is too strict as several of the LPEVs trade at small stock exchanges. Instead, the trading volume requirement is based on Bartholdy et al. (2007), which require that a stock listed on a small stock exchange must be traded at least 80% of all trading days. Following Bilo et al. (2005) only deals where the LPEV has an average market value above USD 2 million and a relative bid-ask spread27 of maximum 20% during the combined estimation and event period are included. Finally, the sample is trimmed and the 1.25% most extreme observations in each tail are removed as recommended by e.g. Campbell et al. (2010). Thus, the final sample contains 129 deals28.
8.2.
Descriptive Statistics
The 129 deals are conducted by 18 different LPEVs29. The majority of the LPEVs are European and organized as LPE funds. In addition to this, most of the LPEVs are founded before 1990 and have a diversified investment strategy. Interestingly, 3i Group PLC accounts for nearly 60% of the deals30. Thus, the results in chapter 10 are reported for two samples; the total sample and a sample excl. 3i Group. According to Kasper Hansen (Associate Director from 3i Group interviewed May 16th 2012), 3i Group is a LPE fund from 1973 with a diversified investment strategy. It is listed on the London Stock Exchange and has the highest market value of the all the LPEVs. The average market value of the LPEVs at the time of acquisition is USD 4.7 billion, but only USD 1.1 billion when 3i Group is excluded. The targets in the sample are primarily private companies (96.7%) within services (46.5%) or manufacturing (28.7%). These results are comparable to those found in e.g.
26 27 28 29
(Bilo et al. 2005). (Bilo et al. 2005).
See appendix 4 for a list of the 129 deals. See appendix 5 for an overview of the descriptive statistics of the sample. 30 Due to its age and size, 3i Group is dominating samples on LPE deals. Mller and Vasconcelos (2010) report that 3i Group accounts for 54% of the deals in their sample and hence choose to report separate results. The same is done in this study.
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Gottschalg et al. (2010). 38.8% of the targets are from common law countries, while 61.2% are from civil law countries. The most common countries of origin for the targets are the U.K., the U.S., France, Spain, and Germany. The deals span from 2001 to 2012, with about two thirds being conducted between 2004 and 2008. It thus seems that the sampled deals are fairly representative of the overall M&A market31. Furthermore, most of the deals employ cash as the means of payment. The average deal size is USD 55 million, which is fairly small compared to an average deal size of USD 126 million for the M&A market in general in the same period. In addition to this, only 10.9% of the deals have a size corresponding to more than 10% of the LPEVs market value at the time of the announcement. Compared to former studies such as Humphery-Jenner et al. (2012), the sample includes a quite high share of crossborder deals (58.1%). The reason is that most of the LPEVs are European, and European acquirers tend to have a high share of cross-border deals. Finally, all the deals are outsider-driven. Thus, there is no bias from insider-driven deals in the sample.
9.
METHODOLOGY
Having outlined the sample and how it was selected, this chapter will explain the event study methodology and discuss the different test statistics and their performance.
9.1.
Introduction
Event studies are used to measure the effect of an economic event on the value of a company (Campbell et al. 1997). The event study methodology as we know it today was developed by Fama, Fisher, Jensen and Roll (1969) and has only been slightly updated since32. It consists of a seven step procedure where one must; define the event, select the sample, determine the measurement of abnormal return, outline a procedure for estimating the abnormal return, outline a procedure for testing the hypotheses, present the empirical results, and interpret them (Campbell et al. 1997).
9.2.
Definition of the Event
In order to investigate the effect of an event, it is necessary to clearly define what the event is. In this study the event of interest is the announcement of an acquisition by a LPEV. In order to measure the effect of the event, one must define the event window.
31 32
For a comparison, see exhibit A.2 in appendix 2 and exhibit A.5.1 in appendix 5. E.g. by Brown and Warner (1980, 1985).
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The event window must be as narrow as possible in order to avoid distortion from e.g. releases of other news. On the other hand, it must be wide enough to capture the effect of the event, even if it is announced after trading closes. Therefore, the study will use an event window of one trading day around the event (i.e. a 3-day event window) as recommended by e.g. Park (2004), Bartholdy et al. (2007), and Campbell et al. (2010). We will define the event day as = 0, the first day of the event window as = T1 + 1, and the last day of the event window as = T2, where is a measure of event time. The length of the event window can then be defined as L2 = T2-T1 (Campbell et al. 1997). One could have used more than one event window in order to analyse whether the abnormal return is captured (Campbell et al. 2010; Kolari & Pynnonen 2011). That is, however, outside the scope of this thesis.
9.3.
Estimation of Abnormal Return
To enable measurement of the effect of an event one needs to define the dimension along which the effect is measured. This includes a number of choices. First, the measurement of return needs to be decided upon. In general, we distinguish between measuring returns as simple returns (9.1) and log returns (9.2); ( ) , , (9.1) (9.2)
where rit and Rit are the simple return and the log return from holding security i from period t-1 to period t. Pit and Pit-1 are the closing prices for security i at time t and time t1 respectively. Log returns are also known as continually compounded returns and have several advantages (Campbell et al. 1997). One of the main advantages is that the multiperiod log return is simply the sum of the one-period log returns. In addition to this, logtransformation increases the normality of the returns and eliminates negative values (Henderson 1990). This is very important in our case for two reasons. First, much of the event study methodology relies on the assumption of normal distributed returns33. Second, Brown and Warner (1985) show that daily abnormal returns tend to be right skewed. Therefore, log returns will be used going forward.
33
See section 9.4 for more information about the assumptions and appendix 7 for a test of the assumptions.
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Secondly, the abnormal return must be defined. The normal return is the return which would be expected if the event did not occur. The abnormal return is the difference between the actual return and the expected normal return (MacKinlay 1997). It follows that in order to estimate the abnormal returns one must estimate the expected returns. This requires one to choose an estimation model. Here we distinguish between four different models: 1) the constant-mean-return model, 2) the market model, 3) factor models, and 4) the market-adjusted-return model. The constant-mean-return model assumes that the expected return is constant through time whereas the market model assumes that there is a linear relationship between market return and the return of security (MacKinlay 1997). The market model is defined as follows: , (9.3)
where Rit and Rmt are the returns for period t for security i and the market index. it is the error term for security i for period t and is expected to be mean zero and have a variance equal to . Compared to the constant-mean return model, the market model is better
since is removes the part of the return that is related to variation in the markets return. This decreases the variance of the abnormal returns (Campbell et al. 1997). The market model is based on a single factor, namely the market return. Factor models include other factors than the market return as explanatory variables as well, such as exchange rates. According to Campbell et al. (1997) the gains from employing multifactor models are limited, since the marginal explanatory power is small. The market-adjusted-return model is essentially a restricted form of the market model with i=0 and i=1. It is used when we have no estimation period, or when we do not want to use the estimation period for estimating the expected returns (Campbell et al. 1997). However, Campbell et al. (1997) argue that one should only use restricted models as a last resort. Based on this, as well as the facts that the market model is better than the constant-mean-return model and that the gains from employing multifactor models is limited, the market model is chosen as the estimation model. Thus, we can define the expected return as: | The abnormal return can therefore be defined as: | (9.5) (9.4)
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Since the abnormal return is measured over an event window, which comprises several days, we accumulate the returns and get a measure of the cumulative abnormal return (CAR) for the individual security across time. (9.6)
When we investigate the effect of the announcement of acquisitions by LPEVs, we want to investigate this effect not only across time, but also across securities. Thus, we calculate the average of the CAR for the individual securities. This measure is called the cumulative average abnormal return (CAAR) and is calculated as: (9.7)
Now, the only thing we lack in order to estimate the abnormal returns is a measure of Rmt. The market return is measured by the return on a reference (market) index. If one has securities from more than one country, as is the case for this study, one can choose between global, regional, or national indices. Besides this, one must choose whether to use value- or equal-weighted indices and whether to use local or global currency market indices. Finally, one must choose which index provider to use. Several authors have discussed which type of market indices to use in multi-country event studies (Park 2004; Campbell et al. 2010). Campbell et al. (2010, p. 3078) argue that localcurrency market-model abnormal returns using national market indexes are sufficient. In addition to this, value-weighted indices most appropriately reflect the total market performance (Henderson 1990). For these reasons national MSCI local-currency, valueweighted indices are used as reference indices for the market return. In order to estimate the parameters of the market model we need to define an estimation period. To avoid seasonality, an estimation period of 250 trading days is often recommended since it approximately corresponds to the number of trading days in a calendar year (see e.g. Campbell et al. (2010) and Corrado (2011)). Some authors argue that the estimation period should end a number of days prior to the first day of the event window in order to avoid that information leaks prior to the event affects the estimation period (Park 2004; Campbell et al. 2010; Corrado 2011). Due to the very private nature of PE, information leaks prior to the announcement are not expected to occur, and therefore the estimation period will end the day before the first day of the event window.
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Formally, we can therefore define the estimation period as the period from = T0+1 to = T1 with a length of L1 = T1-T0. In order to ensure that the estimation period is unbiased, one normally needs to exclude events, where the same type of event occurred during the estimation period. In the case where announcement of events lead to abnormal returns, inclusion of events in the estimation period imply that the estimation period is contaminated. This will bias the expected returns upwards and hence bias the abnormal returns in the event window downwards. The idea behind event studies is that the event is unexpected and hence surprises investors. Thereby it makes them incorporate the new information into their information set and adjust the value of the stock. However, as explained in section 6.2.3 LPE acquisitions are partially anticipated and thus only lead to minor adjustments of the stock price of the LPEV. Based on this, the inclusion of announcements of acquisitions in the estimation period is not expected to impose any significantly bias on the estimated expected returns.
