Private exit crisis? : return on assets of former private equity portfolio firms during the financial crisis

Bachelor Thesis.

Private Exit Crisis? Return on Assets of former Private Equity Portfolio

Firms during the Financial Crisis.

Thijs P. Dijkman (10359524)

University of Amsterdam

Bachelor Economics and Business

Supervisor: MSc Mark Dijkstra

University of Amsterdam

2

Statement of Originality

This document is written by Student Thijs Dijkman who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

Abstract.

This thesis focusses on the return on assets and liquidity ratios of former private equity portfolio firms. A sample of 72 private equity partnership-exits that occurred in 2005 is observed and benchmarked to a relevant peer group of 159 firms. This thesis observes that former private equity portfolio firms still show higher return on assets than their peers even after the private equity partnership leaves. Also, the matter of outperformance depends on the type of exit the private equity firm uses. While institutional buyouts and other types of private equity partnership-exits (except IPO’s) show higher return on assets than their peers, the outperformance is insignificant for IPO’s. As for liquidity ratio’s, the former private equity portfolio firms tend to show higher liquidity ratio’s which initiates better resistance against financial distress. The effect of different types of exit on liquidity ratio is observed to be insignificant.

3 Contents.

Chapter 1. Introduction……….. 4

Chapter 2. Literature review... 6

2.1. Private equity pre-buyout and post-buyout... 6

2.2. Previous research on long-term effects………. 7

Chapter 3. Method………... 10

3.1 Model description and expectation... 10

3.2 Data collection……… 10 Chapter 4. Results……… 13 4.1 Descriptive statistics... 13 4.2 Regression results... 14 4.3 Discussion of results... 16 Chapter 5. Conclusion... 17 5.1 Conclusion... 17 5.2 Suggestions... 17 References... 18 Appendix...19

4 Chapter 1. Introduction

In the 1980’s there was an increase of leveraged buyouts by private equity partnerships and while in 1991 $10 billion was invested in these firms, in 2000 they committed a $180 billion investments in this specific sector (Kaplan and Schoar, 2005). Since this buyout expansion, the discussion about the function and economic contribution of these private equity partnerships was born. Despite the billions involved we still have little understanding of the profitability, cash flows and economic contribution in the private equity business (Kaplan and Schoar, 2005). This is due to a lack of information of these firms. However, with the information that is available there is still room for investigating some effects of private equity.

Source: Kaplan (2015) Note: LBO = leveraged buyout

Private equity raise money by private investors, most of the time it involves wealthy investors who have don’t have the time, capabilities and/or experience to invest in business opportunities and want to outsource these practices. They bring their money to a private equity partnership where experienced businessmen control their money. With their money gained by these investors the PE partnerships analyse markets and business opportunities to find underperforming or under-priced firms. With their expertise and business plans they buy-out these firms and try to solve their inefficiencies to generate more profit or make money buy-out of mergers, acquisitions and synergies.

5

Most studies agree that private equity partnerships solve inefficiencies in their portfolio firms and create value with their experienced managers and expertise on running high potential businesses (Kaplan, 1989; Scellato, 2012). Hence, Guo, Hotchkiss and Song found that private equity managers take excessive risk by overleveraging the portfolio firms (Guo et al, 2009). They found that they only improve balance sheet items like ROE or the ebitda multiple by higher leverage and not because of added value through their ‘better’ business strategies. Thus it may look like private equity partnerships are increasing their portfolio firm returns but in fact it could be just a risk-return trade-off.

Studies like Kaplan (1989) and Bruton, Keels & Scifres (2002) showed that private equity partnerships do improve the performance of their portfolio firms but their experiments are mostly measured in a relative safe environment. But the credit risk due to high levels of debt is mainly felt during a crisis (Nejadmalayeri and Singh, 2012). So this study focusses on how previous portfolio firms of PE perform during a financial crisis. This leads to the

following research question: “How are the ROA and Liquidity ratio of former private equity

portfolio firms affected by the financial crisis of 2007-2009?”

