- the implications of the financial crisis on … · crisis on norwegian target companies’...

Kenny Strandberg

Fredrik Falkendal Nilsen

- THE IMPLICATIONS OF THE FINANCIAL

CRISIS ON NORWEGIAN TARGET

COMPANIES’ PERFORMANCE AND PRIVATE

EQUITY FUNDS’ STRATEGIES –

GRA 19003

Master Thesis - BI Norwegian Business School

Supervisor: Bogdan Stacescu

Study Programme: Business and Economics Major: Finance

NYDALEN, OSLO

Date of submission:

03.09.2012

This thesis is a part of the MSc programme at BI Norwegian Business School. The school takes no responsibility for the

methods used, results found and conclusions drawn.

GRA 19003 Master Thesis - MSc in Business and Economics 03.09.2012

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TABLE OF CONTENTS Table of Figures ..................................................................................................................................................................... 4

Executive summary................................................................................................................................................................ 5

Acknowledgement .................................................................................................................................................................. 6

Chapters of the thesis ............................................................................................................................................................ 7

1 Introduction and motivation .............................................................................................................................................. 9

2 Industry presentation ....................................................................................................................................................... 11

2.1 What is private equity? ............................................................................................................................................... 11

2.2 Why private equity? .................................................................................................................................................... 11

2.3 Types of private equity ............................................................................................................................................... 12

2.4 The private equity organization .................................................................................................................................. 13

2.5 The investment process ............................................................................................................................................... 14

3 The Norwegian PE Market .............................................................................................................................................. 15

3.1 Market report .............................................................................................................................................................. 15

3.1.1 Investments ......................................................................................................................................................... 15

3.1.2 Fundraising ......................................................................................................................................................... 18

3.1.3 Disinvestments .................................................................................................................................................... 20

3.1.4 Summary market report ...................................................................................................................................... 21

4 Theory ................................................................................................................................................................................ 22

4.1 Agency theory ............................................................................................................................................................. 22

4.2 Leverage ..................................................................................................................................................................... 23

4.3 Wealth transfer hypothesis .......................................................................................................................................... 24

4.4 Parenting advantage .................................................................................................................................................... 24

5 Previous Research ............................................................................................................................................................. 25

6 The influence of economic cycles ..................................................................................................................................... 28

7 Data .................................................................................................................................................................................... 31

7.1 Data gathering ............................................................................................................................................................. 31

7.2 Challenges................................................................................................................................................................... 31

7.3 Sample ........................................................................................................................................................................ 32

8 Preparation and Methodology ......................................................................................................................................... 34

8.1 Quantitative part: Performance ................................................................................................................................... 34

8.1.1 Peer groups ......................................................................................................................................................... 34

8.1.2 Performance measures ........................................................................................................................................ 35

8.1.3 Statistical method ................................................................................................................................................ 35

8.2 Qualitative part: Strategy ............................................................................................................................................ 35

9 Performance measures ..................................................................................................................................................... 36

9.1 Growth ........................................................................................................................................................................ 36

9.2 Profitability ................................................................................................................................................................. 37

9.3 Capital management ................................................................................................................................................... 37

9.4 Leverage ..................................................................................................................................................................... 38

10 Hypotheses ....................................................................................................................................................................... 39

10.1 Hypothesis 1 (Higher growth)................................................................................................................................... 39


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10.2 Hypothesis 2 (Higher profitability) ........................................................................................................................... 39

10.3 Hypothesis 3 (Improved capital management) .......................................................................................................... 39

10.4 Hypothesis 4 (Higher leverage) ................................................................................................................................ 40

11 Results and testing .......................................................................................................................................................... 41

11.1 Growth ...................................................................................................................................................................... 41

11.1.1 Pre-recession period ......................................................................................................................................... 41

11.1.2 Recession period ............................................................................................................................................... 42

11.1.3 Isolated growth – Holding period ..................................................................................................................... 42

11.2 Profitability ............................................................................................................................................................... 43



11.2.3 Isolated profitability - Holding period .............................................................................................................. 44

11.3 Capital management.................................................................................................................................................. 44



11.3.3 Isolated capital management – Holding period ................................................................................................ 45

11.4 Leverage ................................................................................................................................................................... 45



11.4.3 Isolated leverage ratio – Holding period .......................................................................................................... 46

12 Robustness tests............................................................................................................................................................... 47

12.1 Lagged equity in ROE .............................................................................................................................................. 47

12.2 Removal of oil related companies ............................................................................................................................. 47

12.3 Five year holding period ........................................................................................................................................... 48

13 Survey .............................................................................................................................................................................. 50

13.1 Rationale for investing .............................................................................................................................................. 51

13.2 The attractiveness of industries ................................................................................................................................. 52

13.3 Financing .................................................................................................................................................................. 53

13.4 Underlying factors for value creation ....................................................................................................................... 54

13.5 Exit ............................................................................................................................................................................ 56

13.6 Summary survey ....................................................................................................................................................... 57

14 Limitations and further research .................................................................................................................................. 59

15 Conclusion ....................................................................................................................................................................... 60

16 References ........................................................................................................................................................................ 61

17 Exhibits ............................................................................................................................................................................ 64

Exhibit 1 – All Norwegian funds per mars 2011 .............................................................................................................. 64

Exhibit 2 – Analysed PE-companies ................................................................................................................................. 65

Exhibit 3 - Survey ............................................................................................................................................................. 66

Exhibit 4 – Results testing ................................................................................................................................................ 73

Exhibit 5 – Preliminary Thesis Report ............................................................................................................................ 106


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TABLE OF FIGURES

Figure 1: The separation between buyouts and venture capital..................................................... 12

Figure 2: PE organization structure ............................................................................................... 13

Figure 3: Investment activity in Norway separated in VC and BO ............................................... 16

Figure 4: Number of PE investments separated in venture capital and buyouts ........................... 17

Figure 5: Relationship between new investments and add-ons ..................................................... 18

Figure 6: New capital committed and the number of new funds................................................... 19

Figure 7: New capital committed and share of foreign capital ..................................................... 19

Figure 8: New capital invested per capita in Europe and Norway ................................................ 20

Figure 9: Number of exits separated in seed, venture and buyout ................................................ 21

Figure 10: GDP growth in Norway and in the UK, and the percentage change in OBX 2006-2011

(Source OECD and Oslo Stock Exchange) ................................................................................... 30

Figure 11: Sample distribution ...................................................................................................... 32

Figure 12: Industry adjusted growth .............................................................................................. 41

Figure 13: Isolated holding growth ............................................................................................... 42

Figure 14: Industry adjusted profitability ...................................................................................... 43

Figure 15: Isolated holding profitability ........................................................................................ 44

Figure 16: Industry adjusted capital management ......................................................................... 44

Figure 17: Isolated holding capital management ........................................................................... 45

Figure 18: Industry adjusted leverage ratio ................................................................................... 45

Figure 19: Isolated holding leverage ratio ..................................................................................... 46

Figure 20: Industry adjusted growth when oil related companies are excluded ........................... 48

Figure 21: Profitability when the firms are held in minimum 5 years .......................................... 48

Figure 22: Countries that Norwegian PE companies operate and invest in .................................. 50

Figure 23: Norwegian PE companies rational for investing in target companies ......................... 51

Figure 24: Attractiveness of industries for Norwegian PE companies .......................................... 52

Figure 25: Types of financing used by Norwegian PE companies................................................ 53

Figure 26: Underlying factors for value creation for Norwegian PE companies .......................... 55

Figure 27: Exit strategies used by Norwegian PE companies ....................................................... 56

Figure 28: Deciding factors for exit for Norwegian PE companies .............................................. 57


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EXECUTIVE SUMMARY

This Master’s thesis analyses changes in the operating performance of 95 Norwegian

Private Equity (PE) targets in the period 2003-10 and the changes of the strategies of

Norwegian PE firms, with the goal to identify the impact of the financial crisis.

To analyse changes in operating performance, a quantitative study is conducted. We

analyse the performance relative to peers by comparing mean values. We separate our

sample period into a pre-recession period (03-07) and a recession period (08-10). In

addition, we perform tests on the isolated holding performance of the targets. Further,

we chose performance measures to capture growth, profitability, capital management

and leverage. In turn, these four classes formed our four hypotheses.

As for growth, our findings show evidence of an extraordinarily high sale CAGR for

the targets in the pre-recession period. In addition, when looking at isolated holding

performance, we find proof of positive industry adjusted growth.

In terms of profitability, the target companies are outperformed by their peers on all

measures in both periods when comparing mean values. In addition, we found

evidence of a negative change in profitability throughout the holding period.

Considering capital management, the targets show evidence of lower efficiency in the

pre-recession period while the opposite is true in the recession period. When looking

at isolated capital management, the targets outperform the peers.

As for debt, targets’ leverage ratio, compared to peers, is lower in the pre-recession

and higher in the recession. This result is remarkable as it challenges the view that

buyouts are heavily leveraged. Further, targets decrease their ratio less than peers.