9.4.
General Testing Procedure
Step number five in the event study is to specify the testing procedure. This includes defining the null hypotheses, specifying the test statistics and evaluating their performance. The hypotheses which we want to test (the alternative hypotheses) were specified in chapter 7, while the null hypotheses are still to be specified. Here it is important to distinguish between the two types of tests we run. First of all, it is analysed whether CAAR is different from zero, corresponding to the following null hypothesis: H0x: CAAR = 0 (9.8)
Secondly, it is analysed whether the CAAR differs depending on certain deal, target, and acquirer characteristics. This is analysed by dividing the sample into smaller subsamples and then testing whether the CAAR differs between these groups. Based on the literature review we know, for most of the groups, which of the two groups that is expected to have the highest CAAR. Hence, the null hypothesis is the following; H0y: CAAR to group 1 CAAR to group 2, (9.9)
for all the hypotheses except for the hypotheses about the deal period, the industry of the target and the structure of the LPEV. In these cases the null hypothesis is
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H0z: CAAR to group 1 = CAAR to group 2
(9.10)
Having defined the hypotheses, it is now time to discuss the test statistics. Inspired by Bartholdy et al. (2007) a battery of nine test statistics is used for the analysis of whether CAAR is different from zero. Each test statistic will briefly be discussed below34. The battery includes both parametric and nonparametric tests, as well as tests that correct for event-induced variance. This is done in order to increase the robustness of the conclusions (Campbell et al. 1997). Parametric tests usually take some form of a t-test for differences in means and rely on three assumptions: the abnormal returns must be normally distributed, have a constant variance and be uncorrelated across securities35. When these assumptions are fulfilled, parametric tests have more power than nonparametric tests. Three parametric tests will be presented below. They differ by the way the correct for problems inherent in the data and the degree to which certain assumptions have to be fulfilled in order for them to obtain a decent performance. T1 relies on the assumption that the abnormal returns are independent across all securities in the sample. The test statistic divides the CAAR by its standard deviation, which is derived from the variance of the abnormal returns of the individual securities during the estimation period (Bartholdy et al. 2007). T1 adjusted with adjusted cross-sectional independence applies the so-called Patell adjustment (Patell 1976). The reason is that the abnormal returns are forecasts from the market model. Therefore, one needs to adjust the standard deviation from T1 for the variance of the forecast error. This is what the Patell adjustment does. The adjustment factor depends on the number of observed returns during the estimation period; the larger the number of observed returns, the lower the adjustment (Bartholdy et al. 2007). Since quite strict liquidity requirements were imposed during the sample selection, the adjustment factor will be relatively small for our sample. T2 is a t-statistic which standardizes the abnormal returns by scaling them with their standard deviation (Bartholdy et al. 2007). Thus, it reduces the bias from outliers and ensures that high abnormal returns will have less weight if the security had a high standard deviation.
34 35
See appendix 6 for a specification of the test statistics used in the event study. See appendix 7 for a test of the assumptions.
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T3 differs from T2 by including Patells adjustment. Thus, the standard deviation is adjusted for the variance of the forecast errors. Besides this, it is equal to T2. Nonparametric tests are used when the data is ordinal or when the assumption of normality is unsatisfied (Keller, 2005). Instead of analysing the difference in means, nonparametric tests analyse whether the locations of the populations differ. The advantage of nonparametric tests is that they are free of specific assumptions about the distribution of the returns (Campbell et al. 1997)36. This implies that they can be used to analyse samples with quite few observations. Three nonparametric tests are used in this study. T4 is a rank test. It converts the abnormal returns into a uniform distribution and assigns a rank to each return. The rank is standardized, since we know that the security will not be trading all trading days (Corrado & Zivney 1992). The expected rank (0.5) is then subtracted from the rank of each security and the sum of these differences is divided by the standard deviation of the ranks to get the test statistic (Bartholdy et al. 2007). T5 is a sign test and works by converting the abnormal returns into nominal data. It relies on the assumption that abnormal returns are independent across securities and that the probability of observing either a positive or a negative abnormal return is 0.5 respectively (Campbell et al. 1997). This implies that the sign test might be poorly specified when the distribution of the abnormal returns is skewed, since the expected proportion of positive abnormal returns in this case will be different from 0.5 (Campbell et al. 1997). If the probability of observing either a positive or a negative abnormal return is 0.5, then the expected sign of the abnormal return will be zero. The sign test therefore analyses whether the average observed sign is different from zero. T6 is a generalized sign test. Instead of assuming that the probability of observing either a positive or negative abnormal return is 0.5 respectively, T6 estimates the probability from the estimation period (Bartholdy et al. 2007). The test then compares the proportion of positive abnormal returns during the event window with the proportion of positive abnormal returns during the estimation period (Renneboog et al. 2007). Event-induced variance tests are employed in the case where the variance changes around the event day. An increase in the variance will cause the expected standard deviations based on the estimation period to underestimate the standard deviation in the
36
Therefore, nonparametric tests are also known as distribution-free tests (Keller 2005).
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event window. Hence, the test statistics will be upward biased. Due to the fact that an event gives investors new information, and investors react to new information cf. the EMH, it is likely that the variance will increase around the event day. Therefore, two event-induced variance tests are conducted. T7 is a parametric test with adjusted variances and is also known as the BMP test37. It corrects for the problem of event-induced variance by using standardized abnormal returns and a variance that is estimated from the event window rather than from the estimation period (Boehmer et al. 1991). T8 is a nonparametric rank test with adjusted variances. As opposed to T4, this test standardizes the abnormal returns before they are ranked. For the abnormal returns in the estimation period the test uses the same standardization procedure as T2, while it uses standard deviations based on Patells adjustment for the standardization of the abnormal returns in the event window (Bartholdy et al. 2007). The abnormal returns on the event date are then standardized by the standard deviation across all securities on the event date. Afterwards, the ranking procedure from T4 is followed.
9.5.
Testing Procedure for Tests of Differences
For the analysis of whether CAAR differs depending on certain deal, target and acquirer characteristics, two types of tests are carried out. First, a t-test and a Wilcoxon rank sum test are used to analyse whether there are differences in means and locations between two groups (Keller 2005). The t-test is a parametric test and is adjusted whenever the two groups have unequal variances. To shed light on this an F-test is employed. The Wilcoxon rank sum test is a nonparametric test which analyses the differences in the ranks between two groups (Keller 2005). Secondly, an ANOVA test and a KruskalWallis test are used to test for differences in means and locations between more than two groups. The ANOVA test is a parametric test which simultaneously compares the means of a number of groups (Keller 2005), while the Kruskal-Wallis test is a nonparametric test which simultaneously compares the ranks of a number of groups. In addition to the abovementioned tests, one could have made a multiple regression analysis. However, the value added from conducting such an analysis would be limited in our case. The interpretation would be complicated by the fact that most of the explan-
37
After Boehmer, Musumeci & Poulsen (1991)
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atory power would be captured in the intercept since most of the variables are dummy variables. Furthermore, some of the variables have a sample size as low as five. This would imply that several of the underlying assumptions would be unsatisfied. For these reasons, a multiple regression analysis has not been included in the test procedure38.
9.6.
Performance of Test Statistics
The performance of a test is measured by means of its size and power. The size of a test is the probability of committing a type I error, i.e. rejecting the null hypothesis when it is true. When the probability of committing a type I error is equal to the size of the test, the test is well-specified (Kothari & Warner 2006). The power of a test is the probability of finding abnormal returns when they are present (Kothari & Warner 2006), i.e. one minus the probability of committing a type II error. Thus, the goal is well-specified tests with high power. In order to analyse the performance of the test statistics one could have conducted a Monte Carlo simulation. This is however outside the scope of this thesis. Instead the performance is evaluated based on former studies. In general, parametric tests have higher power than nonparametric tests when their assumptions are fulfilled (Bartholdy et al. 2007). However, nonparametric tests dominate parametric tests in terms of power and size for multi-country studies with three-day event windows (Campbell et al. 2010). Among the nonparametric tests, the rank test dominates the sign test in detecting small abnormal returns (Corrado & Zivney 1992). Furthermore, it works well for small samples and has better performance than T7 (the BMP test) when the estimation period is contaminated, i.e. includes other events (Aktas et al. 2007). In the case of event-induced variance, T7 and T8 have higher power than the other tests, with T8 being the most powerful in multi-country studies (Aktas et al. 2007; Campbell et al. 2010; Corrado 2011). The abnormal returns in our sample are approximately normally distributed39, but some of the subsamples suffer from small sample sizes40. In addition to this, the business model of LPEVs implies that the estimation periods are most likely contaminated41. Finally, there are indications of event-induced variance in the data. In case of doubt, emphasis will therefore be placed on the results of T8.
38 39
That being said, a multiple regression analysis would not have changed the results significantly. See appendix 7 for a test of the assumptions. 40 See exhibit 10.1 in chapter 10. 41 See section 9.3 for a discussion of this.
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10. EMPIRICAL FINDINGS