To test whether the former private equity portfolio firms outperform their market this paper investigates the performance by ROA and liquidity ratios of a firm after the private equity partnership exits. To answer the research question this thesis is structured as follows. First the literature review gives us understanding about the private equity business and insight in previous studies to private equity performance. In the third chapter the method of this research is explained. Chapter 4 displays and analyses the results, discuss the limitations and suggest future direction. Chapter 5 will form the conclusion.

6 Literature review.

2.1 Private equity pre-buyout and post-buyout.

The private equity market is structured in to three main components. The investors,

intermediaries and the issuers. The investors are pension funds, high-net-worth individuals, investment banks and some other types investors (Fenn, Liang and Prowse, 1997). They supply money for the intermediaries such as limited private equity partnerships. With the money of these investors the private equity partnerships invest in new ventures or recently established private companies. What makes private equity investments special is that they invest to gain control over the company and with monitoring, consulting or mergers and acquisition they try to retrieve returns on their investments. According to the following papers private equity partnership offset themselves of other investment vehicles by using several characteristic strategies.

Kaplan and Stein (1993) found in their survey of 124 large management buyouts by private equity that private equity transactions are typically characterized by an increase in debt levels. This can be considered either as a positive or a negative aspect. A positive effect is that the larger level of debt forces the managers to invest in projects with a positive net present value (Meles, 2011). In this way private equity firms limit the waste of cash flow and increase portfolio companies efficiency and productivity. On the negative side, high levels of leverage may increase the risk of financial distress and bankruptcy. Kaplan and Stein (1993) suggest that high debt levels may have increased bankruptcy likelihoods. Kaplan and

Strömber (2009) supported the idea that when debt becomes cheaper relative to equity, private equity partnerships are able to increase their returns by raising debt levels. With again the main drawback of increase in risk of default.

Franzoni, Nowak and Phalippou (2012) examined the private equity returns and liquidity risks. They found that the liquidity risk beta of 0.64 exceeds their large majority (86%) of peer groups (Franzoni, Nowak and Phalippou, 2012). They also found a positive correlation between liquidity risks and private equity returns. Which contributes to the theory that private equity do not improve businesses but just change their returns by a risk-return trade-off.

On the other hand, private equity is likely to exhibit better performance of their portfolio firms and researchers analysed why. First of all there is an optimization in the agency theory. Jensen (1989) found out that in modern organizations the separation of control and managerial control generates a wide range of agency problems. Problems like ineffective

7

internal oversight, managerial entrenchment and operational inefficiency will arise if this is separated. Kaplan (1989) found in his survey of 76 management buyouts that private equity partnerships increase their portfolio firm’s operating income, decrease their capital

expenditures and increase their net cash flows. Kaplan suggested that this was due to improved incentives since the private equity partnerships gives the management of the portfolio firm a larger percentage of equity post-buyout than pre-buyout and therefore the management is more drilled to increase performances.

Bruton, Keels and Scifres (2002) examined the performance and restructuring of 39 firms over the complete buyout cycle and found that these agency theory explanations of performance are generally valid throughout the buyout cycle in other words pre-buyout, post-buyout and after the private equity partnership leaves the portfolio company. They observed their sales and profit margin as performance measure and change in SG&A expenses as efficiency measure. They found a better outcome of these performance measures throughout the complete buyout cycle and their explanation was as follows. When the private equity partnership buys out a firm they become the solemnly owner with only one goal: increase the profits of the firm this is in contrast when a firm has a lot of shareholders with different goals. The private equity partnership often use their own expertized managers or make the existing managers shareholder in the firm. This managerial ownership increases the incentive of the managers to make the choices that benefits shareholder value (Burton, Keels & Scifres, 2002). Furthermore, increased managerial ownership ensures that there is likely to be more

agreement to make needed changes in the firm’s activities. With this structure the corporate governance of the firm becomes more efficient and aligned.

Cressy, Malipiero, & Munari (2007) found that more industry-specialized private equity firms show higher post-buyout profitability levels. They used a sample of 122 buyouts completed in the UK between 1995 and 2002. In contrast, the authors could not find a

relationship between private equity partnership experience and higher level of profitability. Nevertheless, their research showed that industry specialization and an established network within an industry helps the private equity partnership to outperform the market.

