Private Equity Investments ||

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<ul><li><p>Schriften zum europischen Management</p><p>Herausgegeben von/edited byRoland Berger Strategy Consultants Academic Network, Mnchen, Deutschland</p></li><li><p>Die Reihe wendet sich an Studenten sowie Praktiker und leistet wissenschaftliche Beitrge zur konomischen Forschung im europischen Kontext.</p><p>This series is aimed at students and practitioners. It represents our academic contri-butions to economic research in a European context.</p><p>Herausgegeben von/edited byRoland Berger Strategy Consultants Academic Network,Mnchen</p><p>Herausgeberrat/Editorial Council:Prof. Dr. Thomas Bieger Universitt St. Gallen</p><p>Prof. Dr. Rolf Caspers () European Business School, Oestrich-Winkel</p><p>Prof. Dr. Guido Eilenberger Universitt Rostock</p><p>Prof. Dr. Dr. Werner Gocht () RWTH Aachen</p><p>Prof. Dr. Karl-Werner Hansmann Universitt Hamburg</p><p>Prof. Dr. Alfred Ktzle Europa-Universitt Viadrina, Frankfurt/Oder</p><p>Prof. Dr. Kurt Reding Universitt Kassel</p><p>Prof. Dr. Dr. Karl-Ulrich Rudolph Universitt Witten-Herdecke</p><p>Prof. Dr. Klaus Spremann Universitt St. Gallen</p><p>Prof. Dr. Dodo zu Knyphausen-Aufse Technische Universitt Berlin</p><p>Prof. Dr. Burkhard Schwenker Roland Berger Strategy Consultants</p></li><li><p>Claudia Sommer </p><p>Private Equity Investments </p><p>Drivers and Performance Implications of Investment Cycles </p><p>RESEARCH</p></li><li><p>ISBN 978-3-658-00233-6 ISBN 978-3-658-00234-3 (eBook)DOI 10.1007/978-3-658-00234-3</p><p>The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie;detailed bibliographic data are available in the Internet at http://dnb.d-nb.de.</p><p>Springer Gabler Springer Fachmedien Wiesbaden 2013This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physicalway, and transmission or information storage and retrieval, electronic adaptation, computersoftware, or by similar or dissimilar methodology now known or hereafter developed. Exempted from this legal reservation are brief excerpts in connection with reviews or schol-arly analysis or material supplied specifically for the purpose of being entered and executed on a computer system, for exclusive use by the purchaser of the work. Duplication of this pub-lication or parts thereof is permitted only under the provisions of the Copyright Law of the Publishers location, in its current version, and permission for use must always be obtained from Springer. Permissions for use may be obtained through RightsLink at the Copyright Clearance Center. Violations are liable to prosecution under the respective Copyright Law.The use of general descriptive names, registered names, trademarks, service marks, etc. in thispublication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. While the advice and information in this book are believed to be true and accurate at the date of publication, neither the authors nor the editors nor the publisher can accept any legal responsibility for any errors or omissions that may be made. The publisher makes no warranty,express or implied, with respect to the material contained herein.</p><p>Printed on acid-free paper</p><p>Springer Gabler is a brand of Springer DE. Springer DE is part of Springer Science+Business Media. www.springer-gabler.de</p><p>Claudia SommerUniversity of St. Gallen, SwitzerlandVoestalpineLinz, sterreich</p><p>Bernhard SchmidtLangenhagen, Deutschland</p><p>Library of Congress Control Number: 2012948198</p></li><li><p>To my mother Sigrid And in loving memory of </p><p>My father Wolfgang </p></li><li><p>Preface </p><p>This piece of work results from a research idea inspired by my professional experiences during the private equity turbulences between 2005 and 2008. In 2005 and 2006, a time that can be considered to be the top of a private equity boom, I had been part of several due diligence teams and got involved in a few giant private equity deals that exceeded each other in terms of deal size and complexity. A few months later, working as a restructuring professional, I encountered companies struggling with their heavy debt burdens and being unable to find alternative financing in an almost dried up financial market. This observation made me wonder why private equity markets exhibit such massive cycles and sparked the research idea for this dissertation. </p><p>I am indebted to my referees Professor Andreas Grner and Professor Klaus Spremann from the Swiss Institute of Banking and Finance at the University of St. Gallen. They have been genius supervisors and supported my research process in many ways. They greatly enhanced my research process and outcome by challenging my arguments, providing invaluable input and directions but at the same time giving me the freedom to develop my own ideas. I also thank participants of colloquiums, courses, and "Bastelstunden" (informal research round tables at the Swiss Institute for Banking and Finance), who have patiently listened to my sometimes premature thoughts and research results. They gave useful advice and were great mates making my visits in St. Gallen a lot of fun. In particular, I would like to thank Dr. Lydia Ebersbach for being the greatest motivator and closest friend who has accompanied my research endeavor. </p><p>I am indebted to my mentors Dr. Ralf Moldenhauer and Nils Kuhlwein von Rathenow at Roland Berger Strategy Consultants, who supported my research efforts in giving me the opportunity to join the generous corporate PhD program. Without this sabbatical, the financial support, resources and infrastructure, this dissertation would have hardly been possible. I thank Dr. Christian Krys for his support and the organization of inspiring and joyful doctoral camps. </p><p>Special thanks are due to my friends who have generously forgiven many unanswered calls and emails. I would like to mention Nina Landsiedel, Steph Badde, Manja Ber, Peter and Ruth-Martina Ulka as representatives for all those who cheered me up and shared moments of fun with me, whenever I reappeared after weeks and sometimes months spent in the library. </p></li><li><p>VIII Preface </p><p>I would like to express my deepest gratefulness to my husband Benjamin Sommer for his love and enduring support. In being a role model of a disciplined and sanguine researcher, he continuously encouraged me to pursue my research efforts until the finishing point. </p><p>My deepest gratitude is owed to my family, who has provided fruitful ground, inspiration and support for all my achievements. Sadly, my father did not live long enough to see this dissertation completed. I dedicate this work to him. </p><p>Hamburg, September 2012 Claudia Sommer </p></li><li><p> Content Overview </p><p>1 Introduction ........................................................................................................... 1 </p><p>2 Background ......................................................................................................... 13 </p><p>3 Theoretical Framework ........................................................................................ 27 </p><p>4 Data and Methodology......................................................................................... 65 </p><p>5 Empirical Part I: Drivers at Aggregate Level ....................................................... 95 </p><p>6 Empirical Part II: Drivers at Industry Level ....................................................... 169 </p><p>7 Empirical Part III: Performance Implications ..................................................... 209 </p><p>8 Practical Implications ........................................................................................ 