Having explained the event study methodology, this chapter will present the empirical findings and discuss the validity and the reliability of the results.
10.1. Discussion of the Results

The results are presented in exhibit 10.1. A separate exhibit with results for the sample excl. 3i Group can be found in appendix 8. These results are stated in brackets in the following sections. 10.1.1. Overall CAAR The study finds an overall 3-day CAAR of 0.26% (-0.10%)42. The CAAR is insignificant across all tests for both samples. This result implies that announcement of acquisitions by LPEVs does not generate significant short run abnormal returns to their shareholders. Consequently, H1: CAAR to the announcement of acquisitions by LPEVs 0 is confirmed. This result is in line with the literature presented in chapter 6. The CAAR to acquirers in general is insignificant or positive up to 1.2% (Andrade et al. 2001; Moeller et al. 2005). Thus, the CAAR to LPEV acquirers does not seem to differ from that of other acquirers. In addition to this, the result is supported by Jegadeesh et al. (2010) who find that the market expects long-run abnormal returns of -2% to 2% for LPEVs. As explained in chapter 6, the CAAR is likely to be affected positively by the facts that PEVs generate more value in acquisitions than other acquirers (Achleitner et al. 2009, 2010) and are able to capture a larger share of the value generated (Bargeron et al. 2008; Officer et al. 2010; Stotz 2011). On the other hand, the magnitude of the CAAR is likely to be negatively affected by partial anticipation from investors (Schipper & Thompson 1983; Malatesta & Thompson 1984; Montgomery 1994; Thompson 1995). Furthermore, the estimation period might be contaminated by announcements of other acquisitions. If these acquisitions have a positive CAAR then the expected return in the event window will be higher and thus the CAAR will be lower. However, the CAAR is insignificant both for deals with and without contaminated estimation periods. Thus, contamination does not seem to affect the results. Based on the discussion above, a possible interpretation of the result is that investors expect LPEVs to conduct acquisitions on a frequent basis and generate more value in acquisitions than other acquirers; thus, they expect LPEVs to deliver higher rates of
42
These results are not statistically different from each other cf. exhibit A.9.1 in appendix 9.
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return from acquisitions. Consequently, an insignificant CAAR is most likely a result of high expected returns and thus represents a decent rate of return from acquisitions compared to that of other acquirers. Exhibit 10.1 CAAR to Announcements of Acquisitions by LPEVs
Parametric tests Sample All acquirers Deal Period* 2001 - 2003 2004 - 2008 2009 - 2012 Deal Size Large Small Target Industry* Min. & Con. Manufacturing T., C., E., G. & S. S. W. & R. Trade F., I. & R. E. Services Target Legal Origin Civil law Common law 79 50 0.29% 0.22% 0.85 0.50 0.85 0.50 1.33 0.05 1.30 0.06 0.90 0.51 1.06 0.31 1.15 0.32 1.35 0.06 0.90 0.50 -1.23 0.22% 1.51% 0.81 1.12 0.81 1.11 0.89 1.15 0.87 1.14 0.83 1.38 0.74 1.77
c
Nonparametric tests T3 1.05 T4 1.09 T5 1.07 T6 1.10
Var. adj. tests T7 1.10 T8 1.08
Differences T-test W-test
N 129
CAAR 0.26%
T1 T1 adj. 0.97 0.97
T2 1.07
6.23a 20 86 23 1.70% 0.00% 0.02% 1.74