2.2 Previous research of long-term effects of private equity

While the pre-buyout and post-buyout effects tend to show an increase in profitability. This thesis focusses on the performance of private equity portfolio firms after the private equity partnerships steps out. If private equity partnership takes too much risk it should be seen in the long term performance after the partnerships leaves. There has been significant

8

research on long term effects of private equity. First, Holthausen & Larcker (1996) observed the performance of 90 Reversed Leveraged Buy-outs (RLBO) (I.e. firms making their first public) offering after previously completing a leveraged buyout by private equity) in the US occurred between 1983 and 1988. They found out that on average the OPNIC1/assets and operating cash flow divided by assets of these firms is significantly better than other IPO’s in their industry in at least the four sequential years (Holthausen & Larcker, 2006). Holthausen & Larcker also initiated that this outperformance is due to the organizational structure that is designed by the private equity partnerships.

Another paper by Levis (2011) focused on the IPO exits of private equity partnerships. Levis results showed higher absolute returns for private equity backed IPO’s. He noted that this is just a risk-return trade-off. He also found out that the private equity offered their portfolio IPO’s at a reasonable price but since the market anticipates on aggressive IPO pricing by private equity the first days of trading are relative modest. After that the price on average tent to rise and this causes the private equity backed IPO to perform well in the aftermarket.

Cao & Lerner (2009) focused on reverse leveraged buyouts as well. They examined the stock performance of 526 reverse leveraged buyouts that occurred since 1981 until 2003. They found that these reverse leveraged buyouts at least weakly outperform their market peers. They also noted that the high leverage after the IPO, which is frequently criticized, does not appear to be associated with poor performance. Furthermore Cao & Lerner (2009) found that the outperformance of the IPO’s declines after several years after the exit.

Another study by Meles, Monferrá and Verdoliva (2014) focused on the performance of other private equity exits. They examined private equity exits via IPO, secondary buy-out, buy back and trade sale. Their results also showed that private equity backed firms outperform the market. Sequential on that issue, the outperformance depends on several aspects of private equity investment and exit-type whether the performance wears off or continue after the exit. First Meles et al. (2014) found considerable evidence that there is an inverted U shaped relationship between the length of the private equity investment and the post-exit period firm operating performance. This implicates that the duration of the investment increases operating performance but a too long period of investment implicates a low firm quality since private equity is unable to solve their inefficiencies.

The second observation is that bank-based private equity investments outperform their markets over the post-exit period. Meles et al. (2014) explained this by considering that bank-based PE partnerships could be interested in a long-term relationship to yield synergies with

9

the banking core business (Meles et al., 2014) by establishing a well performing firm and lend them money which the firm has to pay back. Non-bank-based private equity partnerships have strong incentives to retain high returns as soon as possible without considering a long-term relationship since when the non-bank-based private equity firm leaves they no longer have connection to their portfolio firm. Finally the paper observed that the change in performance of IPO’s is less than the other exits. Which is in contrast to the theory that only high quality firms should go public (Meles et al., 2014).

So what became clear of the research to pre-buyout and post-buyout is that private equity is very likely to solve inefficiencies and outperform their market peers. They add value by better monitoring, their industry specialization and network. Also, it is likely that a better aligned structure and shareholder activism plays a role in the outperformance in the private equity-portfolio firms. As for the post-buyout and PE-exit it is very likely that the interference of private equity firms still plays a role in the outperformance of the former portfolio firms. The outcomes of the researches in paragraph tend to show that after the PE-exit the firms still perform better than their rivals. There is still an argument that this is due to a risk return trade-off (Levis, 2011) but most researchers agree that PE just creates better performing companies.

10 3. Method and data.

3.1 Model description and expectation.

The complete and final model that is used to check the performance of the firms is displayed below.

