The Operating Performance and Value Creation of Leveraged Buyout Investments: Empirical Firm-Level Evidence from Finland

Abstract

The purpose of this thesis is to investigate the historical performance of Finnish leveraged buyout (LBO) investments in terms of firm-level transactions. Specifically, the thesis focuses on the operating performance and value creation of Finnish leveraged buyouts backed and exited by private equity firms during period over and after the second leveraged buyout boom of 2003–2007.

The study sample consisted of a hand-collected firm-level data on 114 Finnish private equity-backed LBOs that took place between 1996 and 2012. The sample of LBO firms included Finnish target companies that became private equity owned and eventually were liquidated via exit by the private equity firm during the studied time period. As a result, both the entry and exit years of portfolio companies were studied and the sample covered all financial statements of the 114 target companies in the entry and exit periods in order to compare the operating performance of the pre-buyout figures to the end of the holding period levels. Furthermore, the drivers of value creation were examined to detect the association between different financial as well as operational ratios and enterprise value (EV) change during the holding period of private equity sponsor. As a methodology, a median univariate test were used for analysing the operational performance hypothesis, whereas multivariate cross-sectional regressions were applied for value creation hypotheses.

The main findings of this study were consistent with the existing academic literature on buyouts in that Finnish firm-level LBOs conducted by private equity firms enabled to create value for their portfolio companies during the holding period. Furthermore, the sales growth was found persistently to be a significant positive driver of value creation in portfolio companies over full sample as well as pre- and post-recession sub-samples. Additionally, an inverse relationship between longer holding period of PE sponsor and enterprise value growth was found, which was in line with earlier studies. However, opposing results was found on leverage effect and buyout sizes. In particular, a statistically significant, negative relation was found for both measures and enterprise value growth suggesting that more highly-leveraged buyout transactions or larger buyouts do not generate higher enterprise value as showed by earlier studies. Finally, weak statistically significant positive relation between EBITDA margin and EBITDA multiple and enterprise value growth was found in pre- and post-recession period separately supporting the earlier academic findings.