To strengthen our analyses we did numerous robustness tests. We lagged the targets

equity in the ROE-calculation, removed all oil-related companies and made a sample

of targets with a holding period of at least five years and a holding of minimum two

years in both periods. These tests did not change our conclusions.

To examine potential changes in the strategies of the Norwegian PE-firms, a

qualitative study is performed. A survey conducted reveal that PE-firms use less debt

because of availability. In addition, they use more time on their existing portfolios

rather than new investments because of a challenging exit market, and consequently

that their holding periods has expanded during the recession.


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ACKNOWLEDGEMENT

Conducting this thesis has been an exciting, but also challenging task. We are

delighted with the product, and we want to give an acknowledgment to the ones that

helped us throughout the process. We want to give a special thank you to our

supervisor Bogdan Stacescu for superior advising and guiding. Further, we want to

thank Menon Business Economics and Gjermund Grimsby in particular, for their

contributions. In addition, Kenneth Karlsen at FSN Capital deserves credit for

valuable inputs to our thesis.


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CHAPTERS OF THE THESIS

Chapter 1: Introduction and Motivation

The chapter offers a brief explanation of what we want to analyse and how we are

going to do it. Further, it describes why we want to conduct this thesis.

Chapter 2: Industry presentation

The chapter touches upon issues as what is PE, why PE, types of PE, the organization

of PE and how the investment process of PE works.

Chapter 3: Market report

The chapter firstly present the potential of the market. Later on, a full market report

with trends in investments, fundraising and disinvestments is offered.

Chapter 4: Theory

The chapter explains the relevance of the agency theory, leverage theory, the wealth

transfer hypothesis and parenting advantage in relation to PE.

Chapter 5: Previous research

The chapter maps out relevant theses and other studies in order to give a broad picture

of previous findings and to make sure that we separate ourselves from their work.

Chapter 6: The influence of economic cycles

The chapter is supposed to give an overview of the advantages and disadvantages a

financial crisis entails for PE investments.

Chapter 7: Data

The chapter describes how we have gathered the data, the challenges we have

encountered, and our sample.

Chapter 8: Preparation and methodology

The chapter outlines the two parts of the thesis; namely the quantitative and the

qualitative part. As for the quantitative part, our research question is presented.

Further, it describes how we assign peer groups, and our statistical method.

Concerning the qualitative part, our second research question is presented, and it

describes the methodology of this section.


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Chapter 9: Performance measures

The chapter present our selected performance measures. The financial indicators are

selected to capture the changes in performance of the targets. The measures are

separated into growth, profitability, capital management and leverage.

Chapter 10: Hypotheses

The chapter outlines our four hypotheses, and we expect that the target companies

outperform their peers on each and one of them in both periods. That is, that they

experience higher growth, higher profitability, improved capital management and a

higher leverage ratio.

Chapter 11: Results and testing

The chapter present all results from both periods, and the results found in the holding

period.

Chapter 12: Robustness tests

The chapter outlines our robustness tests. We have lagged the target companies’

equity in the ROE calculation, removed all oil-related companies and made a sample

of targets with a holding period of at least five years and a holding of minimum two

years in both periods.

Chapter 13: Survey

The chapter present our findings concerning the changes in the PE-firms rationale for

investing, attractiveness of industries, financing, and exit strategies.

Chapter 14: Limitations and further research

The chapter describes our limitations of the thesis and our suggestions for further

research.

Chapter 15: Conclusion

In this chapter our main conclusion is presented.

Chapter 16: References

Chapter 17: Exhibits


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1 INTRODUCTION AND MOTIVATION

Private Equity (PE) has experienced an explosive growth in recent years and today

influences the international economy. The industry enjoys broad recognition

especially in the US, but it seems like there is limited knowledge about the subject in

Norway. That is, PE does not get a lot of attention in Norwegian media or other

Norwegian literature. Consequently, we feel that this paper is able to contribute to

and complement existing literature. Furthermore, we find the industry fascinating due

to its active investment role and its important role as a source of private capital.

We want to investigate whether PE is special. PE is costly, but still seems to be a

highly valued asset class as it is associated with high returns - often above industry

averages. Further, the high returns seem even more satisfying as investors find the

risk to be lower because of portfolio diversity. On the other side, there are aspects

making a PE-investment less desirable. E.g. they are affected by frictions such as low

liquidity that make investors demand higher returns because of the long time horizon

the capital gets tied up for. In addition, PE firms often invest in high growth

companies, which increase portfolio risk. This “risk-story” also intrigues us. That is,

if PE were over performing everybody all the time and in addition at a “low” risk, it

would be difficult to understand why not everybody invests via PE. To discover

whether PE is special also in periods with high risk, we include the financial crisis in

our thesis. We have formed the following research questions:

“Is the operational performance of the PE fund’s portfolio company significantly

better compared to its peers, relative to both pre- and recession period?”

“Are the strategies of the PE funds affected by the financial crisis?”

The two research questions complement each other and will give us a good overview

of the industry and how it has been affected by the “financial crisis” – they should

reveal the full “risk-story”. The first question implies that we are looking at a given

investment strategy and checking its performance in both good and bad times. The

second question deals with the change in investment strategies, so these results will

build on the answers to the first question.


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In order to answer the two research questions, we have separated our thesis into two

parts; one quantitative- and one qualitative part.

In the quantitative part, we will analyse the performance of the PE target companies’

in a pre-recession period (2003-07) and in a recession period (2008-10), and further

compare their performance with peer groups. Financial indicators covering growth,

profitability, capital management, and leverage will capture the performance. This is

covered in chapter 9. We will assign one peer group to each target company by using

a 5-digit industry code and the level of revenue for the year of the acquisition. This

will allow us to compare the isolated holding performance of the targets with a set of

comparable firms. Moreover, we will merge these peer groups into one big group,

and further separate this group into the two time periods we want to investigate. By

doing this we can compare the mean values of our entire sample with one peer group.

The latter will serve as our main purpose of this quantitative part, while the analysis

of the isolated holding performance is included to add depth and further

understanding to our results, which will be presented in chapter 11.

In order to exam the robustness of our results, several tests will be performed. These

tests will be presented in chapter 12.

In the qualitative part, we will analyse potential changes in the strategies of the

Norwegian PE-firms. In order to do this we will conduct a survey and the results from

this survey will be presented in chapter 13. The survey embraces rationale for

investing, the attractiveness of industries, financing, underlying factors for value

creation, and exit strategies. We want to examine whether the financial crisis has

made the PE firms change their strategies in these areas.


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2 INDUSTRY PRESENTATION

2.1 What is private equity?

PE is a source of investment capital from individuals and institutions with the purpose

of investing and acquiring equity ownership in nonpublic companies at different

development stages. Partners at PE firms raise and manage funds with the goal of

achieving highest possible returns for their shareholders within the risk profile of the

fund. The investments horizon is usually medium to long term (8-12 years) (NVCA

2011a).

Another important aspect of PE funds is that they engage in “active ownership". This

includes representation in the companies’ boards, counseling (both outside

consultancy and own expertise) and close monitoring of the company's management,

as well as supervising the operations and development of the acquired companies.

2.2 Why private equity?

For companies wanting to raise equity, the total capital market consists of the private

and the public market. If a private company wants to go public, an initial public

offering (IPO) is made. This enables the company to list on a stock exchange and

raise capital in exchange for equity ownership to the investors. Further, if a public

company wants to acquire additional capital, more shares can be issued and sold in

the stock market. The public market is liquid and well organized, but it is expensive

to do an IPO and the costs of getting and staying listed is significant. Due to

regulations, the standards and costs of reporting are high. Hence, these markets are

unreachable for most small and medium size companies which accounts for the vast

majority of all businesses in the economy (Spilling 1998). These companies also have

the wish and intent to grow and expand, and thus need capital to fulfill their

ambitions. This capital can be provided via PE.

In addition, the expertise of the PE funds can further help the target company to the

next level, whether it is launching a product, going international, going public (IPO)

or becoming more efficient. Here is where PE finds its place in the capital market.

Furthermore, PE firms often acquire public companies, where the goal is to take the

company private, restructure, and capitalize on the value creation potential of the

company. Google, Apple and Facebook are all examples of companies that have been


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previously PE-backed. The expertise and capital they got from the PE-firms may be

key reasons for their dominant position today.

2.3 Types of private equity

PE is commonly separated into Venture Capital and Buyouts. Venture Capital and

Buyouts is distinguished by the maturity of their portfolio companies. As these

companies are at different stages in their life cycles, the two PE-types also vary in

terms of investment strategies. Venture capital often has a main focus on product

development and implementing the “right” market mix. These companies often need

capital to develop and expand. Buyouts are often mature companies with solid cash

flows that can manage the amount of debt raised to buy the target company. The main

focus is often switched towards restructuring and further development of the

company. The involvement of PE-firms often includes the acquisition of majority

shareholdings in the company, and the aim is to revitalize the company after the

investment. Among other things, this may be relevant in connection with company

internationalization (NVCA 2011a).