𝑅𝑜𝑎_𝑖,𝑡 = 𝛼 + 𝛽₁𝐼𝐵𝑑𝑢𝑚𝑚𝑦_𝑖+ 𝛽₂𝐼𝑃𝑂𝑑𝑢𝑚𝑚𝑦_𝑖+ 𝛽₃𝑃𝐸𝑑𝑢𝑚𝑚𝑦_𝑖 + 𝛽₄𝐶𝑟𝑖𝑠𝑖𝑠_𝑡 + 𝛽₅𝑙𝑛𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟_𝑖,𝑡+ 𝛽₅𝑙𝑛𝑎𝑠𝑠𝑒𝑡𝑠_𝑖,𝑡+ 𝛽₇𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑠𝑡𝑟𝑢𝑐𝑡𝑢𝑟𝑒_𝑖,𝑡 + 𝛽8𝐶𝑜𝑢𝑛𝑡𝑟𝑦𝑑𝑢𝑚𝑚𝑖𝑒𝑠𝑖 + 𝜀

Furthermore a model for the liquidity ratio is used for the regression to check the financial distress.

𝐿𝑖𝑞𝑢𝑖𝑑𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜_𝑖,𝑡 = 𝛼 + 𝛽₁𝑃𝐸𝑑𝑢𝑚𝑚𝑦_𝑖 + 𝛽₂𝑐𝑟𝑖𝑠𝑖𝑠_𝑡+ 𝛽₃𝑃𝐸𝑑𝑢𝑚𝑚𝑦_𝑖∗ 𝐶𝑟𝑖𝑠𝑖𝑠_𝑡+ 𝜀

The Return on Assets is the performance measure of the firms. Since stock prices are unavailable for some of the firm it is the most reliable source of performance measure. This type of performance is also used by Kaplan (1989), Holthausen & Larcker (1996) and Cressy et al.(2007). The dummies IB, IPO and PE are respectively dummies for exits via institutional buyouts, initial public offerings and other types of exits by the private equity partnership. These types of exits are also used by Meles et al. (2014). According to the paper of Kaplan & Stromberg (2009) institutional buyouts (secondary buyouts and buyouts by an strategic buyer) are the most common ways of exit (62% in their sample) and IPO follow with 14%. In the first regression no difference in types of exit is made since there is only focus on difference between former private equity portfolio firms and their market peers. Since Kaplan (1989), Holthausen & Larcker (1996), Cressy et al.(2007) and Meles et al. (2014) all found a positive effect of private equity on the returns of the firms it is expected to find this result again. Nevertheless the type of exit may perhaps play a role on the performance. Since Institutional buy-outs are buy-outs from 1 equity firm to another the portfolio firm will still be backed up by PE and may be less affected by the crisis since a wealthy investor backs the firm up. An IPO on the other hand will be listed on the stock market and dependent on other funding facility’s which tend to retain their money during the crisis.

The Crisis dummy is set on 1 for 2007 until 2009 for the financial crisis and 2011 for the European euro crisis. The PE*crisis is to measure the effect of private equity in times of the crisis. Since Franzoni et al. (2012) and Kaplan and Stein (1993) found that private equity partnership do increase the leverage of their portfolio firms and therefore increase the credit

11

risks it is expected that former private equity portfolio firms suffer more from the crisis than their market peers.

Control variables for the return on assets are turnover, assets, capital structure and country dummies. Turnover is used as a control variable in Guo et al. (2011), Bruton et al. (2002) and therefore used in this paper as well. The log on assets is used to control the size differences and was used by Scellato & Ughetto (2013). Based on previous research capital structure does affect the return on assets and is used in the papers by Guo et al. (2011) and Holthausen & Larcker (1996). In this capital structure is shareholder funds divided by total assets. The constant term will be in here just for econometric reasons. It tells nothing since variables that are essential to define a company are included e.g. assets, turnover and capital structure.

The liquidity ratio is defined by the data base Amadeus measures the ability for the firm to pay its short-term debt obligation. It is a measure for default risk and used by Franzoni et al. (2012). It is expected that the former private equity portfolio companies will have a lower liquidity ratio. Since the PE wants to make the highest profit possible they will try to make the company that will be traded of as efficient as possible and therefore with the lowest liquidity ratio possible.

