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Notes
- 1.
For example, “Texas Pacific Group” opened its office in London in 1997, “Kohlberg, Kravis, Roberts & Co.”, “E.M. Warburg Pincus & Co.”, and “Clayton, Dubilier & Rice” opened offices in 1998. “The Carlyle Group” opened its London office in 1999 and by March 2000 had raised its first USD 730 million European fund.
- 2.
TPG for example recently completed a USD 1.5 billion transaction in Singapore together with affinity equity partners (see Guevarra, 2007), Blackstone and Apax acquired a USD 1.7 billion interest in Egyptian telecommunication company Weather (see Bryan-Low & Singer, 2007), and KKR made a USD 0.9 billion investment in Indian Flextronics Software Systems (see Range & Santini, 2007).
- 3.
Some, in particular European contributions use venture capital for the entire private equity market, also applying it to leveraged buyout. This study follows the predominately US definition and distinguishes private equity by maturity stages in venture capital and leveraged buyouts.
- 4.
The research of Baker and Smith (1998) is based on KKR’s activities during the 1980s and early 1990s. The illustrated equity share of 5% is only used in very aggressive buyout transaction structures. It can generally be expected at levels around 20%. The general legal structure also holds for venture capital intermediaries though the capital structure for such investments is typically characterized by higher levels of equity.
- 5.
Gottschalg et al. (2004) show in their sample that venture capital funds even invest on average (median) in 32 (28) companies and leveraged buyout funds in 16 (12) companies.
- 6.
The number of members in the US private equity associations (NVCA) for instance went from 454 to 866 between April 2005 and April 2007.
- 7.
The study focuses on the comparability of private equity firms and diversified corporations. Assets other than corporate investments are therefore excluded from this analysis. Fund-of-funds are furthermore excluded to avoid double counting as their investments go into primary private equity funds.
- 8.
The different value creation levers applied by private equity firms are detailed in Sect. 3.2.3 “Value Creation Techniques”.
- 9.
Figures for the U.K. indicate a decrease of exits through flotation from over 30% in the late 1980s to approximately 5% in the period 2001–2005 while secondary buyouts increased from less than 10% to over 20%. Trade sales dropped from around 45% to approximately 35%. The residual is receivership.
- 10.
Research by Kaplan and Stein (1990) conducted in leveraged recapitalizations of public corporations; provides only indicative evidence for the risk implications of leveraged in buyout transactions.
- 11.
Grossman and Hart (1982) furthermore outline that high debt and the implied risk of bankruptcy also put the high equity stake of managers as well as their reputation and power at risk. The high personal investment thus functions as further motivational factor.
- 12.
Holthausen and Larcker (1996) show that the superior performance is not an effect of restrictions in capital expenditure or working capital as those figures return to the industry median after the reverse leveraged buyout.
- 13.
Also see Kosedag and Michayluk (2004) for a summary of studies regarding the post-buyout performance of buyout targets.
- 14.
Total revenues include carried interest, management fees as well as transaction fees charged for entry and exit.
- 15.
Additional performance indicators can be used to assess private equity performance including means of addressing the correlation with other asset classes and the duration of private equity investments; IRR however remains the industry-standard to assess private equity performance.
- 16.
Also see Cumming et al. (2007) for a detailed overview of empirical studies regarding performance of private equity investments.
- 17.
Koltes (2005) outlines that the growing size of private equity firms requires an increasing professionalism in the management of the PE firm itself which might lead to the implementation of similar, value destroying structures in PE firms as criticized in the corporate centers of multi-business firms.
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© 2009 Physica-Verlag Heidelberg
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Klier, D.O. (2009). Introduction to the Private Equity Industry and the Role of Diversification. In: Managing Diversified Portfolios. Contributions to Management Science. Physica, Heidelberg. https://doi.org/10.1007/978-3-7908-2173-4_3
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