Figure 1: The separation between buyouts and venture capital

Furthermore, the buyout part of PE investments is commonly divided into leveraged

buyouts (LBOs), management buyouts (MBOs) or venture capital buyouts. LBOs

are defined as “acquisitions of public companies by private investors who finance a

large fraction of the purchase price with debt” (Brealey, Myers and Group 2003).


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MBOs have many of the same characteristics as other types of buyouts with the main

difference being that the management acquires the firm. However, not all PE

investments are based on debt financing as financing can come through equity

participation as well. In this paper we focus only on buyouts.

2.4 The private equity organization

PE funds are organized differently from other types of investment funds. The funds

are usually divided into limited partners (LPs) which are the investors, and general

partners (GPs) which are the management of the PE firms. The majority of capital

raised from the LPs is from institutional investors such as banks, pension funds,

insurance companies, mutual funds etc., while private investors usually represents a

minority stake. The LPs have no direct impact on how the fund is managed but the

investments are made on strict guidelines about risk, time to maturity, etc. that gives

the investors indirect control of the way the fund is run (Grünfeld and Jakobsen

2006). The GPs is the management company that is responsible for the daily activity

of the funds and the investments made by the LPs. The GPs get paid from yearly

management fees and success fees depending on the performance of the fund or the

investment.

Figure 2: PE organization structure

Further, as shown in the PE organization structure presented by the European Private

Equity and Venture Capital Association (EVCA)1 (figure 2), there can be outside

1 http://www.evca.eu/entrepreneur/default.aspx?id=3222


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advisers such as consultancy companies, industry experts, etc. in the investment

process.

2.5 The investment process

The fund manager usually manages several funds and before a new fund is initiated,

issues, such as fund size, investment strategy, industry focus and geography is

decided2.

After the framework for the fund is set, the fundraising period starts and usually lasts

from 6 to 12 months depending on the interest from investors. When the fundraising

period is complete, the GPs screen potential target companies. When a candidate is

found, the PE management approaches the company either directly or through an

intermediate part. The next step is to do a due diligence to map out the target (legal,

tax, technical and financial issues) and industry. After the research is done, but before

the final contract is signed, the negotiation starts and a deal is lined up containing

specific terms and conditions such as covenants and warrants, containing the

purchase price, management agreements, etc. After the deal is signed the GPs

restructure the company to extract its value potential while closely monitoring both

operations and financial performance. As the investment period comes to an end, the

PE fund exits either through an IPO, industrial sales, management buybacks or other

disinvestment strategies3.

2 http://www.argentum.no/Main-categories/Nordic-PE/Fundraising2/ 3 http://www.nvca.no/userfiles/NVCA_rbok_2010_web.pdf


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3 THE NORWEGIAN PE MARKET

The Norwegian PE market is still quite new and not fully developed. However, it

seems to be a market with high potential that is yet to be extracted. Further, the

Norwegian market is growing rapidly. As an illustration, in 2001 the companies

backed by Norwegian PE funds had 5.000 employees, while this number has

increased to 60.000 by the end of 20114.

The Nordic PE market has shown a great track record and serves several beneficial

socio-economic factors, which leads it to be an attractive investment opportunity. In

addition, Norway is appealing much because of its stable economic condition and

high BNP per capita. Moreover, large portions of the investments are mature, leading

to high activity in 2011 and high-expected activity in 2012. Norway is ranked in the

top quartile in all the different categories on the last Global Venture Capital and

Private Equity Country Attractiveness Index, and is currently ranked as the 13th most

attractive market in Europe for investments (IESE (2012)5. In the latest market report

published by Argentum they also find that Norwegian companies are very interesting

to international actors. Over two thirds of all exits in 2011 involved an international

investment in a Norwegian company (Argentum 2011).

Furthermore, on the first of February 2012, a PE Research Centre focusing on the

Nordic market was opened at NHH, making it the first of its kind in the Nordic

region, and one of few in Europe. “The Argentum Centre for Private Equity will be

an independent academic research Centre. The objective of the Centre is to bring

together researchers and practitioners to further understand how private equity

works, strengthen the understanding of best practices in private equity management

and the contributions of private equity to businesses, investors and society (Argentum

2012).” The initiation of the research center underlines the growing recognition and

academic focus on PE in Norway.

3.1 Market report

3.1.1 Investments “Norwegian PE firms invested a total of 4 billion NOK in 2011, a decrease of 34

4 http://webtv.tv2.no/webtv/sumo/?treeId=114 5 http://blog.iese.edu/vcpeindex/norway/

http://webtv.tv2.no/webtv/sumo/?treeId=114















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percent from 2010, while at the same level as 2009.” As shown in the table below the

invested PE capital is mainly in the buyout segment (NVCA 2011b). Further, the drop

in total amounts invested is in large because of a decline in the amount invested in

buyouts.

Figure 3: Investment activity in Norway separated in VC and BO

In Europe, the development in buyout investments has been quite volatile in the same

period, with a 100 percent increase from 2009 to 2010. The amount of capital

invested in seeds has decreased dramatically the last couple of years both in Norway

and in Europe, much due to the lack of funds in this segment. The investments by

venture capital funds have decreased every year with a large drop in 2009, and in

2011, and accounts for NOK 1.2 billon. This is quite similar to the development in

Europe.

The decline in number of investments is primarily due to a strong drop in venture and

seed investments, which is clearly demonstrated in the figure 4 below. Venture

investments fell almost 50 percent compared to 2010, while the number of buyout

investments remained stable (NVCA 2011b). Venture capital represent a significant

part of the total PE investment activity and a lag in the level of investments hurts the

early stage target companies. In particular, the seed segment has been affected by the

drop in allocated capital; both in 2007 and in 2008 there were seed investments that

amounted to over NOK 200 million, while in 2011 it was reduced to one investment

0

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3000

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6000

7000

2008 2009 2010 2011

Seed

Venture

Buyout


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and a total amount of NOK 7 million (NVCA 2011b). Hence, seed investments seem

to be undercapitalized and almost non-existing for new investments in Norway

(PLC)6. This is of concern as these funds are critical for start-up companies’ future

development and thus economic growth through this innovative business segment.

Buyouts, however, seems to be on the rise or at least remains stable (NVCA 2011b).

The difference in buyout investments compared to venture and seed investments

could be to some extent based on interest rates. It has been found that buyouts are

more sensitive to interest rates, and the rates have been declining.

Figure 4: Number of PE investments separated in venture capital and buyouts

Another interesting feature when looking at the recession period is that the

relationship between PE acquisitions and add-on investments made by PE companies

seem to move with economic cycles. After plotting investments and add-ons we

obtain figure 5 below. Our figure indicates that in periods of economic downturn PE

companies focus less on new investments. The reason might be that during recessions

it can be harder to sell off companies, and consequently targets are kept and

developed further while waiting for a better market to realize the investment. In

addition, during economic setbacks the fight for the few good targets increase,

driving the price up to levels which offer low returns. Thus, PE companies give

6 http://crossborder.practicallaw.com/9-500-9675?source=relatedcontent#a77761

0

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30

40

50

60

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80

90

100

2008 2009 2010 2011

Seed

Venture

Buyout

http://crossborder.practicallaw.com/9-500-9675?source=relatedcontent#a77761


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priority to their existing portfolios until the market conditions improve and desirable

acquisitions can be made.

Figure 5: Relationship between new investments and add-ons

Since 2001 the capital under management has increased from NOK 7.5 billion to

NOK 61 billion by H1 2011. In the period 2003 to 2008 there were a strong increase

in the capital pool managed by Norwegian funds, but after 2008 it has stabilized

around NOK 60 billion. Except for a strong growth in 2008, the capital under

management for the buyout segment has been stable the last years, and account for

over 50 percent of the total committed capital (NVCA 2011b). Further, the difference

between the venture and buyout segment is much smaller when looking at capital

under management, indicating that capital allocated to buyout has been utilized more

frequently.

3.1.2 Fundraising Three new funds were established in 2011, and the total capital raised surpassed NOK

11 billion. This is much higher than in 2009 when only NOK 900 million were raised,

and in 2010, but not as high as in record years of 2006 and 2008. In the period

between 2006 and 2008, 45 new funds were established and over NOK 35 billion

were raised in the period (NVCA 2011b). We also notice that the amount of capital

raised compared to new funds points towards larger funds, which is reflected by more

activity from buyouts and less by the seed segment. This might arise from smaller PE

companies or newly started companies struggling to raise capital in a more selective

market, while more established PE companies with a solid track record might attract

capital more easily. These companies are in general buyout or venture companies.

0

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Nu

mb

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Relationship between new investments and add-ons

New investments

Add-on investments


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Figure 6: New capital committed and the number of new funds

Further, there has been an explosive development in the percent of new capital

committed coming from foreign investors. The Norwegian market has been seen as

more stable and safer than most other markets during the recession and hence it

should come as no surprise that capital is flowing into the Norwegian PE sector.