3.2 Data collection.

To test the performance of private equity-exits this paper focuses on 72 European private equity-exits in 2005. These private equity partnership-exits are found by the database Zephyr in the database for PE deals. To make a fair comparison to the market of the PE-exits a peer group is estimated. Based on industry, total assets and shareholder funds this peer group is estimated. Substantial financial data of the former PE-portfolio firms and the peer group is retrieved from Bureau van Dijk’s database Amadeus.

The data of the 72 European private equity-exits is found via Zephyr’s database for PE. With search strategies ‘time period 2005-2006’ and ‘geography Europe’ 176 private equity-exits are found. The problems with the exits is that most of them are privately owned and there is insufficient data to these exits. So when this sample is putted through Amadeus there are only 72 European private equity-exits companies which have sufficient date on the variables described in the previous paragraph for time period 2006-2011.

As for the peer group a segmentation analysis for the 72 European private equity-exit is made. Since the ROA depends on what kind of industry the company is in the peer group is controlled for industry. The private equity-exit group is divided based on four major BVD

12

industries. Other services, machinery, wholesale/retail and Other appeared to be the biggest (Figure 1) and therefore are used as industry categories.

The peer group consist of 159 European companies where the % per industry (figure 5) is matched. The companies within this group are selected on total assets and shareholder funds in 2006 which are in the range of 30% of the private equity-exit values and match the average of the 72 private equity-exit group. The total dataset includes now 72 European exits and 159 peer group companies. The financials in the time period 2006-2011 of this dataset is retrieved from Amadeus.

13 4. Results.

4.1 Descriptive statistics.

The descriptive for the variables are displayed in the appendix Figure 2. Figure 3 is displayed below and represents the average return on assets of former private equity firms and non-private equity firms.

Figure 3.

This figure shows that former private equity portfolio firms does have a higher return on assets over time. When the financial crisis starts it seems that the ROA of former private equity portfolio firms are more affected by the crisis than their peers. Still ROA is higher for the former private equity portfolio firms than their peers over the whole period.

Figure 4.

The average liquidity ratio is displayed above. It shows that liquidity ratios of former private equity portfolio firms are higher than their peers and grow over time. The higher the ratio the safer the firm is and what can be concluded is that former private equity portfolio firms increased their liquidity.

0 2 4 6 8 10 12 14 16 2006 2007 2008 2009 2010 2011 R o a %

ROA

Liquidity ratio

14 4.2 Regression results.

Results from regression clustered.

(1) (2) (3) (4)**** Pedummy 4.8106*** 4.5048*** 6.2680*** (1.6514) (1.6465) (1.3692) Crisisdummy –.5245 –.5347 –.6220* –.6556 (.3538) (.3539) (.3392) (.7775) pecrisis –.5237 –.5344 –.4603 –.5060 (1.2582) (1.2603) (1.1953) (1.4184) IBdummy 9.7314*** (1.366) IPOdummy -2.3282 (1.9848) OtherDummy 3.9951*** (1.5693) Log assets –1.8944*** –1.3823*** (.7020) (.4124) Log turnover 2.9176*** 2.7800*** (.4724) (.2618) Capital structure 11.7488*** 13.8499*** (2.6269) (1.6432) Constant 4.5564*** 6.6496*** –18.1861*** -25.82387*** (.5019) (1.4833) (9.5859)

Country dummies No Yes Yes Yes

R^2 0.0296 0.0463 0.1479 0.1670***

Note: Standard error in parentheses. *** p<0,01 **p<0,05 *p<0,1., ****non clustered; no robust std error; adjusted Rsquare..

The results of the regression on return on assets are displayed above. It shows that former private equity has higher return on assets. The dummy for the crisis is significant in the third regression and it tends to maintain its expected negative effect. Then for the pe*crisis dummy it tends to be negative but this is not significant. So while there is an expectation that the former private equity firms are more affected by the crisis than their peers this seems not significant.

The different types of exit appears to affect the return on assets. While institutional buyouts and other types (except IPO’s) have a significant effect of respectively 9.7314 and 3.9951 percentage point increase of ROA compared to the market, IPO’s effect is

15

Results from regression liquidity ratio.

