Creating value in private equity investments

Abstract

Private equity has shown persistence in creating value in underlying portfolio investments as evidenced from its outperformance of corporate counterparts. The superior returns that these investments achieve have been attributed to a combination of quantitative and qualitative factors, including financial engineering, operational improvements and strong capabilities in composing and effectively structuring the management function of underlying investments. This research set out to identify and quantify the relative importance and preferred levels of features, both quantitative and qualitative, that are deemed by private equity practitioners to create value in underlying private equity investments. The research was conducted using a mixed-method approach with conjoint analysis, which is often used in decision-making research, as the main tool and basis for the design and data analysis. The quantitative results of the research showed that the quality of a management team is the key feature that private equity professionals deem important and together with Corporate Governance and Incentive structures, is the management platform that drives value creation. The results also showed that Financial value engineering continues to play a strong role, but that Operational improvements take a small leading position in creating value. Finally, the composition of each category's underlying features appears to have distinct features when compared to the literature reviewed.