Figure 7: New capital committed and share of foreign capital

Despite low figures in both 2009 and 2010, Norway is raising more funds than the

rest of Europe per capita. The reason for not having data from 2001 to 2011, like the

other figures, is because of a lack of data availability. In 2010, EUR 100 per

Norwegian were raised to PE-investments while the corresponding figure for the

average European amounted to EUR 32. Figure 8 below also makes it clear that

except from 2009, the Norwegian PE industry is growing faster than the PE industry

in the rest of Europe when looking at new capital allocated per capita. In 2010 the

0

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30

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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New comitted capital New funds


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ratio between funds raised in Europe and Norway per capita was at its highest ever

(NVCA 2010). It is, however, worth mentioning that these results might be biased in

the sense that per capita figures may look “too good” for countries like Norway

which are rich and have a low population. That is, the differences may in fact not

necessarily be that large, but we believe that the numbers do illustrate important

aspects of the development of fundraising.

Figure 8: New capital invested per capita in Europe and Norway

3.1.3 Disinvestments As for exits, trade sales make up for approximately 25 percent of the exits and is the

most commonly used strategy in Norway. The buyers are typically companies

wanting to grow further, or acquire a special technology or expertise the portfolio

company possesses. Furthermore, there has been an increase in exits from 2009 to

2011 (NVCA 2011b). However, the number of exits is much lower than before the

recession when general activity in PE was higher. The recent rise in exits can be

connected to PE funds maturing after the enormous amount of new funds initiated in

2006 (5 year is a common maturing period for PE funds). As a result, it is expected

that the trend of a rise in exits will continue into 2012 as several PE funds have longer

holding periods or have chosen to extend their holding due to low returns or low

investor interest. This development is important for the understanding of our sample,

as the sample have a high proportion of entries before the crisis and a low number of

exits during the crisis. There will be a further description of our sample in chapter 7

which covers the data of this thesis.

0

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21

Figure 9: Number of exits separated in seed, venture and buyout

3.1.4 Summary market report The market report reveals that the number of investments has decreased from 2010 to

2011, but they are at the same levels as in 2009. The large drop is mainly because of

the decrease in venture and seed investments, as buyout levels have remained

relatively stable. Furthermore, the relationship between investments and add-ons

appear to be correlated with economic cycles. This indicates that PE-funds use more

time on existing portfolios rather than new acquisitions in periods of a recession.

The number of new committed capital has increased from 2010 to 2011 and is closing

in on the high levels found in 2008, while the number of new funds initiated is low in

the years of the recession. Furthermore, new committed capital from foreign investors

has increased during the crisis. This is not that surprising as Norway has been less

affected by the crisis compared to most other countries, and hence it serves as a safer

market to invest in.

As for exits, there have been very few divestments in the years of the recession. The

levels are, however, increasing in 2011, indicating that the exit market is recovering.

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22

4 THEORY

4.1 Agency theory

“Agency theory is concerned with resolving two problems that can occur in agency

relationships. Firstly the goals and desires of the principals and the agents can be

different, also monitoring of the management can be difficult or expensive and thus

the shareholders can’t know if the management behaves appropriate. Secondly there

can be a problem of attitude towards risk" (Eisenhardt 1989).

The agency problem arises because of conflicting interests of shareholders and

management. That is, shareholders want to maximize share price and dividend yields,

while managers want to maximize personal returns, for example meet quarterly or

annual report deadlines in order to secure bonuses (Insight and Lambert). When

dividend yields are raised, monitoring will be improved. The reason is that high

dividends “force” the company to raise capital on a regular basis, and hence the free

rider problem will be reduced. That is, not one person can provide service for

everybody because now investors need to monitor the company themselves in order

to find out whether it is attractive or not (Easterbrook 1984).

Lundgren and Norberg (2006) argue that it is “essentially three different sources of

value creation in leveraged buyout transactions emanate from the basics of agency

theory and reduction of agency costs, (i) the incentives realignment hypothesis, (ii)

the control hypothesis and (iii) the free cash flow hypothesis”.

4.1.1 The incentives realignment hypothesis The mentioned conflicting incentives of shareholders and managers can be aligned

through buyouts. For example, a management buyout may result in management

getting an equity share, or a higher equity share, in the company and consequently get

similar incentives as the shareholders – increase share price. In order to do that,

managers need to maximize firm value, and not necessarily accomplish personal

goals.

When managers have an incentive to maximize performance, benefits can be that they

work harder leading to operational efficiency. In addition, it encourages management

to only undertake positive NPV projects. This will increase firm value. However, it

may also lead to underinvestment (risk aversion).


23

4.1.2 The control hypothesis After a buyout transaction the target company is often taken private, and will have a

less dispersed ownership. When turning private, the secondary market for selling

shares disappears and hence an easy exit opportunity is not available. This will

increase the shareholders’ incentives to monitor and this may increase wealth.

Furthermore, the buyout investors have expertise and may increase wealth even

further as they are better at monitoring compared to other equity investors.

4.1.3 The free cash flow hypothesis There are both advantages and disadvantages of having debt. A high leverage ratio

leads to high interest payments. Consequently, one needs to allocate money to pay the

interest. This is a disadvantage in the sense that you reduce manager flexibility, and it

may lead to a short-term orientation. In addition, the high interest payments increase

the probability of default because you are more exposed to unfortunate economic

cycles. On the other hand, it can serve as an advantage; given that a lot of the cash

flows have to be set aside for interest expenses, it leaves less room for insufficient use

of the remaining capital. That is, debt reduces the agency costs of free cash flow by

reducing the cash flow available for spending at the discretion of managers (Jensen

1986).

4.2 Leverage

Miller and Modigliani published two path-breaking articles in 1958 and 1961. The

Miller-Modigliani irrelevance theorem (MM proposition 1) argues that under certain

conditions, namely a well-functioned market, rational investors and neutral taxes,

firm value will not be affected by the capital structure. That is, decisions concerning

the financial structure affect only how the “corporate pie” (the statistical distribution

of income that the firm generates) is shared, but has no effect on the total size of the

pie (Tirole 2006). However, these conditions are questionable in real life, and Miller

and Modigliani later extended their proposition 1 and concluded that the tax shield

from debt financing also affected firm value. By this extension, the optimal capital

structure was 100 percent debt financing. However, a capital structure only consisting

of debt will increase the probability of financial distress. Consequently, a trade-off

theory was developed, where one should take the trade-off between tax benefits and

the increased probability of financial distress into account. “In the static tradeoff


24

theory, optimal capital structure is reached when the tax advantage to borrowing is

balanced, at the margin, by costs of financial distress”(Myers 1984).

Graham (2000) finds that by leveraging up to the point where the marginal tax benefit

begins to decline, a firm can add 7,3 percent to firm value when the personal tax

aspect is subtracted. However, Molina (2005) measures the effect of leverage by

looking at the default probability represented by the firms’ credit ratings. As a result

he finds that leverage causes financial distress, which largely offsets the benefits

found by Graham.

4.3 Wealth transfer hypothesis Eberhart and Siddique (2002) investigate the wealth transfer hypothesis and claim

that reducing leverage will reduce the probability of financial distress. Hence, there is

a transfer of wealth from stockholders to bondholders. Further, increased leverage

will increase the probability of financial distress; the wealth transfer than goes in the

opposite direction. With their assumptions and a constant capital structure, the wealth

transfer hypothesis predicts that a change in leverage should be positively correlated

to future stock returns. In a study done by Bradshaw et al. they found the opposite;

that changes in leverage are negatively related to future stock returns (contradictory

to the wealth transfer hypothesis) (Bradshaw, Richardson and Sloan 2006).

4.4 Parenting advantage

According to Goold, Campbell and Alexander (1998) “the parent can only justify

itself if its influence leads to better performance by the businesses than they would

otherwise achieve as independent”. Hence, a PE sponsor may create value because of

their expertise and other benefits they have to offer. As mentioned, the governance

model they apply is a feature that public firms are struggling to copy. In addition,

they employ a time horizon that is long enough to implement drastic changes, but at

the same time short enough for them to have the motivation to complete all the

changes.


25

5 PREVIOUS RESEARCH

As for previous theses, there are a few that look at the buyout segment. However,

most of these are looking at the Swedish buyout market. In a thesis written by

Lundgren and Norberg (2006), they looked at the operating performance of 67

Swedish leveraged buyouts between 1988 and 2003. Contrary to most other results,

they found no significant industry adjusted improvements in operating performance

in the first three years after the buyout. In the pre and post exit period, they did not

find any clear pattern, which indicates that performance was in line with the industry

peers.

Another thesis, written by Grubb and Jonsson (2007), analysed the magnitude and

determinants of PE sponsored buyouts’ impact on the operating profitability in

Swedish buyout companies exited between 1998 and H1 2006. They found that

buyouts have a significant positive impact on the companies’ operating performance.

