Table Of ContentDecision-Making in Private Equity Firms
Mark Broere
Decision-Making
in Private Equity Firms
An Empirical Study of Determinants
and Rules
Mark Broere
Cottbus, Germany
Doctoral thesis, Brandenburgische Technische Universität Cottbus-Senft enberg, 2013
ISBN 978-3-658-03779-6 ISBN 978-3-658-03780-2 (eBook)
DOI 10.1007/978-3-658-03780-2
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Acknowledgements
This doctoral dissertation would not have been possible without the support of many people. I
would like to express my deep gratitude to my supervisor, Professor Dr Klaus Serfling, for
accepting the project and for providing valued guidance and assistance in my thesis-writing. I
would also particularly like to thank Professor Ulrich Hommel, Ph.D, for assuming the task as
co-reviewer and giving much appreciated advice.
The quality of the results hinges on the quality of the empirical data; I am greatly indebted to
all the private equity professionals who supported this project as interview partners and survey
participants. I am especially grateful to our long-standing family friend Elaine Robson and my
cousin Andy Adler for their encouragement, advice, and comments as well as for inspiring
discussions on the essence of scientific writing.
My deepest gratitude goes to my wife and family for their never-ending patience and support.
Mark Broere
Brief Contents
1 Introduction ........................................................................................................................... 1
2 Data ...................................................................................................................................... 15
3 Objectives and Minimum Return Requirements ................................................................. 35
4 Success Measures and Decision Metrics ............................................................................. 67
5 Exit Decisions .................................................................................................................... 113
6 Summary of Results .......................................................................................................... 151
7 Zusammenfassung in deutscher Sprache ........................................................................... 159
Appendices ............................................................................................................................. 167
References .............................................................................................................................. 199
Contents
Brief Contents ......................................................................................................................... VII
Contents .................................................................................................................................... IX
List of Figures ....................................................................................................................... XIII
List of Tables .......................................................................................................................... XV
List of Abbreviations ............................................................................................................. XIX
Abstract ................................................................................................................................. XXI
1 Introduction ........................................................................................................................... 1
1.1 Research Topic ............................................................................................................. 1
1.2 Method ......................................................................................................................... 4
1.2.1 Type of research ............................................................................................... 4
1.2.2 Research process and design ............................................................................ 5
1.2.3 Target population and sample frame ................................................................ 6
1.2.4 Data collection .................................................................................................. 8
1.2.5 Data analysis .................................................................................................. 10
1.3 Limitations ................................................................................................................. 12
1.4 Organisation of the Thesis ......................................................................................... 13
2 Data ...................................................................................................................................... 15
2.1 Abstract ...................................................................................................................... 15
2.2 Data Quality ............................................................................................................... 16
2.2.1 Calculation of survey outcome rates .............................................................. 16
2.2.2 Comparison with previous private equity mail surveys ................................. 17
2.2.3 Analysis of non-response ............................................................................... 20
2.2.3.1 Background .................................................................................... 20
2.2.3.2 Analysis of types and causes of non-response ............................... 21
2.2.3.3 Comparison of respondents and non-respondents ......................... 21
2.2.3.3.1 Bivariate analyses ....................................................... 21
2.2.3.3.2 Logistic regression ...................................................... 22
2.2.3.4 Comparison of early respondents and late respondents ................. 24
2.2.3.5 Implications for the study .............................................................. 26
2.2.4 Correlations between survey responses and comparable external data .......... 27
X Contents
2.3 Descriptive Statistics .................................................................................................. 28
3 Objectives and Minimum Return Requirements ................................................................. 35
3.1 Abstract ...................................................................................................................... 35
3.2 Existing Literature ...................................................................................................... 36
3.2.1 Objectives ....................................................................................................... 36
3.2.2 Minimum return requirements ....................................................................... 37
3.3 Development of Research Focus and Hypotheses ..................................................... 39
3.4 Results and Discussion ............................................................................................... 41
3.4.1 The importance of private equity firm objectives .......................................... 41
3.4.2 The influence of firm characteristics on the evaluation of objectives ............ 45
3.4.3 The importance of MRR types for the investment decision ........................... 51
3.4.4 The influence of firm characteristics on the evaluation of MRR types ......... 53
3.4.5 The importance of MRR factors ..................................................................... 54
3.4.6 The influence of firm characteristics on the evaluation of MRR factors ....... 57
