1. The Impact of Private Equity
Investors on their
Portfolio Companies
Mike Wright
Centre for Management Buyout Research
Nottingham University Business School
www.cmbor.org

2. Centre for Management Buy-out Research
 Identified emergence of UK buy-out and private equity market
early 1980s
 Organised first European buy-out conference in 1981
 Centre for Management Buy-out Research (CMBOR)
 Established in 1986 at Nottingham University Business School
 To examine developments in UK & European buy-out markets in
comprehensive and independent manner
 25 years of research into MBO/MBIs
 Established world leading database of buy-outs
 Currently >25,000 buy-outs in UK and Europe
 Number of publications generated from database including:
 UK Quarterly Review and European MBO Review
 Academic Articles

3. Private Equity & Portfolio Companies
1600 200000
1400 180000
160000
1200
140000
1000 120000
m n
u br
€ illio
N me
800 100000
600 80000
60000
400
40000
200 20000
0 0
91
93
95
97
99
91
93
95
97
99
01
03
05
07
09
18
18
18
18
18
19
19
19
19
19
20
20
20
20
20
Number Value (€m)
 From Folklore to Science
 Summarize main themes from over 100 studies covering
US and Europe (Gilligan and Wright, 2010)
 Performance, growth and their drivers
 Role of Boards
 Employment and employee relations
 Asset sales, Longevity and distress
Source: CMBOR

4. Do Buyouts Improve Firm Performance?
 Buy-outs improve profitability
 Operating profitability of PE backed buy-outs greater than
for comparable non-buyouts by 4.5% over first three buy-
out years
 Industry specialisation of private equity firm
important
 Similar evidence from France & NL
 BUT Public to Privates [PTPs]
 Emerging US and UK evidence suggests accounting
returns on 1990s/2000s deals are not as great as for
1980s deals [Guo et al., 2009; Weir et al., 2008]
Source: CMBOR/Barclays
Private Equity/Deloitte

5. Do Buyouts Improve Firm Performance?
 Buy-outs improve productivity
 Total factor productivity (TFP) assessed
36,000 UK manufacturing establishments
 4,877 experienced MBO between 1994-8
 MBO establishments were approx. 2% less
productive than comparable plants before transfer
ownership
 After MBO substantial productivity increase
 [see also Davis et al., 2009 for US]

6. Does PE Affect Growth & Investment?
 Refocusing & divestment greater than non-buyouts
 Buy-outs improve entrepreneurial actions
 New product development
 Role of private equity firms
 CAPEX & R&D mixed evidence
 Divisional buyouts greater growth in sales, efficiency
& profits (Meuleman et al., 2009)
 PE backed buyouts increase patent cites (Lerner et
al., 2008)
 Strategic control systems enable growth

7. What Drives Performance Changes?
 Management team shareholding has largest
impact on equity returns
 After adjusting for management selecting an
attractive deal
 Paying a lower price gives greater scope for
greater equity for management
 Gains in LBOs > Gains in Leveraged
Recapitalizations

8. What is the role of PE and the Board?
 Active PE firm monitoring important
 Industry specialism & experience of deals done
 Boards:
 in PE buyouts active, non-bureaucratic boards
that help lead strategies to create value
 in listed corporations accompany management’s
strategy and tend to focus on risk management

9. What is the role of PE boards in distress deals?
 Listed corporation non-executive directors appear
generally less involved than boards in PE-backed
buyouts when restructuring becomes necessary
 PE firm boards more rigorous and timely in distress
 PE firms have an important role in restructuring
distressed portfolio firms and their strategies even
following debt/equity swaps
 Listed corporations can face greater problems in
injecting new cash as they need to issue a formal
investment proposal
 [Wilson, Wright, Cressy, 2010]

10. Does PE adversely affect employment & wages?
Years relative to year of deal
Variables t+1 t+2 t+3 t+4 t+5
MBO Employment -2.28% 2.96% 7.46% 21.43% 26.02%
MBI Employment -10.22% -9.70% -11.10% -3.35% -5.02%
Source: Wright et al. (2007)/CMBOR
 Employment
 Now many studies – employment effect contingent
 Davis et al. (2008) employment grows more slowly & declines more rapidly in PE until
t+4; greenfield growth (US)
 Boucly et al. (2009) 3 years following LBO, targets grow faster than peers by 13%
(France)
 (Amess & Wright, 2007, 2010; Amess, Girma & Wright, 2008) (UK)
 Majority of deals increase employment after initial fall
 Employment growth in MBOs higher than non-LBOs but lower in MBIs
 Buyouts whether PE or not no different employment change compared to matched firms
 M&A has more negative effect than PE on employment
 Wage growth in MBOs & MBIs, lower than non-LBOs

11. What is Impact of PE Buyouts on
Employee Relations?
 Occupational pension schemes: increase but shift to defined
contribution schemes based on investment performance and
contributions open to new members
 Increase in regular team briefings; Internal promotion as norm;
work organised around team working for the majority of the staff;
Formal grievance procedure; incentive pay schemes; non-
managerial training
 Little change in union representation; 2/3 unions in favor neutral
towards buyout
 More consultative committees, more influential; increased focus
on employment issues and especially on discussing company’s
future
 Evidence of direct meetings between PE firms and employee
representatives
 [Bacon et al., 2008a, b]