Hence, there are contradicting results concerning this topic. In addition, Gulliksen,

Wara and Hansen (2008), a NHH thesis, wrote about PE performance in Scandinavia.

They concluded that PE backed companies outperform their peers in measures of

EBITDA-levels, ROA-levels and growth. Furthermore, and interestingly, they found

that the levels of debt are much lower than what is commonly believed. Another

NHH thesis, written by Andresen and Sandnes (2009), looked at whether Norwegian

PE firms were able to create value in their target companies. They find that target

companies have significantly higher revenue growth than their peers. Further they

find EBITDA margin and ROA to grow less than their comparable firms. These

results are, however, not significant.

The largest study done on the Norwegian market is written by Grünfeld and Jakobsen

(2006). They study 12,353 Norwegian PE-backed companies in the period 2000-

2004, and consequently do not take the recession into account. They find that

Norwegian firms backed by PE funds have relatively higher growth rates and increase

more in value than the relative industry average.

However, a survey that does take the recession into account is the study done by The

Centre for Management Buy-out Research (CMBOR) and the Credit Management

Research Centre (CMRC). They produced a report that tracked the performance of a

large sample of PE-backed buyouts in the UK market between 1995 and 2010 and


26

compares this to a sample of other private companies and stock exchange listed

companies. They split their sample period in two with one pre-recession period

(2003-06) and one recession-period beginning in 2007 when the insolvencies began

to rise and compared the mean values of the selected financial ratios for the two

periods. The report concluded that PE backed companies showed a stronger economic

efficiency and profitability during the recession as compared to private and listed

peers. In addition, they found a lower failure-rate for PE-backed buyouts than for

non-PE backed buyouts. This suggests that PE-backed buyouts are not more likely to

fail than industry peers, even though that is contrary to some commentators’

expectations (Wilson et al. 2011). This study is similar to what we want to look at,

and it will be interesting to see whether we find the same results when taking on the

Norwegian market.

As for other studies, a McKinsey research shows that the top 25 percent of PE funds

outperform the relevant stock market indices. Moreover, they do so by a considerable

margin – and persistently (Beroutsos, Freeman and Kehoe 2007). Other studies, like

the portfolio company study conducted by SVCA in collaboration with Ernst &

Young looking at both venture capital and buyout, also confirm that PE outperforms

the market in Scandinavia. They found that PE backed companies had 2 percentage

points higher revenue growth and higher profitability compared to their peers

(Riskkapitalföreningen and Young).

In a large study, comprising almost 40 percent of the U.S. Venture Economics

universe from 1984-2010, Robinson and Sensoy (2011) found that in their sample the

PE funds outperformed public equities, on average. Furthermore, a study by Harris,

Jenkinson and Kaplan (2012), found that buyout fund returns in the US have

outperformed public markets for a long period of time, while venture capital funds

outperformed public market in the 1990s, but have underperformed public equities in

the 2000s.

DeGeorge and Zeckhauser (1993) focused on the buyout category. Their findings

were that reverse LBO’s substantially outperform comparison firms in the period

before going public (IPO), but underperform them in the following period even

though net performance remains positive. Another study that is often referred to is

Kaplan (1989), where he looks at 48 large management buyouts. His main focus is on


27

operating income (before depreciation), net cash flows, and reductions in capital

expenditures. He found that in the three years after the buyout, these companies

experience increases in operating income, decreases in capital expenditures and

increases in net cash flow.

There are, however, studies that find the opposite; that PE backed companies do not

outperform their peers or the market. Kaplan and Schoar (2005) find that buyout and

VC funds underperform the S&P 500. Phalippou and Gottschalg (2009) paper sheds

light on the return distribution offered by the PE industry over the 25 years of its

existence. They found evidence that the performance of PE funds is lower than the

performance of the S&P 500 by as much as 3.8percent per year.

The study by Saga and Breyholtz (2011) did look at how the financial crisis has

influenced PE-backed buyouts in Norway. They found that PE backed companies

experience better crisis management and that they are better suited to leverage their

capital structure compared to peers. However, the period studied was only from 2006

until 2009 and the sample size amounted to only 36 target companies. By conducting

a more extensive study both in terms of data size and time period we will separate

ourselves from their thesis. Furthermore, the survey we have sent out to the PE-firms

will identify possible changes in strategies due to the financial crisis. By not only

looking at possible changes in efficiency or profitability, we separate our work even

further from existing research.


28

6 THE INFLUENCE OF ECONOMIC CYCLES

Richard Lambert, Director-General the Confederation of British Industry (CBI) said

that, and we quote, “the spectacular returns generated by some private equity houses

over the past half dozen years have been derived from three sources. High leverage,

rising asset prices, and a business model that cuts out the agency problem inherent in

listed companies, by aligning exactly the interests of owners and managers”(Insight

and Lambert). However, he added that the credit crunch and global economic

slowdown had brought those days to an end, temporarily at least7. There are both

supporting and contradicting views to this statement.

When you have high leverage and/or depend on rising asset prices you are exposed to

business cycles. Phalippou and Zollo (2005) actually document that fund performance

co-varies with both business cycles and stock-market cycles. They find that to be an

unattractive property and hence this supports the view of Lambert, that these sources

of success turn negative when the market is in a recession. Furthermore, when you

have high leverage you are exposed to business cycles, as the probability of distress is

positively correlated with debt (Eberhart and Siddique 2002). As the economy enters

into a credit crunch, debt will be less available and more expensive, and hence the

number of deals will decrease. Further, the exit-market will also suffer as the general

valuation in the market decrease and consequently it is less attractive to realize

investments. In addition to these risks and as mentioned, PE-investments are affected

by frictions (such as low liquidity) and this additional risk requires high returns.

Despite that the PE-industry seems to be characterized by being highly cyclical, some

researchers find that PE-firms outperform their peers both in recessions and under

healthy market conditions and hence contradict the view of Richard Lambert. As

mentioned, Wilson et al. (2011) concluded that PE-backed companies in the UK

market showed a stronger economic efficiency and profitability during the recession

as compared to private and listed peers. In addition, they found a lower failure-rate

for PE-backed buyouts than for non-PE backed buyouts, suggesting that they are not

more likely to go bankrupt despite a higher leverage ratio. Bernstein et al. (2010)

highlight many interesting arguments for the success of PE-firms, even when the 7 http://www.dofonline.co.uk/content/view/1693/116/

http://www.dofonline.co.uk/content/view/1693/116/















29

market is in a recession. One possible reason may be that “their investors constitute a

concentrated shareholder base, which can continue to provide equity financing in a

way that might be difficult to arrange for other companies during downturns”. This

may point toward fewer failures when you are acquired by a liquid PE-firm and this

supports the mentioned result by Wilson et al. (2011).

As another possible reason, Bernstein et al. suggest an argument, which was

originally proposed by Jensen (1989). Jensen proposed that “LBO’s do get into

financial trouble more frequently than public corporations do. But few LBO’s ever

enter formal bankruptcy. They are reorganized quickly (a few months is common),

often under new management, and at much lower costs than under a court-supervised

process”. That is, their ability to adjust quickly may enable them to manage a

recession in a better way than their peers. In addition, Bernstein et al. (2010) suggest

that “the high debt share in PE transactions forces them to respond earlier to negative

shocks in their business”. This might make PE companies more aware and hence

restructure with early signs of a slowdown in the economy. In a lecture from Yale

University, Stephen Schwarzman, the co-founder of Blackstone Group talked about

the future evolution of PE8. Concerning the impact of the credit crunch he said that it

of course did influence the availability of borrowing. However, he underlined that

this has happened before, and PE still remains because capital keep coming back – it

is just growing in step-functions and not in a linear way.

We take these arguments into consideration and will investigate whether Norwegian

PE-targets are able to outperform their peers in light of the recent/ongoing recession.

Norway has been less influenced by the “financial crisis” than the UK (see figure 10),

where researchers have found PE to outperform peers, due to more stable government

finances and lower unemployment rates and hence we expect to find the same results

as the mentioned study.

Further, it is not easy to define the “financial crisis”. As for Europe in general, and

the US, the crisis perhaps climaxed with the downfall of Lehman Brothers in

September 2008, but many regard the crises to have started as far back as in early

8 http://academicearth.org/lectures/stephen-schwarzman

http://academicearth.org/lectures/stephen-schwarzman


30

2007. We define the “financial crisis” in Norway to begin 1st of January 2008. The

year 2008 was chosen because of Norwegian GDP growth numbers falling to

0percent in 2008 and 1st of January specifically because we then easier can

implement the accounting data from the target companies (see figure 10).

Figure 10: GDP growth in Norway and in the UK, and the percentage change in OBX 2006-2011 (Source

OECD and Oslo Stock Exchange)

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31

7 DATA

7.1 Data gathering The data we needed to identify was firstly a list of all Norwegian PE buyout-firms,

secondly all PE-funds, thirdly all deals done by these funds with both entry dates and

exit dates, and finally get sufficient financial data from all the target companies in

order to form the selected performance measures. Furthermore, we needed to collect

comparable firms, and their financial data.