(1) (2) (3) Pedummy 1.5911*** 1.7630*** (.2873) (.4985) Crisisdummy –.0656 –.0323 (.3343) (.3158) pecrisis –.2574 –.1711 (.6102) (.5762) IBdummy .7410 (.5452) IPOdummy –.9224 (.8314) OtherDummy .92011 (.6310) Log assets .5330*** (.1471) Log turnover –.6921*** (.1064) Capital structure 5.5363*** (.6445) Constant 1.1893*** 1.2331*** 1.4440 (.1575) (.2730) (2.479)

Country dummies No No Yes

Adjusted R^2 0.0225 0.0213 0.1278

Note: Standard error in parentheses. *** p<0,01 **p<0,05 *p<0,1.,

The results of the regression on liquidity ratios are displayed above. In the first model private equity seemed to have higher liquidity ratios but when adding more significant variables the effect of private equity, the crisis and private equity in the crisis becomes

insignificant. Different types of exit do not seem to be significant. So for liquidity ratios there is no significant difference between the former private equity portfolio firms and the peer group.

4.3 Discussion

The results show that former private equity portfolio firms have a higher return on assets than their market peers. The reason for this could be that private equity only buys out companies with higher return on assets or that private equity created higher return on assets by developing their portfolio companies. Since previous research (Bruton et al., 2012; Kaplan

16

1989) proved that private equity creates higher performing business the second assumption is made. The results show that this outperformance remains in the five sequential years after the exit of the private equity partnership. As was found by Meles et al. (2014) the outperformance does depend on the type of exit. If the company is exited via an IPO it is uncertain how the performance compared to the market will be this is against the findings of Levis (2011) and Cao & Lerner (2009) which observed an outperformance of the market by the IPO’s for at least the four sequential years. When the company is exited via an Institutional buyout or other strategies it is likely that the outperformance in terms of return on assets will hold on. This is in line with the hypotheses stated by Meles et al. (2014). Also, liquidity ratios for former private equity portfolio companies tends to be higher than their peers although this is not significant. When adding more variables the effect of private equity declines.

4.5 Limitations.

The first limitation is that the performance measure could be improved if it considered the ROA pre-buyout, post-buyout and after the exit like Meles et al. (2014) did. This will take the previous ROA into account and show differences between pre-buyout, post-buyout and after the exit. Unfortunately when the observed companies are private they do not have sufficient data for an regression on this subject. This brings up the next limitation, of the 179 private equity exits only 72 have sufficient data. There could be a bias that only the well performing former portfolio firms show their financials since this is not obligatory.

17 5. Conclusion and suggestions.

5.1 Conclusion.

The main goal of the thesis was to observe the performance of private equity-exits during the financial crisis. The existing literature concluded that private equity is capable of solving inefficiencies pre-buyout and post-buy-out. This is achieved by solving agency problems and profiting from the private equity network and experience of their managers in a certain industry. The limited investigations on long-term effect of PE interference observed on one hand outperformance of firms that recently had a private equity-exit. The performance of IPO’s is still uncertain but what is certain is that the IPO exit performs worse than other exits.

This paper went deeper in the performance of the former portfolio firms during the financial crisis. By observing return on assets and liquidity ratios 72 former private equity portfolio firms benchmarked to their peers. The results show that the outperformance in terms of higher return on assets holds for the sequential five years after the private equity

partnership leaves. Still, the descriptive statistics describe that the crisis slightly converges the return on assets of former portfolio firms and their peers but the outcome of the regression states this is not significant enough to assume. Furthermore, following the descriptive statistics, former private equity portfolio firms have higher liquidity ratios. The regression showed that these ratios remain unaffected by the crisis.

In the aspect of the different types of exits, IPO’s are worse off than Institutional buyouts and other types of exits based on return on assets. This tends to support Meles et al. (2014) explanation that the IPO’s are not backed up by an private equity partnership anymore and depend largely on the unstable financial market that occurred in the financial crisis. For the liquidity ratio the different types of exit does not seem to matter since none of the results is significant.