3.5 Conclusions ................................................................................................................ 62
3.5.1 Objectives ....................................................................................................... 62
3.5.2 Minimum return requirements ....................................................................... 64
4 Success Measures and Decision Metrics ............................................................................. 67
4.1 Abstract ...................................................................................................................... 67
4.2 Existing Literature ...................................................................................................... 67
4.3 Performance Measurement in Private Equity ............................................................ 72
4.3.1 Review of private equity performance measures ........................................... 72
4.3.1.1 Investment multiple ....................................................................... 72
4.3.1.2 Internal rate of return ..................................................................... 74
4.3.1.3 Time-weighted rate of return ......................................................... 79
4.3.1.4 Public market equivalent ............................................................... 80
4.3.1.5 Profitability index .......................................................................... 83
4.3.1.6 Other metrics ................................................................................. 84
4.3.2 Theoretical and practical challenges of measuring performance in
private equity .................................................................................................. 85
4.3.3 The quality of IRRs and multiples as measures of performance .................... 87
4.3.3.1 Criteria for evaluating the quality of performance measures ........ 87
4.3.3.2 Discussion ...................................................................................... 89
4.3.3.2.1 Relevance and goal conformity .................................. 89
4.3.3.2.2 Validity and reliability ................................................ 90
4.3.3.2.3 Practicality .................................................................. 93
Contents XI
4.3.3.3 Preliminary observations ............................................................... 93
4.4 Development of Research Focus and Hypotheses ..................................................... 94
4.5 Results and Discussion ............................................................................................... 96
4.5.1 The importance of success measures ............................................................. 96
4.5.2 A ranking of success measures by importance ............................................... 99
4.5.3 The importance of IRRs and multiples as decision criteria ......................... 100
4.5.4 The influence of firm characteristics on the evaluation of
success measures .......................................................................................... 103
4.5.5 Measures of investment risk or risk-return .................................................. 108
4.6 Conclusions .............................................................................................................. 109
5 Exit Decisions .................................................................................................................... 113
5.1 Abstract .................................................................................................................... 113
5.2 Existing Literature .................................................................................................... 114
5.2.1 Early contributions ....................................................................................... 114
5.2.2 The decision on exit time ............................................................................. 115
5.2.3 The decision on exit channel ........................................................................ 117
5.3 Development of Research Focus and Hypotheses ................................................... 119
5.3.1 Exit decision power ...................................................................................... 119
5.3.2 The decision on exit time ............................................................................. 120
5.3.3 The decision on exit channel ........................................................................ 121
5.4 Results and Discussion ............................................................................................. 121
5.4.1 The distribution of exit decision power between private equity firms
and portfolio companies ............................................................................... 121
5.4.2 The influence of firm characteristics on the evaluation of exit
decision power .............................................................................................. 125
5.4.3 The usage of decision rules for initiating an exit process ............................ 128
5.4.4 The influence of firm characteristics and exit decision power on the
evaluation of decision rules for initiating an exit process ............................ 133
5.4.4.1 Decision rules for performing investments .................................. 133
5.4.4.2 Decision rules for underperforming investments ........................ 135
5.4.4.3 The influence of decision power on the evaluation of decision
rules .............................................................................................. 137
5.4.5 The importance of criteria for the exit channel decision .............................. 138
5.4.6 The influence of firm characteristics on the evaluation of criteria for
the exit channel decision .............................................................................. 140
5.4.7 The influence of decision power on the evaluation of criteria for
the exit channel decision .............................................................................. 144
XII Contents
5.5 Conclusions .............................................................................................................. 145
5.5.1 Distribution of exit decision power .............................................................. 145
5.5.2 Decision rules for initiating an exit process ................................................. 146
5.5.3 Criteria for the exit channel decision ........................................................... 148
6 Summary of Results .......................................................................................................... 151
6.1 Summary of Chapters ............................................................................................... 151
6.2 Additional Conclusions ............................................................................................ 153
6.3 Implications for Practitioners ................................................................................... 155
6.4 Contribution to Literature ........................................................................................ 156
6.5 Suggestions for Future Research .............................................................................. 157
7 Zusammenfassung in deutscher Sprache ........................................................................... 159
Appendices ............................................................................................................................. 167
References .............................................................................................................................. 199