The last activity report made by Menon Business Economics for the Norwegian

Venture Capital Association (NVCA) provided us with a list of all the Norwegian PE

buyout-firms (exhibit 1). With this list in place, we entered the firms’ homepages in

order to identify their funds. This was the easy part. The hard part was to identify all

deals made by these funds. We started looking at the firms’ homepages, but shortly

we discovered that only a number of selected deals were listed and furthermore they

were often listed neither with entry dates nor exit dates. To supplement the deals we

found on the companies’ homepages we contacted Menon Business Economics

(Menon). They provided us with a list of transactions from 2003 until today. That is,

the list only includes entries from 2003 and until 2010. Consequently an investment

entered in for example 2001 is not included regardless whether or not the PE fund has

exited. Further, as long as the entry is done in 2003 or later, the deal is included in our

sample whether it has been exited any time before 2010 or not even exited yet. This

list also included entry and exit dates, and the financial data we needed to form our

performance measures.

In order to gather any missing financial data from the target companies we used Proff

Forvalt, which is a publicly available database. To make up the peer groups, we got

access to the database of CCGR (Center for Corporate Governance Research). One

peer group will be assigned to each target by using 5-digit industry codes and the

level of revenues for the year of the entry. This will be further explained in chapter 8

which cover our preparations and methodology.

7.2 Challenges We have met several challenges regarding our sample. Firstly, we had to limit our

thesis to only include buyouts, as we, in accordance with Menon, concluded that the


32

data for venture capital deals would be limited and/or incomplete. As our research

questions are closely linked, we also chose to only look at strategy changes for

buyout firms in order to build on the results from the first question. Secondly, and as

mentioned, it was difficult to obtain the entry and exit dates for the deals. Thirdly, the

list provided by Menon lacked some financial data, which we needed to complete by

using other databases. In addition, we had to add deals we had found ourselves.

Furthermore, some of the companies in the deals had incomplete accounting data and

consequently we found them to be not reliable and excluded them from our sample.

Finally, the industry classification was changed in 2007, and hence we needed to

account for that when assigning the peer groups.

7.3 Sample

Figure 11: Sample distribution

The list provided to us by Menon and additional individual research resulted in a

sample size of 95 target companies (exhibit 2). When forming the sample we have

excluded 25 companies because of scarce accounting information or holding periods

of one year or less. Of the excluded companies, most has been exited during our

sample period and hence there will be discrepancy between our sample numbers and

the numbers from the buyout industry as a whole. We have illustrated the sample

distribution above. Since the companies we look at do not have entries before 2003, it

is natural that there are no exits in 2003 and 2004, as the holding period often is five

years or more. The number of exits peaks in 2005 while there are quite few exits

during the financial crisis, which is in accordance with the findings in the market

report presented in chapter 3. That is, there seem to be more add-ons than new

0

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33

investments when the market is in a recession as PE-funds seem to focus more on

their existing portfolio rather than new acquisitions because it is harder to get

financing and that there are fewer attractive deals. To illustrate that the exit market is

recovering and that several investments are mature, the numbers of exits in 2011 is

included.

The fact that our sample has few exits during the crisis makes the investments even

more interesting to analyse. The reason is that the main scenario of the sample is

entries before the crisis, that is in the “booming” years, and that they are held

throughout the crisis. Consequently, we are able to get a picture of how the crisis has

affected these investments.

As for the sample for our strategy part, the list of buyout companies is, as mentioned,

found in exhibit 2. Marin Forvaltning is excluded as they were terminated in the

autumn of 2010.


34

8 PREPARATION AND METHODOLOGY

This section is supposed to clarify how we prepared for doing the analysis and

describes the methodology we used in order to complete this thesis.

The thesis is split in two parts; one quantitative part concerning the performance of

the Norwegian PE-targets and one qualitative part that cover potential strategy

changes.

8.1 Quantitative part: Performance

We will calculate measures to capture the performance. Further, we will compare the

median values of these performance measures for the PE-backed companies with

their industry peers. We will have one pre-recession period (2003-07) and one

recession period (2008-11). Our research question for this part is as follows:

“Is the operational performance of the PE fund’s portfolio company significantly

better compared to its peers, relative to both pre- and recession period?”

In addition, we will look at an isolated performance of the target companies

throughout their holding period. This isolated view will allow us to look at the

changes in the performance measures from the entry and throughout the holding

period, regardless of recession or not. Consequently, this will add depth to our

analysis, as the median values only tell whether the measures are higher or lower, and

not if they have changed while the target is under PE-ownership, or during the

specific time-period.

8.1.1 Peer groups We got access to the database of the Centre for Corporate Governance Research

(CCRC), which has an agreement with BI Norwegian Business School, and hence we

used this database to form our peers. The peer groups are found by using 5-digit

industry codes and revenues for the year of the acquisition. In order to get isolated

performance results, we assigned one peer group to each of the target firms – hence

there will be 95 unique peer groups which will be compared to each target, one by

one. To answer our main research question where we compare median values of the

entire sample with their peers, the 95 unique peer groups will be merged into one big

peer group, and further separated into the two periods we want to get results from.


35

8.1.2 Performance measures We will measure the performance of the PE-backed companies using financial

indicators reflecting growth, profitability, capital management and leverage. In

chapter 9 we will discuss in depth how we will measure the performance of the

targets and peers.

8.1.3 Statistical method To answer our research question in the quantitative part of the thesis, we have broken

down the question into four testable hypotheses, which will be discussed in chapter

10 “Hypotheses”. These hypotheses are supported by previous research and we have

designed the hypotheses based on economic theory and our own expectations.

The Wilcoxon signed-rank test statistic will be implemented in order to see if

potential changes are significant. This test statistic tests the null hypothesis that the

median difference is equal to zero. According to Barber and Lyon (1996), this may be

a particularly useful hypothesis to test when a researcher is concerned with making

inferences about the median firm in a particular sample.

8.2 Qualitative part: Strategy To answer the qualitative part of the thesis, we sent out a questioner (see exhibit 3) to

all the Norwegian PE buyout-firms (exhibit 1). This survey will hopefully help us in

answering the questions we are interested in. We want to find out whether the PE-

firms have had any change in the rationale for investing, if there are differences in the

attractiveness of industries and whether the attractiveness of Norway has changed. In

addition, we want to find out whether the PE-funds have changed their ways of

financing. That is, are they using equally amounts of debt to finance the deals when

there is a credit crunch? Furthermore, we will touch upon factors for value creation,

exit strategies and time horizons for the investments. Most questions in the survey are

asked twice, to uncover the situation before the crisis and during the crisis. Further,

we have given the PE-firms the opportunity to briefly explain potential differences.

Our research question for this part of the thesis is as follows:

“Are the strategies of the PE funds affected by the financial crisis?”


36

9 PERFORMANCE MEASURES

How we are going to measure the performance of the PE-backed companies will be a

key issue in this thesis. It is important that these measures capture the value creation

that PE-firms are able to generate. Berg and Gottschalg (2003) differentiate the value

creation of PE-firms into two types of drivers; direct drivers and indirect drivers. The

difference between the two types of drivers is primarily that the direct drivers are

measurable, while the indirect drivers are harder to measure (Berg and Gottschalg

2003). Further, according to Andresen and Sandnes (2009), “the direct drivers have

in common that they all improve cash flow either through revenue expansion, cost-

cutting and margin-improvements, improved asset utilization or financial

engineering”. The measures we have chosen will serve as the direct drivers, while

we will capture indirect drivers of value creation in the survey part of the thesis.

We have limited the measures down to the ones we find most interesting based on

previous research, our own knowledge of the measures, and the ones that best capture

how a direct driver is defined. In addition, we have interviewed and consulted with

one of the leading PE investment companies in Norway, FSN Capital AS, and gained

valuable inputs on which measures that best describe the target companies’

performance.

9.1 Growth

As measures for growth we will look at the compounded annual growth rate (CAGR)

for sales and use linear approximation to capture the annual growth in EBITDA. The

CAGR shows how the investment would have grown, if it had grown in a steady rate.

This is commonly used to identify changes in growth levels of firms. By using the

sales CAGR, we are able to identify if the entry of a PE-firm has enabled the target

company to expand their revenues. The reasons for not using CAGR for EBITDA is

that we encounter situations were either the ending value or the beginning value is

negative, and hence it is not possible to raise it to any power. In addition, there is also

some mainstream wisdom saying that if the numbers are negative there is no CAGR -

it does not make sense. Hence, we use linear approximation to get a measure for the

annual growth. This is only a rough annualization, and it is not the “right one”, but it

will, however, allow us to compare our results with our peers and consequently form

a picture of the development in EBITDA.


