۱- Introduction

۲- Sample construction and valuation effects

۳- Private equity divisional buyouts and subsequent performance: empirical results

۴- Additional tests

۵- An auction-based explanation of the empirical results and its implications

۶- Some alternative explanations for the observed pattern of seller gains

۷- Conclusions

References

Abstract

We study the role and performance of private equity (PE) in corporate asset sales. Corporate sellers obtain significantly positive excess returns in PE deals, gains in wealth significantly greater than for intercorporate asset sales. Based on exit valuations for 98% of PE deals, we find gains in enterprise value in buyouts are significantly greater than for benchmark firms. Corporate seller excess returns are positively correlated with subsequent gains in asset enterprise value. A parsimonious auction model suggests that only restructuring capabilities of PE (not acquisition of undervalued assets) can explain the pattern of the gains generated in these PE deals.

Introduction

Divisional buyouts are an important area of private equity investment activity, and aggregate data indicate that private equity has garnered a sizable share of the corporate asset sales market. 1 As transitional owners focused on creating value from portfolio assets within a contractually limited time horizon and later reselling them (often to strategic acquirers), private equity sponsors are a fundamentally different type of buyer of large corporate assets than strategic (trade) acquirers who focus on creating synergistic value from integrating such assets into their existing operations. Despite private equity’s importance in this area of corporate control activity, there has not been any analytical study of its role in the market for large operating entities divested by listed parent firms, who by their nature are well-informed, highly sophisticated sellers of such businesses. 2 We fill this gap by analyzing the role and performance of private equity sponsors as acquirers of corporate subsidiaries and divisions. Much of our focus is on the large benchmark-adjusted gains in enterprise value generated by private equity ownership after these asset sales. Given this pattern of empirical results, we consider how to explain the underlying bidding behavior of private equity sponsors and their success in competing with strategic buyers in the corporate asset sales market. Our major empirical findings are as follows. One, we find that private equity performs very well in buyouts of large operating assets. For a large proportion of these assets, private equity exits via an IPO of the entity (27% of the assets) or by a trade sale to a strategic acquirer (32% of the assets), transactions that are associated with a high mean annual increase in enterprise value over the period of private equity ownership (108.51% for IPO exits and 30.42% for exits by sales to strategic buyers). We compare annual growth rates of enterprise value of these entities to benchmark listed firms, matched by size and industry over identical periods.3 For the full sample the mean (median) difference between sample and benchmark firms in annualized growth in enterprise value is large, 23.35% (7.79%), and highly significant, suggesting that private equity ownership is associated with enhanced asset value.