c
296.83a
1.73
2.07
2.05
1.92
2.21
2.19
1.99
1.90
-0.02 0.03
-0.02 0.03
0.35 -0.06
0.33 -0.06
0.45 -0.16
0.38 -0.36
0.46 -0.33
0.35 -0.07
0.43 -0.16 0.62 0.55
14 115
0.58% 0.22%
0.47 0.85
0.47 0.85
0.35 1.01
0.35 0.99
0.26 1.03
-0.31 1.23
-0.26 1.25
0.38 1.04
0.25 1.02 0.75 -3.71
4 37 11 13 4 60
1.18% -0.08% 0.02% 0.27% 1.59% 0.37%
0.89 -0.17 0.02 0.36 0.84 0.84
0.89 -0.17 0.02 0.36 0.84 0.84
0.63 -0.43 0.44 0.01 0.78 1.36
0.63 -0.43 0.43 0.01 0.71 1.35
0.94 -0.27 0.51 -0.10 0.93 1.00
1.21 0.00 0.98 -0.46 1.13 0.66
1.19 -0.01 1.01 -0.41 1.17 0.77
0.81 -0.55 0.50 0.01 0.58 1.27
1.23 -0.28 0.53 -0.07 0.91 1.02 0.16 0.62
Target Former Ownership Private Public LPEV Structure Direct Indirect LPEV Experience Experienced Inexperienced 109 20 0.40% -0.46% 1.57 -0.43 1.57 -0.43 1.49 -0.76 1.48 -0.79 1.54 -0.82 1.84c -1.54 1.80c -1.40 1.56 -0.82 1.52 -0.85 124 5 0.34% -1.54% 1.22 -1.06 1.22 -1.06 1.32 -1.14 1.30 -1.13 1.34 -1.16 1.35 -1.29 1.37 -1.26 1.36 -1.20 1.32 -1.03 125 4 0.81 1.75
c
-1.45c
0.91 1.20
0.81 1.37 2.04b 1.57b
1.73b
1.75b
LPEV Investment Strategy Specialized Diversified 10 119 -0.05% 0.29% -0.03 1.12 -0.03 1.12 -0.49 1.26 -0.49 1.24 -0.28 1.19 -1.09 1.43 -1.03 1.44 -0.46 1.31 -0.29 1.17
-0.50
-0.48
Notes: CAAR is defined as the sum of CAR [-1; 1] divided by N. The significance level is indicated by a = 10%, b = 5%, and c = 1%. * implies that the tests for differences are the ANOVA test and the Kruskal-Wallis test. W-test = the Wilcoxon Rank Sum test. The test for differences which is relied upon is marked with bold; the t-test is relied upon when the observations of both groups are normally distributed according to a Jarque-Bera test; when they are not, the Wilcoxon Rank Sum test is relied upon. The industries are as follows: Min. & Con. = Mining & Construction, T., C., E., G. & S. S = Transportation, Communication, Electric, Gas & Sanitary Services, W. & R. Trade = Wholesale & Retail Trade, and F., I. & R. E. = Finance, Insurance & Real Estate.
10.1.2. Deal Period The study shows that deals conducted in the period 2001-2003 had a CAAR of 1.70% (2.56%). For the total sample, this is statistically significant at a 10% significance level
according to all tests, but none of the tests show significance when 3i Group is excluded. However, the latter sample only consists of two deals. Deals conducted in the periods 2004-2008 and 2009-2012 had statistically insignificant CAARs of 0.00% (-0.29%) and 0.02% (-0.04%) respectively. Comparing the three periods, 2001-2003 yields a significantly higher CAAR (approx. 1.70%) than the other periods for the total sample, but an insignificantly higher CAAR when 3i Group is excluded. This is most likely due to the small sample size in the period 2001-2003 when 3i Group is excluded. The CAAR decreases for both 2004-2008 and 2009-2012 when 3i Group is excluded, while it increases for 2001-2003. This suggests that the difference between 2001-2003 and the other periods increases after removing 3i Group. Based on the discussion above, the CAAR can therefore be concluded to differ between 2001-2003 and the other periods. Hence, H2: CAAR to LPE acquirers in 2001-2003 > CAAR to LPE acquirers in 20042008 > CAAR to LPE acquirers in 2009-2012 is partly confirmed. This result is supported by previous empirical studies which find that abnormal returns have declined over time in both M&A and PE (Martynova & Renneboog 2008; Acharya et al. 2011). The decline in the CAAR from the first period to the latter periods can be explained by three things. First, financial markets have most likely become more efficient in their valuation of the LPEVs, since an increasing number of LPEVs have emerged along with LPE indices - both of which have increased the transparency of performance. Secondly, the increasing number of PEVs and LPEVs during the period has increased the competition in the market for corporate control (Wright et al. 2006; Bain & Co. 2012). Third, premiums and hence prices have been driven up (Gou et al. 2011). The fact that CAAR has not declined from the period 2004-2008 to the period 2009-2012 indicates that the business cycle effect counteracts the overall decline in returns. If CAARs decline over time, but LPEVs do better during busts (2009-2012) than during booms (2004-2008) as suggested by (Kaplan & Schoar 2005; Achleitner et al. 2009, 2010), then one can expect approximately the same CAARs during a boom as during the following bust. 10.1.3. Deal Size The CAAR to large deals is 0.58% (0.58%) while the CAAR to small deals is 0.22% (-0.34%). The results are not significantly different from zero for any of the samples. The difference in the CAAR between large and small deals is insignificant for the overall sample. Since 3i Group has a positive effect on CAAR and only conducts small deals, the difference increases after removing 3i Group. Thus we find a difference that is
significant at the 10% level for the sample excl. 3i Group. It is, however, not enough to conclude a difference across both samples and hence H3: CAAR to large acquisitions by LPEVs > CAAR to small acquisitions by LPEVs is rejected. This result is supported by Acharya et al. (2009) who find that value generation is independent of the deal size. It does, however, contradict most of the other previous studies which suggest that larger deals should lead to higher returns (Loos 2005; Wright et al. 2006; Martynova et al. 2006; Bargeron et al. 2008; Officer et al. 2010). A potential explanation is that the deal size is measured on a relative basis in this study, while several of the other studies have measured deal size on an absolute basis. As explained in chapter 6, one would expect better performance of large deals, since larger targets e.g. can bear more debt (Achleitner et al. 2009) and have more dispersed ownership (Faccio & Lang 2002). However, the LPEVs are likely to have larger bargaining power when the targets are smaller. This counteracts the positive effects of larger targets and can therefore explain why the deal size does not have an effect on the CAAR. 10.1.4. The Industry of the Target The study finds CAARs ranging from -0.08% to 1.59% (-0.60% to 1.20%) depending on the industry of the target. The results are insignificantly different from zero across all industries in the samples. Furthermore, the CAARs are not significantly different between the industries. Therefore, one can reject H4: The CAAR to LPE acquirers depends on the industry of the target. This contradicts previous studies which find that PE returns are industry dependent (Loos 2005; Cumming et al. 2007; Gottschalg et al. 2010). There might be several reasons for these results. First of all, four of the six industry categories have sample sizes of 13 (6) or less. Thus, the results should be interpreted with caution. Secondly, M&As and PE activity tend to cluster in different industries in different periods (Andrade et al. 2001; Vinten & Thomsen 2008). This is likely to drive up prices and hence drive down returns. Third, due to the low sample sizes, high level industry categories have been used. Thus, one might find different results if a more detailed industry categorization is applied. 10.1.5. The Legal Origin of the Target The CAAR to deals involving civil law targets is 0.29% (0.03%) while the CAAR to deals involving common law targets is 0.22% (-0.73%). None of these results are significantly different from zero, although T6 and T7 report significance at the 10% significance level for common law targets in the sample excl. 3i Group. The CAAR does not
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differ significantly between civil and common law targets for any of the samples. Thus, H5: CAAR to acquisitions of targets from civil law countries by LPEVs > CAAR to acquisitions of targets from civil law countries by LPEVs is rejected. This contradicts the existing (but scarce) empirical evidence which finds that CAAR depends on the legal origin of the target, although they disagree about which legal origin that is preferable (Martynova & Renneboog 2006; Phalippou & Gottschalg 2009; Humphery-Jenner et al. 2012). Besides a low sample size of common law targets when 3i Group is excluded, the result might be caused by increasing convergence in legal systems due to e.g. globalization and pan-European merger laws (Renneboog & Simons 2005; La Porta et al. 2008). 10.1.6. The Former Ownership of the Target The study finds a CAAR of 0.22% (-0.12%) for acquisitions of private targets and a CAAR of 1.51% (1.20%) for acquisitions of public targets. These results are insignificantly different from zero across both samples, although the CAAR for public targets is statistically significant at the 10% significance level for T5 and T6 for the sample incl. 3i Group. The CAAR is significantly higher for public targets than for private targets at the 10% significance level for the total sample. The result is, however very uncertain since there are only four observations of public targets. Furthermore, only one observation of a public target is left when 3i Group is excluded. Based on this, one cannot confirm H6: CAAR to acquisitions of private targets by LPEVs > CAAR to acquisitions of public targets by LPEVs. This result contradicts previous studies which uniformly suggest that acquirers in general earn higher CAARs in acquisitions of private targets than in acquisitions of public targets (Faccio & Masulis, 2005; Martynova & Renneboog 2006; Masulis, Wang & Xie 2007; Feito-Ruiz & Menndez-Requejo 2011). However, the empirical literature within this area suffers from a lack of PE studies. In addition to this, it is hard to draw any valid conclusions based on a sample of four observations. 10.1.7. The Structure of the LPEV LPEVs organized as direct LPEVs (LPE funds or Investment Companies) earn CAARs of 0.34% (0.05%) in the days surrounding their announcement of an acquisition while indirect LPEVs (LPE firms) earn CAARs of -1.54% (-1.54%). None of these results are significantly different from zero. Interestingly, direct LPEVs earn 1.87% (1.59%) higher CAARs than indirect LPEVs. These differences are statistically significant for both
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samples43. Thus, one can confirm H7: The structure of the LPEV has an effect on the CAAR to announcements of acquisitions. Lahr and Herschke (2009) find no significant differences in risk-adjusted returns across different LPEV structures and are, so far, the only ones to have studied the impact of LPEV structure on the share price performance of LPEVs. As outlined in chapter 6, direct LPEVs are more exposed to the underlying performance of the portfolio companies. This could explain why direct LPEVs outperform indirect LPEVs. However, the exposure is only one dimension of the LPEV structure. One could also investigate the other dimension, i.e. the impact of being internally vs. externally managed, or even better: whether the CAAR differs between LPE firms, LPE funds, and investment companies. 10.1.8. The Experience of the LPEV The study finds that experienced acquirers earn CAARs of 0.40% (0.12%) while inexperienced acquirers earn CAARs of -0.46% (-0.46%). None of the CAARs are significantly different from zero across neither the majority of the tests nor T8, although T5 and T6 report significance at the 10% level for experienced LPEVs in the total sample. Therefore, the CAARs are not significantly different from zero. Interestingly, the CAAR to experienced LPEVs is 0.86% higher than the CAAR to inexperienced LPEVs. This difference is statistically significant at a 5% significance level. The significant difference persists even after removing 3i Group from the sample. Therefore, one can confirm H8: CAAR to experienced LPE acquirers > CAAR to inexperienced LPE acquirers. This result is consistent with previous empirical findings. Wood and Wright (2009) find lower returns to PE funds raised in the 1990s, while Gottschalg and Wright (2008) and Phalippou and Gottschalg (2009) show that experienced PE funds add more value and have higher returns than inexperienced PE funds. The higher performance of experienced LPEVs can be explained by three things. First of all, Loos (2005) finds that the number of deals conducted has a positive impact on PE performance. In addition to this, only the best PEVs survive over time (Bauer et al. 2001), thus the experienced LPEVs are likely to be of a high quality44. Third, experienced LPEVs have access to proprietary deal flows (Berg & Gottschalg 2005; Kaplan & Schoar 2005). According to Loos (2005), this leads to higher performance.
43
However, only five observations of indirect LPEVs were observed in our sample, so one must be cautious interpreting the results. Interestingly, the sample seems to be fairly representative. According to LPX Group (2012d), only 4% of all LPEVs are structured as indirect LPEVs. In our sample they account for 11% of the LPEVs and approximately 4% of the deals. 44 This is also known as the survivorship bias.
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10.1.9. The Investment Strategy of the LPEV LPEVs with a specialized investment strategy earn a CAAR of -0.05% (-0.05%) from the announcement of acquisitions, while LPEVs with a diversified investment strategy earn a CAAR of 0.29% (-0.11%). None of these CAARs are significantly different from zero. Furthermore, LPEVs with a specialized investment strategy do not earn significantly higher CAARs than LPEVs with a diversified investment strategy. Hence, one can reject H9: CAAR to acquisitions by specialized LPEVs > CAAR to acquisitions by diversified LPEVs. In this context, it is interesting to note that there is a trend towards more specialization in PE. Based on the empirical evidence presented in this study, the specialization trend does not seem to be value-maximizing for shareholders. This result is consistent with former M&A studies which find mixed results with respect to specialization (Martynova et al. 2006; Martynova & Renneboog 2008; Feito-Ruiz & Menndez-Requejo 2011). On the other hand, it is inconsistent with previous PE studies, which find that specialization increases operational performance and profitability of the portfolio firms (Cressy et al. 2007; Kaplan & Strmberg 2009) and that geographical specialization yields higher returns to PEVs (Loos 2005; Peer & Gottschalg 2009). The result might be due to several things. First of all, there are only 10 observations of specialized deals; hence the sample size is quite low. However, the difference in CAAR is only 0.34%, which is far below the required level of approximately 1%, where the test statistics are able to find a difference (Kothari & Warner 2006). Secondly, CAAR does not seem to depend on the industry of the target according to section 10.1.4. Third, it might simply be due to the fact that (L)PEVs historically have focused primarily on financial improvements and not focused on operational improvements, which is where specialization has its advantage45. Fourth and finally, this study only analyses industry specialization. Since, specialization can occur along a number of other dimensions such as deal size, geography and type of firms, one might find different results if one analysed the announcement returns to LPEVs which specialize along one these dimensions.
10.2. Value Generating Levers

Relating the results in sections 10.1.2-10.1.9 to the theories about value generation in LPE, one can conclude that investors expect LPEVs to generate most of their value in the acquisition and the holding phase through a mix of value capturing and secondary levers of value generation. This includes financial arbitrage, in the form of superior deal
45
See section 5.2.2. for more information about operational improvements in private equity.
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making capabilities and access to a proprietary deal flow, and corporate governance improvements due to the fact that more experienced LPEVs are better at monitoring. The sources of these value generating levers are all extrinsic, thereby underlining the importance of the LPEVs in the value generation process.
10.3. Reliability and Validity