37

9.2 Profitability

As for profitability, we look at the EBITDA-margin, return on equity (ROE) and

return on assets (ROA). Grubb and Jonsson (2007) find the EBITDA-margin relevant

“as price and leverage are often quoted in terms of multiples of EBITDA”. Further, if

the targets have a large amount of fixed and/or intangible assets, the EBITDA-

measure is of a particular interest. The fixed assets and/or intangible assets lead to

heavy depreciation and/or amortization, but since these charges do not factor into

EBITDA it serves as a good way of comparing companies regardless of industry. In

addition, the capital structure often changes after a buyout and hence EBITDA is a

neutral profitability measure as it is unaffected by the capital structure.

ROE shows how the company is able to use the capital provided by shareholders to

generate profit. We are aware of the fact that income excluding extraordinary items is

supposed to give you a better picture of a firm's sustainable performance. However,

PE firms will most likely report ROE’s that include extraordinary items, so for

consistency concerning peer groups we define ROE as net income divided by

shareholder equity. ROA is commonly used as a profitability measure in previous

research, e.g. Barber and Lyon 1996. In their research they define ROA as net income

divided by the average of the opening balance and the closing balance of total assets.

As they experience no changes in conclusions by using end of period assets, we

define ROA as net income divided by end of period assets (Barber and Lyon 1996).

9.3 Capital management

The development in capital management is less intuitive than for growth or

profitability. However, capital management is often associated, or easier understood,

with turnover ratios or days ratios. E.g. a high ratio of days payable outstanding is

associated as an improvement as this indicate better credit terms for the company.

Furthermore, a company show higher efficiency if working capital is a smaller ratio

of sales.

To get a picture of the efficiency of the targets we will look at changes in net working

capital (NWC). NWC is defined as current assets less current liabilities. This is also

supported by Lundgren and Norberg (2006). Furthermore, we will look at NWC as

percentage of sales to partially control for divestitures and differences in growth

(Kaplan 1989).


38

9.4 Leverage

As mentioned, the capital structure of the target usually changes after an acquisition

of a PE-fund. To capture this potential change, we have included the leverage ratio of

the companies. The leverage ratio will be defined as total debt divided by the total

capital of the company. This measure will also provide an understanding of potential

differences in ROE and ROA as they are affected by the amount of debt and equity

used in the company.


39

10 HYPOTHESES

10.1 Hypothesis 1 (Higher growth)

Numerous studies have found PE-targets to successfully increase their sales and show

higher growth in sales compared to their peers. Strategic changes implemented by the

PE-firm are the main reason mentioned for the increased sales. In addition, the PE-

firms provide a lot of capital to the targets, frequently through add-ons, and this often

boost their revenues. Furthermore, PE-firms enable the target firm to internationalize

and implement the “right” market mix, and hence the target is able to reach out to a

broader market in a more efficient way than before.

In addition to an expected revenue expansion, growth in earnings before interests,

taxes, depreciation and amortization (EBITDA) is also anticipated to be positive for

PE-targets due to improved efficiency.

Hypothesis 1: Norwegian PE-backed companies experience higher growth compared

to their industry peers in both the pre-recession and the recession period.

10.2 Hypothesis 2 (Higher profitability)

In a buyout transaction, the majority of studies find that PE-firms generate value for

the target company by increasing operational effectiveness. The PE-firms obtain a

broad knowledge and expertise in the industries they operate, and by taking

advantage of this experience the target companies are often successful in

implementing cost reduction programs and enhance the efficiency of the company.

Hypothesis 2: Norwegian PE-backed companies experience higher profitability

compared to their industry peers in both the pre-recession and the recession period.

10.3 Hypothesis 3 (Improved capital management)

In addition to increase the above measures, improving (decreasing) working capital

for the target company is an important focus for the PE-firms. PE-firms, as opposed

to most companies, are believed to have the expertise to negotiate better terms for

their targets and hence improve the balance between the firm’s current assets and

current liabilities. By improving working capital, we mean a decline as this indicates

a higher level of efficiency.


40

Hypothesis 3: Norwegian PE-backed companies experience improved net working

capital compared to their industry peers in both the pre- recession and the recession

period.

10.4 Hypothesis 4 (Higher leverage)

The leverage ratio often increases after a buyout. Increased debt levels reduce the free

cash flow, because cash has to be set aside to pay the higher interest payments that

follow the increased debt share. The reduction of the free cash flow will lower the

agency costs, since there is less cash to “waste”. This is recognized by the PE-firms

and they often target to increase debt to reduce agency cost. Further, PE-firms base

much of their investments on utilizing the leverage effect to boost return on

investments. However, higher leverage does not unconditionally improve

performance. A higher debt share may also lead to for instance debt overhang, which

may result in the company not being able to obtain further financing. Further, more

debt is found to increase the probability of financial distress, which again may lead to

bankruptcy. However, we expect the debt share to be higher for PE-targets compared

to non PE-backed firms.

Hypothesis 4: Norwegian PE-backed companies experience a higher leverage ratio

after the buyout compared to their peers in both the pre- recession and recession

period.


41

11 RESULTS AND TESTING

This chapter will present our results regarding our hypotheses. For each result, the

potential differences are categorized as significant on a 10, 5 or 1 percent level. These

levels will make us able to determine whether performance of the target companies is

indeed better than their peers – both for the median differences and the isolated

performance part. All test results are found in exhibit 4.

11.1 Growth We want to examine whether the target companies show higher growth compared to

their peers in both the pre-recession period and in the recession period.

Figure 12: Industry adjusted growth

11.1.1 Pre-recession period As illustrated in figure 12, the target companies show higher growth in both sales and

EBITDA in the pre-recession period. The median target company increase their sales

by 43.28 percent annually and increase their EBITDA by 36.50 percent annually. The

growth numbers are very high in absolute terms for the targets and the main reason is

probably that PE-firms often focus on high growth companies. Further, the higher

growth could be a result of the PE companies expanding their targets through organic

or non-organic activity using their expertise and access to capital. In addition, the

high growth has to be seen in context with the general upswing in the economy. In

this period, the Oslo stock exchange index grew by an average of 34.24 percent. The

increase in the index is of course not the same thing as growth in sales, but it may

serve as a forecast of sales. That is, when the index increases people anticipate higher

sales in the future. Consequently, the average increase of 34.24 percent indicates

optimism in the market and that future growth is expected.

After subtracting the growth from the peer group, creating an industry adjusted

difference; the results show that the target companies experienced a 34.30 percent

higher annual sales growth rate and a 14.23 percent higher annual EBITDA growth

rate. However, only the higher growth in sales is statistically significant. These results

*** 1% level

** 5% level Peers Targets Difference Peers Targets Difference* 10% level (Targets - Peers) (Targets - Peers)

Sales Cagr 0,0898 0,4328 0,343 *** -0,0198 -0,0266 -0,0068

EBITDA Cagr 0,2227 0,365 0,1423 -0,0428 -0,0952 -0,0524

RECESSION PERIOD (08-10)

1 GROWTHPRE-RECESSION PERIOD (03-07)


42

are in accordance with our hypothesis. Our results are in compliance with the results

found by Andresen and Sandnes (2009) when testing the growth of revenues and

EBITDA of 31 target companies in the Norwegian market in the period 1993 until

2007.

11.1.2 Recession period As the results from the pre-recession period supported our hypothesis, the results

from the recession period contradict our hypothesis. Figure 12 show that the target

group decreased their sales by 0.68 percent more than their peers. In addition,

EBITDA decreased with 5.24 percent more in the target firms than in their

comparable counterparties. Furthermore, the targets experience a large drop in both

sales and EBITDA from the pre-recession until the recession period. Hence this adds

value to the “risk story” as target firms perform worse in the recession compared to

comparable firms and their own performance in the pre-recession. None of these

results are, however, statistically significant. These results differ from results found in

the English market by Wilson et al. (2011) as they found that PE backed companies

have higher growth than their peers. Further, they found higher revenue growth in the

recession, while peers decreased their growth in the same period. For EBITDA, both

groups have decreasing growth. However, PE targets growth decreased less.

11.1.3 Isolated growth – Holding period By including the isolated performance, we want to capture the changes in the

measures throughout the PE-ownership and do not care about whether the holding

period is in the recession, before the recession, or extends to both periods.

Figure 13: Isolated holding growth

Figure 13 shows that the PE-firms are able to generate an annual growth in sales of

9.5 percent, which is 3.25 percent higher than their peers. This result is statistically

significant, and supported by Andresen and Sandnes (2009) and Gulliksen (2008)

who also find a positive industry adjusted CAGR from entry to exit. As for the

*** 1% level

** 5% level Peers Targets Difference* 10% level

Sales Cagr 0,0625 0,095 0,0325 *

EBITDA Cagr 0,0452 0,0325 -0,0127

1 GROWTHHOLDING PERIOD


43

growth in EBITDA, the peers actually outperform the target companies by an annual

growth rate of 1.27 percent. This is, however, not statistically significant.

11.2 Profitability This section provides results whether the target companies show better profitability

compared to their peers.