241 </p><p>9 Summary and Conclusion .................................................................................. 253 </p><p>10 Appendices ........................................................................................................ 259 </p><p>11 Bibliography ...................................................................................................... 277 </p></li><li><p> Table of Contents </p><p>Preface..................................................................................................................... VII </p><p>Content Overview ...................................................................................................... IX </p><p>Table of Contents ...................................................................................................... XI </p><p>List of Figures ....................................................................................................... XVII </p><p>List of Tables .......................................................................................................... XIX </p><p>List of Abbreviations ........................................................................................... XXIII </p><p>Abstract (English) ................................................................................................. XXV </p><p>Abstract (German) .............................................................................................. XXVII </p><p>1 Introduction ........................................................................................................... 1 </p><p>1.1 Motivation of Research ............................................................................................. 1 1.2 Problem Statement and Research Gap ....................................................................... 2 1.3 Purpose of Study ....................................................................................................... 5 1.4 Research Methodology .............................................................................................. 7 1.5 Research Process ....................................................................................................... 7 </p><p>1.5.1 Development of the Research Question .......................................................................... 8 1.5.2 Empirical Pre-Tests ....................................................................................................... 8 1.5.3 Development of the Theoretical Framework ................................................................... 9 1.5.4 Data Collection .............................................................................................................. 9 1.5.5 Operationalization ....................................................................................................... 10 1.5.6 Analysis....................................................................................................................... 10 1.5.7 Interpretation ............................................................................................................... 11 </p><p>2 Background ......................................................................................................... 13 </p><p>2.1 Definition and Structure of Private Equity Investments ........................................... 13 </p><p>2.1.1 Private Equity as Asset Class ....................................................................................... 13 2.1.2 Private Equity Investments........................................................................................... 14 2.1.3 Private Equity Firms .................................................................................................... 16 2.1.4 Structure of Private Equity Transactions ...................................................................... 17 </p><p>2.2 Wave Patterns in the History of Private Equity ........................................................ 19 </p></li><li><p>XII Table of Contents </p><p>2.2.1 The Emergence of Private Equity in the US during the 1980s ....................................... 19 </p><p>2.2.1.1 The Rise of Private Equity in the Junk Bond Market of the 1980s ...................................... 19 2.2.1.2 Private Equity as the Capital Markets' Reaction to Government Deficits ............................ 21 2.2.1.3 The End of the Junk Bond Era .......................................................................................... 22 </p><p>2.2.2 The Evolution of Private Equity in Europe ................................................................... 23 </p><p>2.2.2.1 European Private Equity as a Research Object................................................................... 23 2.2.2.2 The Private Equity Wave of the early 2000s ...................................................................... 24 </p><p>2.2.3 Comparison of the Private Equity Waves of the 1980s and the 2000s ........................... 25 </p><p>3 Theoretical Framework ........................................................................................ 27 </p><p>3.1 Neoclassical Theory of Private Equity Investments ................................................. 29 </p><p>3.1.1 Fundamentals of a Neoclassical View of Private Equity Investments ............................ 29 3.1.2 Neoclassical Drivers of Private Equity Investments ...................................................... 31 </p><p>3.1.2.1 Capital Demand ................................................................................................................ 31 3.1.2.2 Capital Supply .................................................................................................................. 33 </p><p>3.1.3 Timing of Buyouts relative to Venture Investments during the Business Cycle ............. 34 </p><p>3.2 Information Asymmetry View of Private Equity Investments .................................. 35 </p><p>3.2.1 Information Asymmetries in Private Equity Transactions ............................................. 36 </p><p>3.2.1.1 Adverse Selection Cost View ............................................................................................ 36 3.2.1.2 Value Add View ............................................................................................................... 36 </p><p>3.2.2 The Impact of Time-Varying Information Asymmetries ............................................... 37 </p><p>3.2.2.1 Adverse Selection Cost View ............................................................................................ 37 3.2.2.2 Value Add View ............................................................................................................... 39 </p><p>3.3 Agency Theory of Private Equity Investments ......................................................... 39 </p><p>3.3.1 Agency Conflicts in Private Equity Investments ........................................................... 39 </p><p>3.3.1.1 Pre-Buyout Agency Conflicts ........................................................................................... 42 3.3.1.2 Post-Buyout Agency Conflicts .......................................................................................... 44 </p><p>3.3.2 Agency Theoretical Drivers of Private Equity Investments ........................................... 45 </p><p>3.4 Market Timing Theories for Private Equity Investments .......................................... 53 </p><p>3.4.1 Capital Structure and Market Timing ............................................................</p></li></ul>