5.2 Suggestions.

In the existing literature it becomes clear the private equity is a remarkable investment vehicle that is capable of solving company inefficiencies and creating companies that

outperform markets. In respect to long-term effects there is still much to learn. Because of the limited available data al lot of private equity exits are still unobserved e.g. 179 exits and only 71 former portfolio firms with enough data. This could result in a bias that only well

performing former portfolio firms show their data. To solve this, partnerships of private equity should supply more data on their portfolio firms.

18 Reference list.

Brav, A. and Gompers, P. A. (1997). Myth or reality? The longrun underperformance of initial public offerings: evidence from venture and nonventure capital-backed companies, The Journal of Finance, 52, 1791–821. doi:10.1111/j.1540-6261.1997.tb02742.x.

Bruton, G.D., Keels, J.K., Scifres, E.l., (2002). Corporate restructuring and performance: An agency perspective on the complete buyout cycle, Journal of Business Research, 55, 709–724.

Cao, J., Lerner, J., (2009). The performance of reverse leveraged buyouts. Journal of

Financial Economics, 91, 139–57.

Cressy, R., Munari, F., Malipiero, A. (2007). Playing to their strengths? Evidence that specialization in the private equity industry confers competitive advantage.

Journal of Corporate Finance, 13, 647–669.

Fenn, G.W., Liang, N., and Prowse, S., (1997). The private equity market: An overview, Financial Markets, Institutions and Instruments, 6, 1–90.

Franzoni, F., Nowak, E., Phalippou, L., (2012). Private Equity Performance and Liquidity Risk. The Journal of Finance. 67, 2341–2373. doi: 10.1111/j.1540-6261.2012.01788.x Guo, S., Hotchkiss E. S., Song, W., (2011). Do Buyouts (Still) Create Value? The Journal of

Finance , 66, 479–517.

Holthausen, R.W., Larcker, D.F., (1996). The financial performance of reverse leveraged buyouts. Journal of Financial Economics, 42, 293–332.

Kaplan, S., (1989). The effects of management buyouts on operating performance and value,

Journal of Financial Economics, 24, 217–54.

Kaplan, S. and Stein, J.C., (1993). The Evolution of Buyout Pricing and Financial Structure in

the 1980s. The Quarterly Journal of Economics, 108, 313–357.

Kaplan, S., Strömberg, P., (2009). Leveraged Buyouts and Private Equity. The Journal of

Economic Perspectives, 23,121–146.

Levis., M (2011). The Performance of Private Equity-Backed IPOs. Financial Management,

40, 253–277.

Meles, A., Monferrá, S., Verdoliva, V., (2014). Do the effects of private equity investments on firm performance persist over time? Applied Financial Economics, 24, 203–218. Meles, A. (2011). Do private equity investors create value for Italian initial public offerings?

19

Nejadmalayeri, A. and Singh, M., (2012). Corporate taxes, strategic default, and the cost of debt. Journal of Banking & Finance, 2900–2916. doi:10.1016/j.jbankfin.2011.07.021 Scellato, G., Ughetto, E.,( 2013). Real effects of private equity investments: Evidence from

European buyouts. Journal of Business Research, 66, 2642–2649

Appendix. Figure 1.

Variable Description

ROA Return on Assets

Pe dummy Dummy to control PE-exit companies and

peer group

Lnturnover log on turnover

Lnassets Log on total assets

Crisis Dummy for crisis.

Capitalstructure Capital structure

Ib dummy Dummy for set on 1 for Institutional buyouts

IPO dummy Dummy for set on 1 for Initial public

offerings

Liquidity ratio The Liquidity ratio for the firms.

∝ Constant term 𝜺 Error term Figure 2. capstructure 1292 .3461304 .2100171 -.4557574 .9974447 Liquidityr~o 1292 1.667121 4.788186 .03 97.55 turnover 1292 6.06e+08 9.93e+08 79000 8.42e+09 Shareholde~s 1292 2.33e+08 6.06e+08 -2.06e+08 1.11e+10 Totalassets 1292 7.41e+08 1.65e+09 238000 1.99e+10 ROA 1292 5.546254 12.05966 -95.31 98.38 Variable Obs Mean Std. Dev. Min Max

20 Figure 5.