Chair of Financial Management
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Bying right and selling high: Multiple expansion still matters for private equity value creation
(2023)
Multiple expansion—selling an asset or company at exit for a higher valuation multiple than the valuation multiple paid at entry—is one of three main value creation strategies for private equity (PE) firms, in addition to financial leverage and operational improvements. Multiple expansion contributes significantly to overall deal performance. However, it remains to be seen whether this contribution is driven by luck (e.g., by riding market tailwinds) or is a systematic component that outperforms market movements in any direction. Building on recent research, this paper analyzes the effect and impact of the spread between entry and exit valuation multiples and compares it with the expansion achieved by a benchmark that tracks market movement.
Die DVFA hat ihre Grundsätze für die Erstellung von Fairness Opinions überarbeitet und erweitert. Die Grundsätze enthalten Anforderungen an den Prozess und den Inhalt von Fairness Opinions, damit diese ihre Funktion erfüllen können. Eine zentrale Anforderung ist die Unabhängigkeit des Erstellers der Opinion; ggf. ist die Einholung einer externen Opinion von einem nicht an der Transaktion beteiligten Anbieter erforderlich. Zudem sind nach den Grundsätzen prinzipiell die gesamten finanziellen Vorteile/Synergien aus einer geplanten Transaktion und deren Aufteilung für die Beurteilung der Fairness aus Käufer- und Verkäuferperspektive relevant. In der Regel wird die Offenlegung der Wertbandbreite im Opinion Letter empfohlen.
This cumulative dissertation extends the literature strand on firm valuation and capital structure under distinctive fiscal considerations by elaborating on corporate finance issues that have not been resolved or not explained in their full magnitude. Essay one reassesses the appropriate valuation of a firm using the APV equation and more appropriately specifying one of its components, the value of tax savings. The second essay thematically follows essay one by utilizing the WACC approach in a multi-state setting under active debt policy. The third and final essay reconsiders capital structure under the artificial restriction of interest deductibility and its resulting influence on the value of potential tax savings. All essays incorporate loss distribution in default for either a partial or a complete loss scenario, thus providing additional insides on this crucial assumption in firm valuation under risky debt.
Der Beitrag diskutiert die Wirkungen von geänderten Inflationserwartungen (als inflationärer Schock) auf den Wert eines Unternehmens. Dabei zeigt sich, dass in einer Übergangsphase Größen aus der Gewinn- und Verlustrechnung (EBIT, NOPAT) und relevante Cashflows (FCF) ganz unterschiedlich auf den inflationären Schock reagieren. Dies führt u.a. dazu, dass gestiegene Inflationserwartungen selbst bei 100%iger Überwälzung zu einer Reduktion des Unternehmenswerts führen
Using a sample of 18,225 global buyouts, we find that management buyouts (MBOs) are significantly more likely to occur if economic policy uncertainty (EPU) increases. This finding is consistent with the idea that EPU provides an opportunity for insiders to capitalize on private information and time the market. Further results suggest that market timing pays off on average. We find that MBOs achieve more favorable buyout prices and greater post-buyout operating improvements than institutional buyouts during times of high EPU. Our results hold when exploiting close national election races as a quasi-natural experiment for EPU.
Same same but different
(2023)
Venture capital (VC) often involves complex equity contracts with so-called preferential rights affecting the allocation of exit proceeds among different share classes and investors. We structure exit-relevant preferential rights in a two-dimensional framework and develop a contingent claims model that allows for ex-ante valuation of separate shareholdings. The model generates insights on the valuation effects of varying setups in VC financing and indicates considerable mispricing potential of VC investments when applying commonly used heuristics such as the most recent funding round. Applying the model to a sample of ventures indicated an average ’overvaluation’ on a per-share basis of 26.7%, with common stocks and early-stage investments being the most affected. In addition, our analysis provides different implications regarding the effects of preferential right structuring for early and late stage investors.
Die aktuellen Preissteigerungsraten in den westlichen Industrienationen liegen derzeit wieder auf dem hohen Niveau der 70er und 80er Jahre. Für die Unternehmensbewertung ist damit der „Inflationsgeist aus der Flasche gelassen“ worden (A. Damodaran). Es ist zu erwarten, dass durch diese Entwicklung auch etwas anderes aus dieser Zeit wieder aus der Flasche gelassen und reanimiert wird: die Diskussion darüber, wie Inflation und Preissteigerungserwartungen technisch korrekt in die Unternehmensbewertung einzubeziehen sind.
Führen aus der Krise
(2022)
Secondary buyouts (SBOs) can be viewed as an oxymoron: Booming SBO activity meets public and investor´s perception of this investments as “lemons”, claiming that first round buyers in the primary buyout (PBO) leave no potential for further value creation on the table. Using a unique back-to-back sample of 276 cases of the same firm in a PBO and a SBO we do not find the internal rate of returns (IRRs) of back-to-back PBO/SBOs to display significant correlation and thus reject the “negative correlation hypothesis”. When directly comparing the performance of the two back-to-back buyout rounds, we find PBOs to display higher IRRs than SBOs at higher risk; however this difference disappears when taking size and holding period differences as two well-known pitfalls of IRR related rank orders into account. Operating performance also is not significantly different. Our results thus suggest that the current perception on SBOs should be revised and turn from "second hand" deals to "second generation" deals.