Since the study is one of the first in its area, it is important to assess the reliability and the validity of the study. Reliability refers to the precision of the measurement instrument while validity refers to whether a measurement measures what it is supposed to measure (Abnor & Bjerke 1997). A measurement is reliable if it provides the same results under different tests. Since the results were found using a battery of test statistics, incl. parametric, nonparametric and event-induced variance tests, the reliability of the measurement instrument is assessed to be good. The validity depends on whether systematic biases were imposed during the research. Several potential biases have been introduced during the study. First of all, the estimation periods are most likely contaminated by other announcements of acquisitions. However, as explained in section 9.3, this is unlikely to bias the results. Secondly, outliers have been removed. This decreases the variance of the results. However, the outliers were both positive and negative and of approximately the same magnitude. Thus, the impact on the final results is likely to be limited. Third, there is a considerable lack of U.S. targets and LPEVs in the sample compared to other studies. This is most likely due to the fact that the major U.S. LPEVs have not been listed until recently. However, it implies that the results might not be generalizable to the U.S. Fourth, several structural factors relating to LPE implies that the results differ from those of former M&A studies: LPEVs conduct smaller deals than other acquirers, but on the other hand they mostly pay cash and usually avoid hostile bids. Thus the biases are likely to cancel out. Fifth, it seems that LPEVs only acquire few public targets. According to the evidence presented in the literature review, this should impose a positive bias. Finally, the test suffers from survivorship bias, since it relies on LPEVs which have survived through the observation period. This imposes a positive bias, as inferior LPEVs tend to go out of business. Based on the discussion above, only a limited number of biases have been imposed on the results. However, they seem to even out and the validity is therefore assessed to be good. The fact that both the reliability and the validity of the study are good implies that the results are of a decent quality. This renders credibility to the findings.
11. CONCLUSION
The thesis has investigated the short run abnormal return to the announcement of acquisitions by listed private equity vehicles. This has been done through three parts. Part 1 provided the theoretical framework. First, Chapter 2 showed that the market for corporate control could be explained by the neoclassical finance theory, the agency theory, and the behavioural finance theory. The neoclassical finance theory argued that managers are maximizing shareholders wealth and hence only make acquisitions which have a non-negative CAAR. The agency theory provided two explanations; the first was that since managements rewards are likely to increase with the size of the company, managers might engage in acquisitions which increase the size of the company, but do not necessarily maximize the value for the shareholders. This should lead to negative CAARs. Secondly, the motive of an acquisition might be to decrease the agency costs. This should lead to positive CAARs. The behavioural finance theory argued that takeovers occur due to management hubris and hence CAARs should be negative. Chapter 3 gave an introduction to PE and outlined some of the current trends. Afterwards, chapter 4 showed that LPEVs are more diverse than PEVs and that the major differences between PE and LPE are that LPE is more liquid, provide better access for retail investors, and is easier and more transparent. In addition to this, PE and LPE differ on a number of structural parameters such as lifetime and size. Part 2 explored the existing literature and led to the development of 22 hypotheses. Chapter 5 explained how LPEVs generate value, before chapter 6 build upon that, and related empirical studies within M&A, PE and LPE, to develop a number of hypotheses. These hypotheses were prioritized in chapter 7, where nine hypotheses were selected for further analysis. Part 3 analysed the hypotheses and provided the empirical results. First, a sample of 129 deals conducted by 18 LPEVs in the period 2001-2012 was identified based on the LPX Composite. These deals were tested by means of an event study, which included a battery of parametric, nonparametric, and event-induced variance tests. Based on this, the study found an insignificant overall CAAR of 0.26% using a 3-day event window. Furthermore, the study found that the CAAR depends on the deal period, the LPEV structure and the experience of the LPEV. Finally, the study showed decent reliability and validity.
Based on this, one can conclude that the announcement of acquisitions by listed private equity vehicles does not generate short run abnormal returns to their shareholders. This result provides support for the neoclassical theorys explanation of acquisitions: efficient markets will ensure that poorly performing management teams are replaced and managers will only conduct acquisitions which maximize shareholder value. In addition to this, the result supports the part of agency theory that argues that acquisitions are profit maximizing because they decrease agency costs. Furthermore, the non-negative CAAR implies that LPEV managers do not seem to suffer from managerial hubris. Secondly, one can conclude that the short run abnormal return to the announcement of acquisitions by listed private equity vehicles depends on certain deal and acquirer characteristics, but does not depend on certain target characteristics. More specifically, the return depends on the deal period, the LPEV structure and the experience of the LPEV. As discussed above, the announcement return is approximately 1.70% higher for deals conducted during 2001-2003 than for deals conducted during 2004-2008 and 20092012. Furthermore, the announcement return is 1.87% higher for direct LPEVs than for indirect LPEVs and 0.86% higher for experienced LPEVs than for inexperienced LPEVs. These results are in line with Gottschalg et al. (2010) which find that there is significant variance in PEVs return depending on fund specific characteristics and vintage year. Thus, the thesis has provided an improved understanding of listed private equity and LPEVs performance when they announce acquisition. However, the research area is largely unexplored and a number of interesting issues remain.
12. FUTURE RESEARCH

One of the major issues is whether the current trend of specializing within specific industries and niches is worthwhile. This study found that specialization along the industry dimension did not lead to abnormal returns. Therefore, it would be interesting to study whether specialization along other dimensions such as geography or deal size leads to abnormal returns. Secondly, very little is known about the LPEVs. Hence, there is a need build upon the work of Lahr and Herschke (2009) and Brown and Krussl (2010) to improve the understanding of the different structures of LPEVs and their influence on the risk and returns.
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13. LIST OF LITERATURE

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Palepu 1990, Consequences of Leveraged buyouts, Journal of Financial Economics, vol. 27, pp. 247-262. Park, N. K. 2004, A Guide to Using Event Study Methods in Multi-Country Settings, Strategic Management Journal, vol. 25, no. 7, pp. 655-668. Patell, J. M. 1976, Corporate forecasts of earnings per share and stock price behavior: Empirical tests, Journal of Accounting Research, vol. 14, no. 2, pp. 246-276. Peer, A. & Gottschalg, O. 2011, Red and Blue: The Relationship Between Institutional Context and the Performance of LBO Investments, Strategic Management Journal, vol. 32, pp. 1356-1367. Phalippou, L. & Gottschalg, O. 2009, The Performance of Private Equity Funds, The Review of Financial Studies, vol. 22, no. 4, pp. 1747-1776. Phalippou, L. 2010, Private equity Funds Performance, Risk and Selection, in Athanassiou, P. (ed.), Research Handbook on Hedge Funds, Private Equity and Alternative Investments, Edward Elgar Publishing Limited, Cheltenham, the United Kingdom, pp.113-140. Renneboog & Simons 2005, Public-to-Private Transactions: LBOs, MBOs, MBIs and IBOs, Working Paper, no. 94/2005, McKinsey & Co. Inc. and Tilburg University. Renneboog, L., Simons, T. & Wright, M. 2007 Why do Public Firms go Private in the UK? The Impact of Private Equity Investors, Incentive Realignment and Valuation, Journal of Corporate Finance, vol. 31, no. 4, pp. 1795-1815. Roll, R. 1986, The Hubris Hypothesis of Corporate Takeovers, Journal of Business, vol. 59, no. 2, pp. 197-217 Ross, S. A. 2002, Neoclassical Finance, Alternative Finance and the Closed End Fund Puzzle, European Financial Management, vol. 8, no. 2, pp. 129-137. Salinger, M. 1992, Standard Errors in Event Studies, Journal of Financial and Quantitative Analysis, vol. 27, no. 1, pp. 39-53. Schipper, K. & Thompson, R. 1983, Evidence on the Capitalized Value of Merger Activity for Acquiring Firms, Journal of Financial Economics, vol. 1,, pp. 85-119.
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Singh, H. 1990, Management Buyouts: Distinguishing Characteristics and Operating Changes Prior to Public Offering, Strategic Management Journal, vol. 11, no. 4, pp. 111-129. Sloan, A. & Benner, K. 2008, The Year of the Vulture, Fortune, vol. 157, no. 11, pp. 62-70. Spliid, R. 2007, Kapitalfonde R pengemagt eller aktivt ejerskab, Brsens Forlag, Copenhagen. Stotz, O. 2011, The Influence of Geography on the Success of Private Equity: Investments in Listed Equity, Applied Financial Economics, vol. 21, pp. 1605-1615. Sudarsanam, S. 2003, Creating Value from Mergers and Acquisitions, Prentice Hall, Harlow, the United Kingdom. Talmor, E. & Vasvari, F. 2012, International Private Equity, Wiley, West Sussex, the United Kingdom. Thompson, R. 1995, Empirical Methods of Event Studies in Corporate Finance, in Jarrow, R., Maksimovic, V. & Ziemba, W. T. (ed.), Handbooks in Operations Research & Management Science, vol. 9, Elsevier Science B. V., the Netherlands, pp. 963-992. U.S. Securities and Exchange Commission 2011, Division of Corporate Finance: Standard Industrial Classification (SIC) Code List, Accessed 18th of May 2012, <http://www.sec.gov/info/edgar/siccodes.htm>. Vinten, F. & Thomsen, S. 2008, A Review of Private Equity, Copenhagen Business School, Center for Corporate Governance Working Papers, no. 1. Wood, G. & Wright, M. 2009, Private Equity: A Review and Synthesis, International Journal of Management Reviews, vol. 11, no. 4, pp. 361-380. Wright, M., Renneboog, L., Simons, T. & Scholes, L. 2006, Leveraged Buyouts in the U.K. and Continental Europe: Retrospect and Prospect, Journal of Applied Corporate Finance, vol. 18, no. 3, pp. 38-55. Wruck, K. H. 1989, Equity Ownership Concentration and Firm Value: Evidence from Private Equity Financings, Journal of Financial Economics, vol. 23, pp. 3-28.
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14. APPENDICES
List of Appendices
Appendix 1 Comparison of LPEVs and PEVs Appendix 2 Overview of M&A Activity, 2002-2012 Appendix 3 Sample Selection Process Appendix 4 List of Deals Appendix 5 Descriptive Statistics Appendix 6 Presentation of Test Statistics Appendix 7 Test of Assumptions Appendix 8 Results for the Sample excl. 3i Group PLC Appendix 9 Test for Differences in CAAR 73 74 75 76 81 89 94 98 99
Appendices on the enclosed CDROM

1. Content of the CDROM 2. M&A Activity, 2002-2012 3. List of LPEVs 4. Final Sample 5. Descriptive Statistics 6. T1-T8 7. T1-T8 (excl. 3i Group) 8. Tests for Differences
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Appendix 1 Comparison of LPEVs and PEVs

