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

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ReferencesAmess, K. and M. Wright (2007), “The Wage andEmployment Effects of Leveraged Buyouts in the UK”,International Journal of the Economics of Business 14,179–195.British Venture Capital Association (BVCA) (2006), TheEconomic Impact of Private Equity in the UK, London, BVCA.Davis, S.J. and J.C. Haltiwanger (1999), “Gross Job Flows”,in David Card and Orley Ashenfelter (eds.), Handbook ofLabor Economics, New York, North-Holland.Davis, S.J., J.C. Haltiwanger, R. Jarmin et al (2006),“Measuring the Dynamics of Young and Small Businesses:Integrating the Employer and Non-employer BusinessUniverses”, Working paper no. 13266, National Bureau ofEconomic Research. Forthcoming in Dunne, T., J. BradfordJensen and M.J. Roberts (eds.), Producer Dynamics: NewEvidence from Micro Data, University of Chicago Press.Davis, S.J., J.C. Haltiwanger, R. Jarmin et al (2007), “VolatilityDispersion in Business Growth Rates: Publicly Traded versusPrivately Held Firms”, in Acemoglu, D., K. Rogoff and M.Woodford (eds.), NBER Macroeconomics Annual 21, 107–180.Davis, S.J., J.C. Haltiwanger and S. Schuh (1996), JobCreation and Destruction, Cambridge, MA, MIT Press.European Private Equity and Venture Capital Association(EVCA) (2005), Employment Contribution of Private Equityand Venture Capital in Europe, Zaventum, Belgium, EVCA.Hall, D. (2007), “Methodological Issues in Estimating theImpact of Private Equity Buyouts on Employment”,unpublished Working Paper, Public Services InternationalResearch Unit, Business School, University of Greenwich.Harris, R., D.S. Siegel and M. Wright (2005), “Assessing theImpact of Management Buyouts on Economic Efficiency:Plant-Level Evidence from the United Kingdom”, Review ofEconomics and Statistics 87, 148–153.Jensen, M.C. (1989), “The Eclipse of the Public Corporation”,Harvard Business Review 67 (September–October), 61–74.Kaplan, S.N. (1989), “The Effects of Management Buyoutson Operating Performance and Value”, Journal of FinancialEconomics 24, 217–254.Kearney, A.T. (2007), Creating New Jobs and Value withPrivate Equity, Chicago, A.T. Kearney.Lichtenberg, F.R. and D. Siegel (1987), “Productivity andChanges in Ownership of Manufacturing Plants”, BrookingsPapers on Economic Activity: Microeconomics, 643–683.Lichtenberg, F.R. and D. Siegel (1990), “The Effects ofLeveraged Buyouts on Productivity and Related Aspectsof Firm Behavior”, Journal of Financial Economics 27,165–194.Long, W. and D. Ravenscraft (1993), “The FinancialPerformance of Whole Company LBOs”, CES workingpaper no. CES-WP-93-16, November 1993.McGuckin, R.H. and S.V. Nguyen (2001), “The Impactof Ownership Changes: A View from Labor Markets”,International Journal of Industrial Organization 19, 739-762.Muscarella, C.J. and M.R. Vetsuypens (1990), “Efficiencyand Organizational Structure: A Study of Reverse LBOs”,Journal of Finance 45, 1389–1413.Schoar, A. (2002), “Effects of Corporate Diversificationon Productivity”, Journal of Finance 57, 2379-2403.Service Employees International Union (SEIU) (2007),Behind the Buyouts: Inside the World of Private Equity,Washington, SEIU.Shleifer, A. and L. Summers (1988), “Breach of Trust inHostile Takeovers”, in Auerbach, A.J. (ed.) (1988) CorporateTakeovers: Causes and Consequences, Chicago, Universityof Chicago Press.Strömberg, P. (2008), “The New Demography of PrivateEquity”, in Anuradha G. and J. Lerner (eds,), Globalization ofAlternative Investments Working Papers Volume 1: GlobalEconomic Impact of Private Equity 2008, New York, WorldEconomic Forum USA.Taylor, A. and C. Bryant (2007), “Private Equity Deals thatCement Business Growth”, Financial Times, 2 April.Tornqvist, L., P. Vartia and Y. Vartia (1985), “How ShouldRelative Change Be Measured?”, American Statistician 39(February), 43–46.Wright, M., S. Thompson and K. Robbie (1992),“Management-Led Leveraged Buy-Outs: A EuropeanPerspective”, Journal of Business Venturing 7, 45–71.64 Large-sample studies: EmploymentThe Global Economic Impact of Private Equity Report 2008
Private equity and corporate governance:do LBOs have more effective boards?*FRANCESCA CORNELLILondon Business School and CEPRÕGUZHAN KARAKASLondon Business School1. IntroductionThe literature on corporate governance has long focused onthe boards of public companies. Boards monitor and provideadvice to management. When ownership of the company isdispersed, boards, and in particular outside directors sittingon boards, monitor management on behalf of the owners.If the role of boards in public companies is to providemanagement supervision, one may ask whether boards playthe same role in companies that have been acquired by oneor more private equity groups. The rationale often given forthe success of private equity is that it concentrates theownership in the hands of a few shareholders. Since theseshareholders are also involved in running the companyoperations, they have strong incentives to maximize the valueof the firm. In addition, private equity partners often haveextensive experience in restructuring companies, and thustheir advice can be very useful. As Sir David Walker statesin his July 2007 consultation document: “... alignment[of interests] is achieved in private equity through controlexercised by the general partner over the appointment of theexecutive and in setting and overseeing implementation ofthe strategy of a portfolio company. Lines of communicationsare short and direct, with effectively no layers to insulate ordilute conductivity between the general partner and theportfolio company executive team.”One may therefore argue that a company which has beenbought by a private equity fund may not need a board at all,as private equity partners can monitor and provide advicedirectly. However, usually such monitoring and advisoryfunctions are provided through the board. For example,Lerner (1995) shows that venture capitalists sit on the boardof the companies they have invested in, and their presenceon the board increases when their support is particularlyvaluable (e.g. during a change in CEO). We may thereforeexpect to find that this is also the case for leveragedbuyouts (LBOs), and the private equity sponsors may beactively involved in the company by participating in theboard. In this paper we study the boards of publiccompanies that have been taken private with private equitybacking. 