Die Grundsätze zur Durchführung von Unternehmensbewertungen IDW S1 fordern für die Ermittlung des Terminal Value die kapitalwertneutrale Wiederanlage von thesaurierten Beträgen. In dieser Studie wird für eine Stichprobe von 158 Bewertungsgutachten auf zwei Wegen überprüft, ob diese Annahme für sog. wachstumsbedingte Thesaurierungen erfüllt ist: Zum einen werden mit Hilfe des Gordon-Shapiro Modells implizite Renditen auf die thesaurierten Beträge berechnet und den Eigenkapitalkosten gegenübergestellt. Dabei zeigt sich, dass in der ganz überwiegenden Zahl der Gutachten (94,5%) zum Teil erhebliche positive Überrenditen unterstellt wurden; im Durchschnitt war die implizite Eigenkapitalrendite mehr als viermal so hoch wie die Eigenkapitalkosten. In einer weitergehenden Analyse werden die entsprechenden wachstumsbedingten Thesaurierungen analog zu den Thesaurierungen, die zur Herstellung der (ebenfalls von S1 geforderten) Ausschüttungsäquivalenz erforderlich sind, behandelt: Sie werden als direkt zugeflossen unterstellt und dem Kursgewinnsteuersatz unterworfen. Zusätzlich wird die korrespondierende Wachstumsrate auf Null gesetzt; der so ermittelte Terminal Value wird dem tatsächlichen Terminal Value des Gutachtens gegenübergestellt. Auch hier weisen die Ergebnisse auf systematische positive Überrenditen und damit verbunden: Abweichungen von der Annahme der wertneutralen Wiederanlage hin. Der tatsächliche Terminal Value ist im Durchschnitt 12,07% höher als der bei direkter wertneutraler Zurechnung der Thesaurierung ermittelte Wert. Im Ergebnis weisen beide Analysen auf systematische Überrenditen auf wachstumsbedingte Thesaurierungen und somit Abweichungen von der Annahme der wertneutralen Thesaurierung in IDW S1 hin.
This chapter examines the enterprise value growth of private equity (PE)-backed buyouts in small and medium-sized enterprises (SMEs). Using a comprehensive sample of PE buyouts from 1997 to 2016 in 59 countries, we find that enterprise value growth rates are significantly higher if the portfolio firm is a small or medium-sized enterprise prior to the buyout. These results also hold for subsequent buyout rounds, i.e., the enterprise value growth of both the primary and secondary buyout is higher if the portfolio firm is a SME prior to the initial buyout. Moreover, we show that good access to finance, management buyouts, and SME investments by large funds have a negative effect on SMEs’ enterprise value growth, whereas a PE firm’s venture capital focus reinforces the positive enterprise value growth of SME portfolio firms. Our results are robust to different tests designed to mitigate selection concerns.
Buying performance?
(2022)
B&B strategies are increasingly popular, with past studies showing them to achieve superior returns. The question of how exactly B&B strategies create value is, however, still a "black box". Relying on a unique and proprietary sample of 161 B&B buyouts with valuation details on related add-on acquisitions, this study is, to the best of our knowledge, the first to decompose EBITDA growth as value driver into the organic, inorganic and the "sourcing" component. The "add-on sourcing effect" thereby considers the reduction of the average entry multiple caused by acquiring smaller firms in add-on transactions at multiples lower than the entry multiple for the platform company and labels the corresponding multiple uplift following the revaluation of add-on acquisitions post-closing. We find this effect to be a significant component of B&B buyout performance, contributing roughly 8% to the equity value CAGR. When eliminating it from the performance measurement, we find B&B outperformance to decrease significantly to the levels of their non-B&B peers. Finally, we find preliminary evidence that potential buyers of the buyout company do not seem to differentiate between the different sources of EBITDA growth.
This study considers the trade-off between better top management team (TMT) decision-making involving complementary perspectives and inefficiencies due to conflicts between individuals. In analyzing characteristics of 1,071 fund partners involved in 1,295 buyout deals by 117 funds, we find that TMTs with greater variety in socio-demographic aspects achieve higher money multiples or IRR. In contrast, greater occupational diversity is associated with a negative net effect on performance. This suggests that the endowment of diversity rooted in demographic characteristics is generally beneficial, while voluntarily acquired attributes are associated with higher coordination efforts.
Additionally, we find the allocation of team members and the associated diversity levels on individual deals of a fund affect fund performance. Generally, an even allocation is positively (negatively) related to fund performance for occupational (socio-demographic) diversity. However, for funds with a high enough endowment of diversity, even distribution across deals is also positively associated with fund performance for socio-demographic diversity. Finally, we find a positive moderating impact of CEO involvement and a negative moderating impact of industry specialization. Overall, the results of this study could guide LPs and fund-of-funds in investment processes and
support GPs with staffing decisions.
We investigate the pricing and value creation in private equity-backed buy-and-build (B&B) strategies using a sample of 3399 buyouts between 1997 and 2020 as well as proprietary performance data. We find that private equity firms pay sizable premiums for B&B platforms. The transaction multiples are similar to those paid by strategic acquirers for matched targets. Despite paying high premiums, private equity firms generate above-average equity returns in B&B strategies. This is because of both higher top-line growth and multiple expansion. To back up our empirical results and shed light on decision-making in B&B strategies, we present evidence from the field. Survey results from 32 interviews with private equity managers provide novel insights into B&B rationale, valuation practices, pricing, value creation, acquisition processes and execution.