Exhibit A.1 Comparison of LPEVs and PEVs
Listed Private Equity Vehicles Trade at a stock exchange Liquid and easy to enter/exit No transaction costs expect the bid-ask spread Unlisted Private Equity Vehicles Trade in secondary markets Illiquid and hard to enter/exit Significant transaction costs due to restrictions on trade and illiquidity discount Easy performance evaluation No minimum investment requires, i.e. access for retail investors Easy to diversify investments due to liquidity and no minimum required investment Unlimited life (evergreen) Capital is permanent Realization proceeds are often retained and reinvested Mainly structured as LPE funds, but quite diverse Investors buy shares at a NAV discount Invest in other assets than private equity Allow for a flexible investment horizon No J-curve effect Transparent and decent disclosure Handle cash management Mainly structured as LPE funds Investors buy shares at the asset value Do not invest in non-private equity assets Fixed investment horizon of 7-10 years J-curve effect Limited disclosure and transparency Cash management is handled by the limited partnership Lower fees Do not offer co-investment opportunities Small
Note: *NAV = Net Asset Value Sources: Bauer et al. 2001; Bilo et al. 2005; Bergmann et al. 2009; Lahr & Herschke 2009; Brown & Krussl 2010; Jegadeesh, Krussl & Pollet 2010; Cumming et al. 2011; Goldman 2011; LPEQ 2012; LPX Group 2012a; Talmor & Vasvari 2012.
Complicated performance evaluation High minimum investment requirements, i.e. no access for retail investors Hard to diversify due to limited liquidity and high minimum required investment Limited life Capital is raised for each new fund Realization proceeds are returned to investors
2% management fee and 20% carried interest Offer co-investment opportunities Large
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Appendix 2 Overview of M&A Activity, 2002-2012

Exhibit A.2 M&A Activity, 2002-2012
No. of deals 3.500.000 Aggregated deal value (USD mn.) 3.000.000 2.500.000 2.000.000 1.500.000 1.000.000 500.000 Aggregated deal value (USD mn.) 28.000 24.000 No. of deals 74 20.000 16.000 12.000 8.000 4.000 -
Year
Notes: The data includes all deals completed from 2002 until 20 th of May 2012, where both targets and acquirers are located in Europe or the US. Source: Zephyr
JULY 2012
Appendix 3 Sample Selection Process

Exhibit A.3 Sample Selection Process
No. Criterion Deleted deals 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Initial number of deals from Zephyr The LPEV is on the list from LPX Acquirer and target are from Europe or the U.S. The deal is completed Rumour date equals announcement date The deal has an ISIN number The deal has a value of more than $1 million The former ownership of the target is known The target has a U.S. SIC code The acquirers date of incorporation is known The acquirers stock price is available There is only one announcement in the event window The trade volume of the acquirers stock is available The acquirers stock trades minimum 80% of all trading days The average market value of the acquirer is above $2 million The bid-ask spread of the acquirers stock is maximum 20% Daily returns are available for the market index The acquirer only invests once in the target Trimming (removal of the 1.25% most positive and the 1.25% most negative observations) 20 Final number of deals in the sample 129 64 4 37 9 88 8 50 5 13 0 0 57 27 4 Remaining deals 495 431 427 427 390 390 381 293 293 293 285 235 230 217 217 217 160 133 129
Sources: LPX Group (2012c), Zephyr, Datastream and own analysis
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Appendix 4 List of Deals

Exhibit A.4 List of Deals
Acquirer name Acquirer country code 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC GB GB GB GB GB GB GB GB CONSILIUM TECHNOLOGIES LTD LAMY SA PETROFAC LTD PROVIMAR SA PIXOLOGY ASPECTS SOFTWARE LTD LA CHEMIAL SPA DISPLAY PRODUCTS TECHNOLOGY LTD 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC GB GB GB GB GB GB GB GB GB GB GB GB GB GB GB GB GB GB GB RICH XIBERTA SA PROSOL GESTION SA EPIGENOMICS AG TOP LAYER NETWORKS INC. JDH HOLDINGS LTD JUTEL OY TRANSMOL LOGSTICA SL HUNTSWOOD PLC NEUROTECH SA LDV LTD VANYERA 3 SL REPUBLIC LTD WILLIAMS LEA GROUP LTD MACTIVE AB ROLLER STAR SA MICROSULIS LTD MICROEMISSIVE DISPLAYS LTD VIBRATION TECHNOLOGY LTD NOVEM CAR INTERIOR DESIGN GMBH ES FR DE US GB FI ES GB FR GB ES GB GB SE ES GB GB GB DE Target name Target country code GB FR GB ES GB GB IT GB
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3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC
GB GB GB GB GB GB GB
ARCCURE TECHNOLOGIES GMBH STI SPA INFINITE DATA STORAGE LTD GRIES-DECO-COMPANY GMBH PHARMETRICS INC. NOVEXEL SA INCLINE GLOBAL TECHNOLOGY SERVICES LTD
DE IT GB DE US FR GB
3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC
GB GB GB GB GB
VONAGE HOLDINGS CORPORATION DAALDEROP BV BRAINSHARK INC. FIOS INC. SALAMANDER ENERGY (THAILAND) LTD
US NL US US GB
3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC
GB GB GB GB
TRANSPORTS ALLOIN SAS SCREENTONIC SA COMBINATURE BIOPHARM AG MERIDEA FINANCIAL SOFTWARE OY
FR FR DE FI
3I GROUP PLC
GB
CHRONICLE SOLUTIONS (UK) LIMITED
GB
3I GROUP PLC
GB
AMBERWAVE SYSTEMS CORPORATION
US
3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC
GB GB GB GB GB GB GB GB GB GB GB GB
HTC SWEDEN AB SONIM TECHNOLOGIES INC. FOTOLOG INC. GIRAFFE CONCEPTS LTD NETRONOME SYSTEMS INC. AZELIS SA CERENICIMO SAS KINETO WIRELESS INC. VETTE CORPORATION KNEIP COMMUNICATION SA ADVANCED POWER AG AOPTIX TECHNOLOGIES INC.
SE US US GB US LU FR US US LU CH US
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3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC 3I GROUP PLC
GB GB GB GB GB GB GB GB GB GB GB GB GB GB GB GB GB GB
FINNET OY INTALIO INC. METASTORM INC. CAIR LGL SA CAMBRIDGE SEMICONDUCTOR LTD UNIN RADIO SA TSMARINE (CONTRACTING) LTD VELOCIX LTD DATANOMIC LTD COREMETRICS INC. LABCO SAS WELLPARTNER INC. ENOCEAN GMBH NUJIRA LTD GARLIK LTD VNU MEDIA BV REFRESCO HOLDING BV STORK MATERIALS TECHNOLOGY BV
FI US US FR GB ES GB GB GB US FR US DE GB GB NL NL NL
3I GROUP PLC ALTAMIR ET COMPAGNIE SCA
GB FR
GO OUTDOORS LTD FRANCE TLCOM MOBILE SATELLITE COMMUNICATIONS SA
GB FR
ARQUES INDUSTRIES AG ARQUES INDUSTRIES AG BURE EQUITY AB BURE EQUITY AB BURE EQUITY AB BURE EQUITY AB CANDOVER INVESTMENTS PLC CANDOVER INVESTMENTS PLC CAPMAN OYJ CAPMAN OYJ CAPMAN OYJ
DE DE SE SE SE SE GB GB FI FI FI
ACTEBIS COMPUTERS BV OXXYNOVA GMBH & CO. KG RUSHRAIL AB VITTRA AB CYGATE AB CARL BRO A/S THULE AB EXTRAPRISE GROUP INC. SCANJOUR A/S NEOVENTA MEDICAL VARESVUO PARTNERS OY
NL DE SE SE SE DK SE US DK SE FI
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CAPMAN OYJ DEA CAPITAL SPA
FI IT
SILEX MICROSYSTEMS AB FIRST ATLANTIC REAL ESTATE HOLDING SPA
SE IT
DEA CAPITAL SPA DEUTSCHE BETEILIGUNGS AG
IT DE
LANIFICIO LUIGI BOTTO SPA CLYDE BERGEMANN GMBH MASCHINEN- UND APPARATEBAU
IT DE
DINAMIA CAPITAL PRIVADO SCR SA DINAMIA CAPITAL PRIVADO SCR SA DINAMIA CAPITAL PRIVADO SCR SA DINAMIA CAPITAL PRIVADO SCR SA DINAMIA CAPITAL PRIVADO SCR SA DINAMIA CAPITAL PRIVADO SCR SA DINAMIA CAPITAL PRIVADO SCR SA ELECTRA PRIVATE EQUITY PLC EURAZEO SA EURAZEO SA GIMV NV GIMV NV GIMV NV GIMV NV GIMV NV GIMV NV GIMV NV GIMV NV GIMV NV GIMV NV GIMV NV
ES
BESTIN SUPPLY CHAIN SL
ES
ES
SOCIEDAD GESTORA DE TELEVISIN NET TV SA
ES
ES
SAFE 2000 SL
ES
ES
MFASIS BILLING & MARKETING SERVICES SL
ES
ES
SAINT GERMAIN GRUPO DE INVERSIONES SL
ES
ES
ESTACIONAMIENTOS Y SERVICIOS SA
ES
ES
SERVICIO DE VENTA AUTOMTICA SA
ES
GB FR FR BE BE BE BE BE BE BE BE BE BE BE
FORTHPANEL LTD GALAXIE SA AIR LIQUIDE SA INTERWISE INC. OPENBRAVO SL VANDEMOORTELE NV UBIDYNE GMBH EASYVOYAGE SA RES HOLDING BV MCPHY ENERGY SA PRIVATE OUTLET SAS EDEN CHOCOLATES PE INTERNATIONAL GMBH AMBIT BIOSCIENCES CORPORATION
GB FR FR US ES BE DE FR NL FR FR BE DE US
GIMV NV GIMV NV GIMV NV
BE BE BE
EBUZZING TINUBU SQUARE PRONOTA NV
FR FR BE
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GIMV NV HELIAD EQUITY PARTNERS GMBH & CO. KGAA INTERNET CAPITAL GROUP INC. INTERNET CAPITAL GROUP INC. INTERNET CAPITAL GROUP INC. INTERNET CAPITAL GROUP INC. KOHLBERG KRAVIS ROBERTS & COMPANY LP MARFIN INVESTMENT GROUP HOLDINGS SA MARFIN INVESTMENT GROUP HOLDINGS SA RATOS AB RATOS AB RATOS AB WENDEL SA
Source: Zephyr
BE DE
PROSENSA HOLDING BV VANGUARD AG
NL DE
US US US US US
VCOMMERCE CORPORATION CHANNEL INTELLIGENCE INC. STARCITE INC. ICG COMMERCE INC. FOTOLIA LLC
US US US US US
GR
SUNCE KONCERN DOO
HR
GR
FAI RENT-A-JET AG
DE
SE SE SE FR
ARCORUS AB ARCUS-GRUPPEN AS INWIDO FINLAND OY STAHL GROUP BV
SE NO FI NL
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Appendix 5 Descriptive Statistics