1 The purpose of this is twofold. First, we want tolearn more about how boards of companies with privateequity investors function. Are these boards dramaticallydifferent from the boards of public companies? Are they justnominal boards, with no relevance for the restructuring ofthe company? Or do they serve an important supervisoryand advisory role in the restructuring process? Second, ifboards are an important part of the restructuring processof a company, given the successful performance of manyprivate equity investments, one may wonder whether privateequity boards are better structured to assist a companyin the restructuring process. Therefore, by looking at thecharacteristics of these boards we can have furtherevidence about what makes a board more effective.In this paper, we have constructed a new dataset,which follows the board composition of all public‐to‐privatetransactions that took place in the UK between 1998 and2003. 2 Out of 142 such transactions, 88 were sponsoredby at least one private equity fund. We can thus look at thechange in the composition of the board at and during thetime of private equity involvement. We examine whetherprivate equity boards are substantially different from theboards of public companies and whether there is support forthe view that boards backed by private equity funds are moreinvolved in an advisory and supervisory capacity than publicboards. When making this comparison, one has to keep inmind, as already mentioned, that the role of a board cannotbe exactly the same in these two situations. As stressed bySir David Walker (July 2007): “... the main driver of reformsof corporate governance of listed companies has been tore‐emphasize the role of the board as a guardian ofshareholder interests. But the private equity model has nomaterial deficiency in this respect.” Keeping this in mind, weuse as a control group a set of public‐to‐private transactionswith no private equity backing. Therefore the control groupconsists of either pure management buyouts (MBOs) orbuyouts backed by non‐financial sponsors. Managementbuyouts are an interesting comparison group as in these* We thank Per Strömberg for providing part of the data. We thank Paul Coombes, Denis Gromband and Josh Lerner for comments.Daniel Metzger and Kai Truempler provided excellent research assistance.1By private equity backing (or sponsorship) we mean that at least one private equity firm has invested in the equity of the company.2The focus on UK companies is due to the availability of data: only for the UK was it possible to find non‐sporadic information aboutboards of private companies in the last 10 years.The Global Economic Impact of Private Equity Report 2008 Large-sample studies: Corporate governance 65
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The Globalization of Alternative In
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ContributorsCo-editorsAnuradha Guru
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PrefaceKevin SteinbergChief Operati
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Letter on behalf of the Advisory Bo
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Executive summaryJosh lernerHarvard
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• Private equity-backed companies
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C. Indian casesThe two India cases,
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Part 1Large-sample studiesThe Globa
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The new demography of private equit
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among US publicly traded firms, it
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should be fairly complete. While th
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according to Moody’s (Hamilton et
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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
Page 69 and 70: sectors. In Retail Trade, the cumul
Page 71 and 72: employment-weighted acquisition rat
Page 73 and 74: FIguresFigure 1: Matches of private
Page 75 and 76: Figure 6:Figure 6A: Comparison of n
Page 77 and 78: Figure 8:Figure 8A: Comparison of j
Page 79 and 80: Figure 11: Variation in impact in e
Page 81: Figure 12: Differences in impact on
Page 85 and 86: et al (2007) track the evolution of
Page 87 and 88: groups aim to improve firm performa
Page 89 and 90: distribution of the LBO sponsors, m
Page 91 and 92: the most difficult cases. This stor
Page 93 and 94: to see whether these changes of CEO
Page 95 and 96: Figure 3:This figure represents the
Page 97 and 98: TablesTable 1: Company size descrip
Page 99 and 100: Table 5: Changes in the board size,
Page 101 and 102: Table 7: Board turnoverPanel A: Siz
Page 103 and 104: Part 2Case studiesThe Global Econom
Page 105 and 106: European private equity cases: intr
Page 107 and 108: Exhibit 1: Private equity fund size
Page 109 and 110: Messer Griesheimann-kristin achleit
Page 111 and 112: ealized it was not possible to grow
Page 113 and 114: The deal with Allianz Capital partn
Page 115 and 116: the deal, the private equity invest
Page 117 and 118: Exhibit 1: The Messer Griesheim dea
Page 119 and 120: Exhibit 5: Post buyout structureMes
Page 121 and 122: New Lookann-kristin achleitnerTechn
Page 123 and 124: feet. This restricted store space w
Page 125 and 126: institutional investors why this in
Page 127 and 128: Although a public listing did not a
Page 129 and 130: Exhibit 5: Employment development a
Page 131 and 132: 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
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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
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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
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consumer products. She was also a R
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AcknowledgementsJosh LernerHarvard
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The World Economic Forum is an inde
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