The Global Economic Impact of Private Equity Report 2008 - World ...

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The key findings are as follows:• When a company goes private a fundamental shift in theboard composition takes place. The board size and thepresence of outside directors are drastically reduced. Theauthors do not find a significant difference in the changein the board size of MBOs and LBOs, but the compositionis very different. In the case of private equity deals, outsidedirectors are replaced by individuals employed by theprivate equity sponsors. In the case of pure managementbuyouts, the outside directors disappear and onlymanagement is left.• Private equity board members are most active in complexand challenging transactions. Private equity groupsappear to adjust their board representation based on theanticipated challenges in the investments (for instance,companies that showed a particular need for monitoringeven when they were public).• The presence of LBO sponsors on the board may alsodepend on the “style” of the private equity firm: certainfirms rely less on their own partners or employees andmore on outsiders. If more than one PE firm is sponsoringthe investment, then the proportion of LBO sponsors onthe board is larger, presumably because each sponsorwants to have a representative on board.• Private equity investors remain actively engaged with theirportfolio businesses in the years after the transaction. Thepercentage of LBO sponsors sitting on the board onlyslightly decreases over time post-transaction.II. Key observations: Case studiesThe large-sample studies were complemented by in-depthanalyses of a total of six private equity transactions inWestern Europe (namely, Germany and the UK) and theemerging economies in Asia (namely, China and India).These case studies are intended to highlight particulartransactions as illustrative examples, rather than berepresentative of all private equity-backed transactionsin these regions and sectors.A. European casesIn Europe, the authors focus on one transaction in Germany(Messer Griesheim) and one in the UK (New Look). Whenthe Messer Griesheim deal closed in 2001, it was thelargest private equity deal in Germany and the largestindustrial buyout in Europe at the time. The company wasowned by pharmaceutical giant Hoechst and the foundingfamily. Goldman Sachs and Allianz Capital Partners boughtout Hoechst, with the family remaining as a shareholder.As a divisional buyout of a large industrial company, thecase study represents a typical case of firm restructuringin Germany at that time. The case offered three interestingareas for analysis: First, employment was a key topic, sincethe major restructuring efforts and divestitures undertakenpost-buyout implied reductions in employment. In additionto analysing sheer employment numbers, additionalindicators regarding employment were identified andanalysed, allowing for a rich discussion on this complextopic. Secondly, Messer Griesheim offered an interestingsetting to discuss the impact of private equity on corporategovernance through the interplay between family owners,industrial companies and private equity investors. Thirdly,the opportunity for a family to regain control over parts ofits original company via private equity was investigatedwithin the case study.In April 2004, New Look was taken private through abuyout supported by Apax Partners and Permira; itrepresented one of the largest UK buyouts in that year.First, a key area of analysis was the impact on corporategovernance through the public‐to‐private transaction. Thecase offered a rich base for a discussion of the impact ofprivate equity on strategic decision-making and corporategovernance. A comparison was undertaken of New Look’scorporate governance while the company was still publiclylisted to the period when it was privately held. Secondly, aswith the Messer Griesheim case, employment developmentpost-buyout was an important topic of study. Thirdly, therefinancing undertaken after the buyout was analysed,as significant payouts to the equity holders, as well as arecapitalization, took place within three years post‐buyout.B. Chinese casesThe two China cases, China Glass Holdings and LittleSheep, profile two different types of private equity investmentin China: the former is a buyout transaction, but with uniquelyChinese characteristics that reflect the country’s legal andeconomic realities; the latter is a classic growth capitalprivate equity investment. Leverage was not a factor in eithertransaction. Yet both cases present strikingly similar storiesof some key factors that are critical for private equitysuccess, especially in emerging market environments wherethe industry is far newer and less well established thanin North America or Europe. Rather than focusing on thefinancial analytics of private equity transactions, these casesconcentrate primarily on the post-investment role played bythe two private equity funds as they worked closely withsenior management of their portfolio companies to buildvalue, enhance competitiveness and strengthen theircapacity to gain access to international capital markets.The case of China Glass Holdings describes the privatizationand subsequent restructuring of a state‐owned glassmanufacturing enterprise that was purchased in its entiretyby Hony Capital, a Chinese private equity fund which ultimatelysuccessfully completed an IPO on the Hong Kong StockExchange. In sharp contrast, Little Sheep tells the story of anentrepreneur whose hobby turned into one of the largest andbest-known restaurant chains in China. Unlike the new andwholly Chinese Hony Capital, 3i Group plc, the private equityinvestor in Little Sheep, is a well-established global privateequity firm founded 60 years ago in Britain. 3i enabled LittleSheep to tap into industry and management expertise thatenhanced its ability to professionalize its business practices.Executive summaryThe Global Economic Impact of Private Equity Report 2008