Deal Characteristics Exhibit A.5.1 Deal Activity per Year
No. of deals 1.750 Aggregated deal value (USD mn.) 1.500 1.250 1.000 750 500 250 Aggregated deal value (USD mn.) 28 24 No. of deals 81 20 16 12 8 4 -
Year
Notes: Pre-2003 includes 1 deal from 2001 and 9 deals from 2002. 2012 includes deals until 20.05.2012. Source: Zephyr
Exhibit A.5.2 Deal Period

Deal Period 2001 2003* 2004 - 2008 2009 2012** Total No. of deals 20 86 23 129 Percentage 15.5% 66.7% 17.8% 100.0%
Notes:*The period 2001-2003 includes only one deal from 2001, **the period 2009-2012 includes deals until 20.05.2012. This includes 4 deals from 2012. Source: Zephyr
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Exhibit A.5.3 Deal Size

Deal Size Less than 10% of the LPEVs MV More than 10% of the LPEVs MV Total No. of deals 115 14 129 Percentage 89.1% 10.9% 100.0%
Notes: Deal Size = Deal Value in USD reported by Zephyr / Market Value of the Acquirer at the announcement date in USD reported by Datastream. Sources: Zephyr and Datastream
Exhibit A.5.4 Deal Size Statistics

Measure Maximum deal size Minimum deal size Average deal size
Source: Zephyr
USD mn. 623.2 1.6 55.0
Table A.5.5 Deal Geographical Scope

Geographical Scope of the deal Domestic deals Cross-border deals Total
Source: Zephyr
No. of deals 54 75 129
Percentage 41.9% 58.1% 100.0%
Exhibit A.5.6 Deal Type of Buyout

Type of Buyout Outsider-driven* Insider-driven** Total No. of deals 129 0 129 Percentage 100.0% 0.0% 100.0%
Notes: *Outsider-driven buyouts are defined as MBIs and IBOs. **Insider-driven buyouts are defined as MBOs. Source: Zephyr
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Exhibit A.5.7 Deal Means of Payment

Means of Payment Cash Mixed Undisclosed Total
Source: Zephyr
No. of deals 105 1 23 129
Percentage 81.4% 0.8% 17.8% 100.0%
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Target Characteristics Exhibit A.5.8 Target Industry
Services Manufacturing Wholesale & Retail Trade Transportation, Communications, Electric, Gas and Sanitary Services Finance, Insurance & Real Estate Construction & Mining 10 20 30 40 50 60 70 No. of targets
Note: Targets are classified according to their primary US SIC codes. Sources: Zephyr, NAICS Association (2008), and U.S. Securities and Exchange Commission (2011).
Table A.5.9 Target Legal Origin

Legal Origin of the Target Common law country Civil law country Total
Source: Zephyr
Percentage 38.8% 61.2% 100.0%
Table A.5.10 Target Former Ownership

Former Ownership of the Target Public ownership Private ownership Total
Source: Zephyr
Percentage 3.1% 96.9% 100.0%
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Exhibit A.5.11 Target Geographical Origin

Country code (country) BE (Belgium) CH (Switzerland) DE (Germany) DK (Denmark) ES (Spain) FI (Finland) FR (France) GB (the U.K.) HR (Croatia) IT (Italy) LU (Luxembourg) NL (Netherlands) NO (Norway) SE (Sweden) US (the U.S.) Total
Source: Zephyr
No. of deals 3 1 12 2 14 5 17 26 1 4 2 8 1 9 24 129
Percentage 2.3% 0.8% 9.3% 1.6% 10.9% 3.9% 13.2% 20.2% 0.8% 3.1% 1.6% 6.2% 0.8% 7.0% 18.6% 100.0%
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Acquirer Characteristics Exhibit A.5.12 LPEV Structure

LPEV Structure Direct LPEVs Indirect LPEVs Total No. of deals 124 5 129 Percentage 96.1% 3.9% 100.0%
Notes: Direct LPEVs = LPE funds and Investment Companies, Indirect LPEVs = LPE firms. Sources: Zephyr and LPX Group (2012c)
Exhibit A.5.13 LPEV Experience

Experience of the LPEV Experienced Inexperienced Total No. of deals 109 20 129 Percentage 84.5% 15.5% 100.0%
Notes: Experienced = Established before 1990, Inexperienced = Established from 1990 and onwards Source: Zephyr
Exhibit A.5.14 LPEV Investment Strategy

LPEV Investment Strategy Diversified Specialized Total
Sources: Zephyr and LPX Group (2012c)
No. of deals 119 10 129
Percentage 92.2% 7.8% 100.0%
Exhibit A.5.15 LPEV Size

Measure Maximum LPEV size Minimum LPEV size Average LPEV size USD mn. 11,133.2 67.4 4,697.4
Notes: LPEV size = the market value of the LPEV at the announcement date reported by Datastream in USD million. 3i Group PLC has an average size of USD 7,175.0 million. When 3i Group PLC is excluded, the average LPEV size is USD 1,144.7 million. Source: Zephyr
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Exhibit A.5.16 LPEV Country of Origin

Country code (country) BE (Belgium) DE (Germany) ES (Spain) FI (Finland) FR (France) GB (the U.K.) GR (Greece) IT (Italy) SE (Sweden) US (the U.S.) Total
Source: Zephyr
No. of deals 15 4 7 4 4 79 2 2 7 5 129
Percentage 11.6% 3.1% 5.4% 3.1% 3.1% 61.2% 1.6% 1.6% 5.4% 3.9% 100.0%
Exhibit A.5.17 LPEV Region of Origin

Region Northern Europe ex. UK and Scandinavia Scandinavia Southern Europe UK US Total
Source: Zephyr
No. of deals 19 11 15 79 5 129
Percentage 14.7% 8,5% 11.6% 61.2% 3.9% 100.0%
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Exhibit A.5.18 Deals per LPEV

No. of deals 3I GROUP PLC GIMV NV DINAMIA CAPITAL PRIVADO SCR SA INTERNET CAPITAL GROUP INC. CAPMAN OYJ BURE EQUITY AB RATOS AB MARFIN INVESTMENT GROUP EURAZEO SA DEA CAPITAL SPA CANDOVER INVESTMENTS PLC ARQUES INDUSTRIES AG WENDEL SA KOHLBERG KRAVIS ROBERTS & HELIAD EQUITY PARTNERS GMBH ELECTRA PRIVATE EQUITY PLC DEUTSCHE BETEILIGUNGS AG ALTAMIR ET COMPAGNIE SCA 0 20 40 60 80
Note: Arques Industries AG was formerly known as Gigaset and can be found under this name in the Excel sheets on the CDROM Source: Zephyr
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Appendix 6 Presentation of Test Statistics Test Statistics for the Analysis of H0: CAAR = 0
T1 T-test with unadjusted variances (Bartholdy et al. 2007)
(A.1)
where
(A.2)
T1 adj. T-test with Patells adjustment (Patell 1976; Bartholdy et al. 2007)
(A.3)
where
(A.4)
T2 T-test with standardized abnormal returns (Bartholdy et al. 2007)

(A.5) (A.6)
where
and
(A.7)
T3 T-test with standardized abnormal returns and Patells adjustment (Patell 1976; Corrado 2011) where with and
46
, ,
(A.8)46 (A.9) (A.10)
(A.11)
One could have used the adjustment for forecast errors suggested by Salinger (1992). The adjustment is, however, only relevant if one uses longer event windows.
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T4 The Rank test (Corrado & Zivney 1992; Bartholdy et al. 2007) where ,
(A.12) , (A.13)
and where
(A.14) (A.15)
T5 The Sign test (Campbell et al. 1997; Bartholdy et al. 2007) where and
(A.16) (A.17) (A.18)
T6 The Generalized Sign test (Bartholdy et al. 2007; Renneboog et al. 2007)

(A.19)
where is the number of positive CAARs in the event window for the sample and SD with and if and , , if (A.20) (A.21) (A.22)
T7 The BMP test: A t-test with variance-adjusted standardized abnormal returns (Boehmer et al. 1991; Bartholdy et al. 2007)

(A.23)
where
(A.24)
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and with and
(A.25) (A.26) (A.27)
T8 The Rank test with variance-adjusted standardized abnormal returns (Patell 1976; Bartholdy et al. 2007)
(A.28)
where
(A.29)
and where When where
(A.30) (A.31)
then ,
is used in (A.31), (A.32)
with
for the estimation period

(A.33)
and When where
then
for the event window (A.34)
is used instead of ,
in (A.31), (A.35)
with
(A.36)
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Test Statistics for the Analysis of Differences between Groups

T-test for differences between two means with equal variances (Keller 2005)

(A.37)
where The test statistic has degrees of freedom.
(A.38)
T-test for differences in between two means with unequal variances (Keller 2005)

