私募股权基金并非全盘皆“差” Private equity funds help companies to expand overseas through takeovers, according to recent research soon to be published in the Strategic Management Journal.
Private equity funds often receive criticism for cynically extracting value from companies to the disadvantage of investors. Recent examples include the Dick Smith and Myer IPOs, and the aborted Guvera IPO and its associated financial woes.
This begs the question of what exactly private equity funds do to create value. One way is by using their experience and connections to help facilitate companies’ international expansions. This could occur through cross-border IPOs, but it can also occur through overseas investments.
Cross-border takeovers are a key example. They have become increasingly common and valuable in monetary terms over time (see the below figure). However, cross-border deals are difficult to execute, involving the challenge of identifying targets and navigating differences in language and regulations. These problems are amplified when acquiring targets in environments where information and corporate regulation is poor.
Private equity funds can help to mitigate these problems through their experience in cross-border deals, and connections with other intermediaries. This can help firms to navigate different legal, regulatory, and cultural environments. It can also help firms identify valuable targets, which might otherwise be obscured.
What we looked at
We sampled around 4,450 cross-border takeovers conducted by acquirers in 37 countries, and identified whether an acquirer was private equity backed. The study also measured the information available within the country of the takeover target, using measures from the International Country Risk Guide (ICRG) and the World Bank.
We then assessed if private equity backed acquirers gained an advantage when acquiring targets in poor information environments. In so doing, we collected information on the private equity funds’ prior experience in cross-border deals and the intermediaries used in the deal.
We used relatively standard metrics to assess takeover performance. First, the study looked at how the market responded to the takeover. This captured whether investors thought the deal created value. Second, the study examined post takeover operating performance.
When and why is private equity support important?
The study found that private equity backed acquirers do significantly better than other firms when acquiring targets in poor information environments. And the worse the information environment, the higher the stock returns on a deal announcement for private equity backed bidders.
For deals in poor information environments, private equity backed acquirers also perform better post takeover. This suggests the deals are potentially more synergistic and that private equity backers help with target selection. Further, private equity funds seem most beneficial when helping firms undertake relatively more difficult-to-execute transactions.
The study identifies several avenues through which private equity backers help to create value. These include through the private equity backers’ experience conducting cross-border transactions, including in the target’s country. Private equity backed acquirers also tend to use other financial advisers (i.e. investment banks) that have more prior cross border deal experience. So experience and connections significantly influence value creation in cross-border deals.
There are clear implications for corporations: support from a private equity fund could help firms to expand, especially into relatively poor information environments.
The clear policy follow on is that private equity funds can create value, and a small set of high-profile failures need not be representative of the benefits of private equity funds as a whole.
Please stay tuned for the 2017 Research Awards – submissions will open on December 1st, 2016.