C. Indian casesThe two India cases, Subhiksha and Bharti Tele-Venture,provide insights into why India has attracted more privateequity investment recently than any other emerging marketcountry. Total investments increased almost 700% between2004 and 2006, from $1.1 billion to $7.5 billion, and 2007is expected to be another record-breaking year. Thismeteoric growth has been fostered by a combination ofcountry-specific factors including India’s sustained rapideconomic growth, burgeoning domestic consumer markets,established public equity market and human capital andcompetitiveness in high-growth sectors.Within the context of these favourable factors, the casesfocus on private equity transactions in two high-growth, butunsettled sectors of the Indian economy: retail (the Subhikshacase), and mobile telecom (the Bharti Tele‐Ventures case).Both these transactions involved minority rather than controlinvestments by the private equity firms involved, i.e. ICICIVenture in the Subhiksha and Warburg Pincus in the BhartiTele-Ventures transaction. ICICI Venture is one of India’slargest and most successful domestic private equity groups,while Warburg Pincus is a global private equity firm founded inNew York in 1966. In both transactions, leverage was not afactor. On the contrary, the cases illustrate that for economieslike India that are in the midst of major structural changes,there are ample opportunities for more traditional “growthcapital” investments in companies that are expanding rapidly,especially in sectors such as retail and telecommunicationsthat are undergoing consolidation.• The discussion of many aspects of private equity’s impacton the economy has been characterized by confusion alongmany dimensions. As the employment study highlights,the evidence supports neither the apocalyptic claims ofextensive job destruction nor arguments that private equityfunds create huge amounts of domestic employment.• Although LBO transactions outside North America andWestern Europe only accounted for approximately 12%of global LBO transactions in number and 9% in valueover the period from 2001 to 2007, private equity activityin emerging economies is expanding and maturing,particularly for minority and growth capital investments.As illustrated by the cases, there are different sets ofdynamics in place for domestic and global private equityplayers in China and India.While these studies represent a first step, one of the mostimportant challenges to address is the ongoing need for rigorousand unbiased evaluations of the broader consequences of privateequity investments and the potential of this form of ownership tofacilitate corporate restructuring globally in a responsible manner.There is clearly a need for further research that is outside the USand Western Europe and that addresses additional questionssuch as the implications of private equity on productivity andwages. We hope to approach these issues in the next volumeof Working Papers.Putting it all togetherWhile each study has its own distinct focus, and – asacknowledged above – there is a need for further study intovarious topics and across different geographies, the projecthas important implications for how to think about the role thatprivate equity plays in the economy. To the authors, fourbroader (albeit tentative) observations emerge from the works:• The substantial periods that firms remain under privateequity control, the robust long-run investments ininnovation as measured by patents and the flexiblegovernance structures (with small boards dominated bymanagers and investors) appear consistent with the viewthat the LBO organizational form is a long-run governancestructure for many firms.• The employment study has mixed results. It suggests thatemployment falls more rapidly at target establishmentspost-transaction. At the same time, private equity targetsengage in more greenfield job creation than controls.Private equity also accelerates the pace of acquisitionsand divestitures. These results regarding private equity’simpact on employment – as well as those in the innovationstudy – fit the view that private equity groups act ascatalysts for change in the economy.The Global Economic Impact of Private Equity Report 2008Executive summaryxi
Page 2 and 3: The Globalization of Alternative In
Page 5: ContributorsCo-editorsAnuradha Guru
Page 9 and 10: PrefaceKevin SteinbergChief Operati
Page 11 and 12: Letter on behalf of the Advisory Bo
Page 13 and 14: Executive summaryJosh lernerHarvard
Page 15: • Private equity-backed companies
Page 19 and 20: Part 1Large-sample studiesThe Globa
Page 21 and 22: The new demography of private equit
Page 23 and 24: among US publicly traded firms, it
Page 25 and 26: should be fairly complete. While th
Page 27 and 28: according to Moody’s (Hamilton et
Page 29 and 30: draining public markets of firms. I
Page 31 and 32: FIguresFigure 1A: LBO transactions
Page 33 and 34: TablesTable 1: Capital IQ 1980s cov
Page 35 and 36: Table 2: Magnitude and growth of LB
Page 37 and 38: Table 4: Exits of individual LBO tr
Page 39 and 40: Table 6: Determinants of exit succe
Page 41 and 42: Table 7: Ultimate staying power of
Page 43 and 44: Appendix 1: Imputed enterprise valu
Page 45 and 46: Private equity and long-run investm
Page 47 and 48: alternative names associated with t
Page 49 and 50: 4. Finally, we explore whether firm