(A.39)
with
( ) ( )
degrees of freemdom.
F-test for differences in variances (Keller 2005) To test whether there are unequal variances, an F-test is used: , with and degrees of freedom. (A.40)
Wilcoxon Rank Sum test for differences between two locations (Keller 2005) , where , (A.41) (A.42)
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(A.43)
and
(A.44)
ANOVA test for differences between two or more means (Keller 2005) , where and , with , with , (A.45) (A.46) (A.47)
Kruskal-Wallis test for differences between two or more locations (Keller 2005) [ where ] , for sample j (A.48) (A.49)
.
. . . .
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Appendix 7 Test of Assumptions

According to Campbell et al. (1997) parametric tests in event studies rely on the assumption of independent and identically distributed (i.i.d.) abnormal returns: (A.50) This assumption is evaluated, both for the total sample and for a sample excl. 3i Group PLC, by making a histogram of the abnormal returns along with a P-P plot of the standardized abnormal returns. In addition to this, measures of kurtosis and skewness are calculated and a Jarque-Bera test is performed. A sample is evaluated to follow the normal distribution if it has a kurtosis close to three and a skewness of zero. Alternatively, a sample is said to follow the normal distribution if the Jarque-Bera statistic is insignificant. From exhibit A.7.1 one can see that the skewness is approximately zero and that the kurtosis is close to three. In addition to this, the Jarque-Bera statistic is insignificant, since it has a p-value of 0.426. Thus, the assumption is evaluated to be fulfilled for the total sample. This is confirmed by looking at the histogram and the P-P plot of the standardized abnormal returns in exhibit A.7.2. Exhibit A.7.1 Histogram, Descriptive Statistics and Test of Normality
20 Series: CAR Sample 1 129 Observations 129 Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis Jarque-Bera Probability -0.0125 -0.0000 0.0125 0.0250 0.001142 0.000680 0.024072 -0.024581 0.008890 -0.028432 3.560549 1.706285 0.426074
16
12
0 -0.0250
Sources: Own calculations in MS Excel 2007 and EViews 5.0
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Exhibit A.7.2 P-P plot of Standardized Abnormal Returns
From exhibit A.7.3 one can see that the skewness is -0.493 and that the kurtosis is 3.852. This is reasonably close to the required values of zero and three respectively. In addition to this, the Jarque-Bera statistic is insignificant, since it has a p-value of 0.153. Thus, the assumption of i.i.d. is evaluated to be fulfilled for the sample which excludes 3i Group PLC. This is confirmed by looking at the histogram and the P-P plot of the standardized abnormal returns in exhibit A.7.4, although the confirmation is not as strong as for the total sample. Exhibit A.7.3 Histogram, Descriptive statistics and Test of Normality (excl. 3i Group PLC)
14 12 10 8 6 4 2 0 -0.02 -0.01 -0.00 0.01 0.02 Series: CAR2 Sample 1 129 Observations 53 Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis Jarque-Bera Probability -0.000428 -0.000651 0.017984 -0.024581 0.008124 -0.493947 3.852071 3.758496 0.152705
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Exhibit A.7.4 P-P plot of Standardized Abnormal Returns (excl. 3i Group PLC)
The assumption of uncorrelated abnormal returns across securities is satisfied when there is no significant clustering of the events in calendar time (Campbell et al., 1997). From exhibit A.7.5 one can see that 15.5% of the events to some degree suffer from calendar clustering. This suggests that the abnormal returns are not completely uncorrelated. However, since the securities are listed in ten different countries, and since the targets are located in 15 different countries, the abnormal returns from the deals that suffer from calendar clustering are expected to be fairly uncorrelated. Thus, the assumption of uncorrelated abnormal returns across securities is evaluated to be fulfilled for the total sample. Exhibit A.7.5 Event Window Clustering
Days Between Events Zero days One day Two days Three days Total
Source: Zephyr
Frequency 4 8 6 2 20
Percentage 3.1% 6.2% 4.7% 1.6% 15.5%
From exhibit A.7.6 one can see that 11.3% of the events in the sample (which does not include 3i Group PLC) to some degree suffer from calendar clustering. One the other hand, the securities are listed in 10 different countries and the targets are located in 13 different countries. Thus, the assumption of uncorrelated abnormal returns across securities is evaluated to be fulfilled for the sample that does not include 3i Group PLC.
Exhibit A.7.6 Event Window Clustering (excl. 3i Group PLC)

Days Between Events Zero days One day Two days Three days Total
Source: Zephyr
Frequency 2 2 2 0 6
Percentage 3.8% 3.8% 3.8% 0.0% 11.3%
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Appendix 8 Results for the Sample excl. 3i Group PLC

Exhibit A.8 CAAR to Announcements of Acquisitions by LPEVs (excl. 3i Group PLC)
Parametric tests Sample N CAAR -0.10% T1 T1 adj. -0.20 -0.20 T2 -0.41 T3 -0.43 Nonparametric tests T4 -0.33 T5 -0.42 T6 -0.26 Var. adj. tests T7 -0.62 T8 -0.34 2.26 2 33 18 2.56% -0.29% -0.04% 0.37 -0.48 -0.07 0.37 -0.48 -0.07 0.48 -0.56 -0.11 0.46 -0.58 -0.11 0.71 -0.34 -0.34 0.00 -0.31 -0.27 0.00 -0.16 -0.23 0.84 -0.67 -0.13 0.88 -0.32 -0.36 1.61c 14 39 0.58% -0.34% 0.47 -0.67 0.47 -0.66 0.35 -0.69 0.35 -0.71 0.26 -0.55 -0.31 -0.29 -0.26 -0.15 0.38 -0.85 0.25 -0.56 0.66 1 12 -0.60% -0.02% 0.59% 0.20% 1.20% -0.45% -0.21 -0.02 0.44 0.12 0.56 -0.60 -0.21 -0.02 0.44 0.12 0.56 -0.59 -0.21 -0.15 0.95 -0.23 0.49 -0.96 -0.21 -0.16 0.94 -0.23 0.41 -0.95 -0.14 0.05 1.06 -0.38 0.44 -0.97 0.59 0.00 1.39 -0.59 0.33 -1.22 0.63 0.01 1.48 -0.57 0.34 -1.09 -0.27 1.38 -0.40 0.36 -1.10 0.16 1.12 -0.26 0.45 -0.98 0.83 44 9 0.03% -0.73% 0.06 -0.43 0.06 -0.42 0.14 -1.30 0.11 -1.30 0.27 -1.22 0.36 0.46
c
Differences T-test W-test
All acquirers(excl.3i) 53 Deal Period* 2001 - 2003 2004 - 2008 2009 - 2012 Deal Size Large Small Target Industry* Min. & Con. Manufacturing
-4.17
0.97
-3.05
T., C., E., G. & S. S. 6 W. & R. Trade F., I. & R. E. Services Target Legal Origin Civil law Common law 4 3 27
1.11
0.13 -1.93
c
0.24 -1.22 -1.18
-1.63 -1.66
Target Former Ownership Private Public LPEV Structure Direct Indirect LPEV Experience Experienced Inexperienced 33 20 0.12% -0.46% 0.26 -0.43 0.25 -0.43 0.07 -0.76 0.07 -0.79 0.26 -0.82 0.74 -1.54 0.77 -1.40 0.08 -0.82 0.31 -0.85 48 5 0.05% -1.54% 0.10 -1.06 0.10 -1.06 -0.07 -1.14 -0.09 -1.13 0.05 -1.16 0.00 -1.29 0.13 -1.26 -0.10 -1.20 0.07 -1.03 52 1 -0.12% 1.20% -0.24 0.61 -0.24 0.60 -0.50 0.61 -0.52 0.60 -0.48 0.98 -0.50 0.58 -0.35 0.58 -0.60 -0.49 -
1.87b
1.37c
1.10
1.49c
LPEV Investment Strategy Specialized Diversified 10 43 -0.05% -0.11% -0.03 -0.23 -0.03 -0.23 -0.49 -0.22 -0.49 -0.25 -0.28 -0.21 -1.09 0.09 -1.03 0.20 -0.46 -0.30
a
0.09 -0.29 -0.22
-0.11
Notes: CAAR is defined as the sum of CAR [-1; 1] divided by N. The significance level is indicated by = 10%, b = 5%, and c = 1%. * implies that the tests for differences are the ANOVA test and the Kruskal-Wallis test. W-test = the Wilcoxon Rank Sum test. The test for differences which is relied upon is marked with bold; the t-test is relied upon when the observations of both groups are normally distributed according to a Jarque-Bera test; when they are not, the Wilcoxon Rank Sum test is relied upon. The industries are as follows: Min. & Con. = Mining & Construction, T., C., E., G. & S. S = Transportation, Communication, Electric, Gas & Sanitary Services, W. & R. Trade = Wholesale & Retail Trade, and F., I. & R. E. = Finance, Insurance & Real Estate.
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Appendix 9 Test for Differences in CAAR

Exhibit A.9.1 Test for Differences in CAAR between the Overall Sample and the Sample excl. 3i Group
Notes: CAR = CAAR for the total sample, CAR2 = CAAR for the sample excl. 3i Group PLC. Source: Analysis in EViews 5.0
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An Explorative Event Study of Listed Private Equity Vehicles

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AN EXPLORATIVE EVENT STUDY OF LISTED PRIVATE EQUITY VEHICLES

- AND THEIR RETURN TO ANNOUNCEMENTS OF ACQUISITIONS

AUTHOR: LINE OF STUDY: ADVISOR: DEPARTMENT:

JULY 2012 BUSINESS AND SOCIAL SCIENCES, AARHUS UNIVERSITY