12. What is Impact of PE Buyouts in Different
Social Contexts on Employee Relations?
 Differences in Portfolio company context
 All contexts show increase in new high performance work
practices (HPWPs) after buyout; significant differences between
contexts disappear after buyout
 Differences in PE firm origin
 Buy-outs backed by Anglo-American firms are as likely to
introduce HPWPs (except for more financial incentives) as those
backed by non-Anglo-American PE firms, suggesting some
adaptation to local institutional contexts.
 Time-scale
 PE investment results in greater increases in HPWPs longer the
anticipated time to exit.
 The impact of PE on HPWPs is affected more by length of the
investment relationship (heterogeneity of PE firm effect) than the
countries where PE is going to or is coming from
 [Bacon et al., 2010a, b]

13. What is the Extent of Asset
Sales?
Substantial sell-offs mainly in few large & PTP deals
Partial Sale Year CE UK
No. Val. (€m) No. Val. (£m)
2000 36 420 78 4352
2001 30 51 94 8905
2002 32 2644 69 4837
2003 35 922 76 2974
2004 49 2938 73 8619
2005 54 2236 99 9145
2006 44 3786 72 6688
2007 49 6472 60 5379
2008 30 5654 44 495
 Number & value of partial sales small share of deal volume and
value

14. Do PE Deals Involve Short
Term Flipping of Assets?
80
70
70
60
avge months to exit
60
50
50
40
40
£50‐500m
30 Over £500m
30
20 20
10 10
0 0
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: CMBOR
 Overall increasing time to exit but heterogeneous longevity
 (see also Stromberg, 2008)
 Secondary buy-outs take longer to exit
 PE-backed MBOs IPO sooner; those backed by active PE exit sooner & perform
better

15. Can PE provide a role in distressed firms?
Receiverships Increasing Source of Buy-outs
120 1200
100 1000
80 800
£ million
Number
60 600
40 400
20 200
0 0
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Total Number Total Value (£m)

16. What is happening to Leverage &
Pricing in PE Buyouts?
60
50
 Dramatic fall in senior 40
debt in financing 30
structures in 2008 20
over above £10m 10
deals 0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
 Substantial increase Equity Mezzanine Debt Loan Note Other Finance
in senior debt pricing Type of Senior Debt 04 05 06 07 08
above LIBOR,
especially for less Tranche A 225 218 224 217 285
traditional layers Tranche B 275 250 262 265 338
Tranche C 327 283 308 303 396
Note: Data shows basis points above LIBOR

17. Does Higher Leverage Increase Likelihood of
Failure?
 Failed vs non-failed buyouts
 Failure rate affected by leverage, timing of deal & by default
probability on buyout (Wright et al., 1996)
 PE buyout failure vs non-buyout failure (Wilson,
Wright & Altanlar, 2010)
 7million firm years 1995-2009 including all UK companies
 PE-backed buyouts have a significantly better coverage ratio (the ability
to pay interest on debt from profit and cash-flow) than non-private equity
backed businesses.
 Leveraged firms [of any kind] more likely to fail
 After taking into account leverage and other factors:
 Private Equity backed buyouts post 2003 not significantly different in failure
likelihood than non-buyouts
 Buyouts and buyins without private equity more likely to fail

18. What is the recovery rate in failed PE deals? ?
 Secured creditors recover 62% average on bankruptcy;
30% sold as going concerns (Citron, Wright, 2008)
 Recovery rates from failed PE buyouts (63%) more than
twice those in failed listed corporations (26-30%)
[Wilson,Wright & Cressy, 2010)
 Dependent on proactive working between PE firms and
banks
 Banks may soon seek to recover value through equity
sales, which may increase receiverships or sales to
distress funds.

19. Deal Types and Involvement of PE Firms
Managerial Managers’
PE Model/ Expertise Innovative Skills
Portfolio Mgt
Leverage & Constrained Conflicted Buy-
Financial Buy-outs outs
Monitoring [weak complements] [strong negative
substitutes]
Lower Leverage Operational Radical Buy-outs
& Close Value Buy-outs [strong positive
[weak substitutes] complements]
Adding
 Need strategies to grow portfolio firms organically or build-up
 Need to acquire expertise to add value & be sector focused
 Select portfolio management with business skills who can
identify and deliver on innovative development strategies
 Need to be involved in portfolio firms beyond initial ‘100 days’

20. Conclusions
 Widespread evidence of positive impact of PE
 Need for recalibration of traditional PE model rather than
fixing a broken one
 Elements of best practice detectable worldwide but
believe have identified general challenges for a
significant swathe of less experienced PE firms
 Potential danger with pressure upon PE funds to invest
 Deals completed at entry prices posing major
challenges to the generation of target returns
 Questioning of whether the lessons from the ending of
the golden age have indeed been learnt