Page 51 and 52: When we estimate these regressions,
Page 53 and 54: cutting back on the number of filin
Page 55 and 56: Table 1: Summary statisticsPanel D:
Page 57 and 58: Table 4: Relative citation intensit
Page 59 and 60: figuresFigure 1: Number of private
Page 61 and 62: Private equity and employment*steve
Page 63 and 64: Especially when taken together, our
Page 65 and 66: centred on the transaction year ide
Page 67 and 68:
and Vartia 1985.) Aggregate employm
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sectors. In Retail Trade, the cumul
Page 71 and 72:
employment-weighted acquisition rat
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FIguresFigure 1: Matches of private
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Figure 6:Figure 6A: Comparison of n
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Figure 8:Figure 8A: Comparison of j
Page 79 and 80:
Figure 11: Variation in impact in e
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Figure 12: Differences in impact on
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Private equity and corporate govern
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et al (2007) track the evolution of
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groups aim to improve firm performa
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distribution of the LBO sponsors, m
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the most difficult cases. This stor
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to see whether these changes of CEO
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Figure 3:This figure represents the
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TablesTable 1: Company size descrip
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Table 5: Changes in the board size,
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Table 7: Board turnoverPanel A: Siz
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Part 2Case studiesThe Global Econom
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European private equity cases: intr
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Exhibit 1: Private equity fund size
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Messer Griesheimann-kristin achleit
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ealized it was not possible to grow
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The deal with Allianz Capital partn
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the deal, the private equity invest
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Exhibit 1: The Messer Griesheim dea
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Exhibit 5: Post buyout structureMes
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New Lookann-kristin achleitnerTechn
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feet. This restricted store space w
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institutional investors why this in
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Although a public listing did not a
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Exhibit 5: Employment development a
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Chinese private equity cases: intro
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Hony Capital and China Glass Holdin
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Hony’s Chinese name means ambitio
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Establishing early agreement on pos
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Executing the IPOEach of the initia
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Exhibit 1A: Summary of Hony Capital
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Exhibit 4: Members of the China Gla
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Exhibit 6A: China Glass post‐acqu
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Exhibit 8: China Glass stock price
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3i Group plc and Little Sheep*Lily
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y an aggressive franchise strategy,
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soul” of the business. But there
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Exhibit 1: Summary information on 3
Page 157 and 158:
Exhibit 6: An excerpt from the 180-
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Indian private equity cases: introd
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ICICI Venture and Subhiksha *Lily F
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investment,” recalled Deshpande.
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2005 - 2007: Moderator, protector a
Page 167 and 168:
Exhibit 3: Subhiksha’s board comp
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Warburg Pincus and Bharti Tele‐Ve
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founded two companies at this time
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By 2003 this restructuring task was
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Exhibit 1C: Private equity investme
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Exhibit 4B: Bharti cellular footpri
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Exhibit 6: Summary of Bharti’s fi
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Exhibit 7: Bharti’s board structu
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In the 1993‐94 academic year, he
Page 185 and 186:
consumer products. She was also a R
Page 187 and 188:
AcknowledgementsJosh LernerHarvard
Page 189:
The World Economic Forum is an inde
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