Figure 14: Industry adjusted profitability

11.2.1 Pre-recession period As figure 14 shows, the peers show higher profitability in all measures in the pre-

recession period. They show 0.045 percent higher EBITDA-margin, 8.33 percent

higher ROA and 27.78 percent higher ROE. The difference in EBITDA-margin is not

statistically significant. However, these results by far contradict our hypothesis. The

results obtained in the pre-recession period are somewhat surprising since we

believed that higher risk should lead to higher returns when the general market is

growing. However, a possible explanation is that most of the buyouts is done in the

late pre-recession period giving little time to implement necessary changes – “it takes

2-3 years to organize the target in the right way, and in that process the margins

often decrease” (Frode Strand-Nielsen, FSN Capital, Finansavisen). Another reason

may be that the PE-firms have invested in high growth companies. They had high

investments in the pre-recession period, and when they should collect their profits,

the recession period “took the profit away”, and the exit market made sure they were

stuck with the investments.

11.2.2 Recession period The results from the recession period are the same as for the pre-recession period –

the peers show better profitability than the target companies. Now, the difference in

EBITDA-margin is also statistically significant. Interestingly, but not surprising, the

measures have decreased from the pre-recession period. The differences have

decreased, indicating that the peers have experienced larger absolute drops in their

*** 1% level

** 5% level Peers Targets Difference Peers Targets Difference* 10% level

EBITDA-Margin 0,0892 0,0847 -0,0045 0,0709 0,0631 -0,0078 **

ROE 0,3486 0,0708 -0,2778 *** 0,227 0,0326 -0,1944 ***

ROA 0,0966 0,0133 -0,0833 *** 0,0722 0,001 -0,0712 ***

2 PROFITABILITYPRE-RECESSION PERIOD (03-07) RECESSION PERIOD (08-10)


44

margins compared to the targets – but in percent the drops in target companies are

higher than in the peer companies. Our results contradict the results of Wilson et al.

(2011). They found their targets to outperform their peers in terms of ROA and gross

margin, in both periods. Our findings are, however, in line with the higher risk we

suspect PE firms to take in order to meet the higher expected returns from investors.

11.2.3 Isolated profitability - Holding period This section allows us to see the changes in the margins from entry to exit (or 2010 if

not yet exited).

Figure 15: Isolated holding profitability

Figure 15 demonstrates that the target companies have suffered a significantly larger

decrease in EBITDA-margins throughout their holding periods. These results are

supported by Andresen and Sandnes (2009) who also find negative industry adjusted

changes for EBITDA-margins. Their results are, however, not statistically significant.

The reason for PE target companies underperforming significantly on EBITDA-

margin is not clear, but might be closely linked to the high growth in sales and targets

not being able to sustain margins.

11.3 Capital management As for capital management we expected that the target companies would improve

(decrease) their working capital compared to their peers. Figure 16 shows the results.

Figure 16: Industry adjusted capital management

11.3.1 Pre-recession period When looking at working capital in percentage of sales, figure 16 reveal that the

targets have 3.95 percent higher WC/Sales share. This share has to be discussed after

looking at the isolated results, as this result will reveal the changes in working capital.

*** 1% level


Change EBITDA-Margin 0,0013 -0,017 -0,0183 **

Change ROE -0,033 -0,0298 0,0032

Change ROA -0,0094 -0,0156 -0,0062

2 PROFITABILITYHOLDING PERIOD

*** 1% level


WC/Sales 0,087 0,1265 0,0395 *** 0,0994 0,0726 -0,0268 ***

3 WORKING CAPITALPRE-RECESSION PERIOD (03-07) RECESSION PERIOD (08-10)


45

11.3.2 Recession period The results from the recession period show a mirror image of the results in the pre-

recession period. That is, now the industry adjusted difference is negative meaning

that the WC/Sales share now is lower for the target group. A reason is that the targets

seem to be high growth companies. That is, their WC did not keep up with the high

sales. This is actually a good thing because it shows improved efficiency, which in

turn supports our hypothesis. If this is a consequence of the PE-firm needing time to

implement their expertise in this area, or a consequence of the crisis, may be

answered by looking at the isolated capital management.

11.3.3 Isolated capital management – Holding period

Figure 17: Isolated holding capital management

Most of the holdings start somewhere in the pre-recession period and last until (or

past) the recession period. Consequently, the results presented in figure 17 supports

the development in capital management from the pre-recession period to the recession

period. During the holding period of the PE-firms, their targets decrease (improve)

their working capital by 19.10 percent. This is a 32.39 percent larger decrease

compared to their peers. Further, their WC/Sales share decrease by 7.80 percent more

than comparable firms, showing that accounted for the higher growth in sales the

capital management still improves more. Both these results are statistically

significant, and support our view that PE-firms are able to improve the working

capital of their target firms. Similar results are also found by Andresen and Sandnes

(2009), but they do not obtain significant results.

11.4 Leverage

Figure 18: Industry adjusted leverage ratio

*** 1% level


Change WC 0,1329 -0,191 -0,3239 ***

Change WC/Sales 0,012 -0,066 -0,078 ***

3 WORKING CAPITALHOLDING PERIOD

*** 1% level


Leverage ratio 0,7337 0,7136 -0,0201 *** 0,6862 0,7179 0,0317 ***

PRE-RECESSION PERIOD (03-07) RECESSION PERIOD (08-10)

4 LEVERAGE


46

11.4.1 Pre-recession period We expect that PE-targets have a higher leverage ratio compared to their peers. The

results are illustrated in figure 18 and they partly support our expectations. That is, in

the pre-recession period the leverage ratio is actually lower for the targets. The

difference is small, only 2 percent, but it is statistically significant, and hence the

result does not support our hypothesis. Nevertheless, the result is supported by

Wilson et al. (2011) who find the leverage ratio for target companies to be lower in

the pre-recession period. They find the ratio to be lower in both periods, but with

even a further decrease in debt for the target firms.

11.4.2 Recession period As for the recession period, we find that targets employ a 3.17 percent higher debt

share compared to their peers. This difference is statistically significant all the way

down to the 1 percent level, and hence our hypothesis is supported. One reason might

be that PE backed companies are able to maintain and obtain bank financing in times

when debt markets are less accessible because large capital strong owners and more

collateral. Another reason may be that the peers are profitable and thus want to repay

some of their debt, or that they are in trouble and have to pay their debt back.

11.4.3 Isolated leverage ratio – Holding period In order to find out whether the target has changed their amount of debt relative to

total assets, we also looked at the change in leverage ratio throughout the holding

period. This is illustrated in figure 19.

Figure 19: Isolated holding leverage ratio

Our hypothesis is only partly correct, and the results are not statistically significant.

We find that peer companies decrease their debt share by 5.78 percent more than the

targets over the same holding periods. This is supported by Andresen and Sandnes

(2009) as they find the same results – the debt share is decreasing, but that the share

is decreasing at a lower rate than their peers.

*** 1% level


Change Leverage Ratio -0,0674 -0,0096 0,0578

4 LEVERAGEHOLDING PERIOD


47

12 ROBUSTNESS TESTS

In order to check whether our results are robust, we performed several tests. The tests

are done to control for potential biases that might be present in the data. Firstly, we

lag the target companies’ equity in the ROE calculation. Secondly, we remove all

target companies in the oil sector, and look at the changes in the operating

performance of the non-oil related companies. Thirdly, we isolate the target firms

with the following criteria; they need to have a holding period of minimum five years,

and need to be held in a minimum of two years in both periods.

12.1 Lagged equity in ROE

The results found regarding ROE show evidence of a low ROE for the target

companies, compared to the peers. As the PE-firms often invest large amounts of

equity in their targets, we lagged their equity in order to get a better picture of how

this equity is able to generate returns for the company. Unfortunately, not all

companies have equity data for the year prior to the acquisition. Consequently, the

robustness test is done on 54 target companies. We compared their ROE with lagged

equity with their ROE when the equity is not lagged.

Whether or not the equity is lagged, we find almost identical ROE results. These

results are, however, not significant. Nevertheless, we use this as an indication that

the large amounts of equity invested does not, alone, lower ROE for the targets.

12.2 Removal of oil related companies

In our survey, 90 percent of the PE companies highlighted the oil industry as

attractive. In addition, about 20 percent of our sample is oil related companies. In

order to cope for this large concentration of one sector, we remove all oil extraction

and oil service companies to correct for any trend in the data. In our sample period,

2003-10, the oil price has been extremely volatile and this of course affects the targets

and peer companies in this industry. We exclude 19 companies that are oil related,

and are left with a dataset of 76 targets.


48

Figure 20: Industry adjusted growth when oil related companies are excluded

The results in the pre-recession period indicate that the target companies have

experienced lower growth, when excluding oil related targets. The opposite is true in

the recession period, where the target companies enjoy a higher growth. The latter

results is, however, not significant. The results might be related to the oil price, which

increased from the fall of 2003 until the summer of 2008, before falling 70 percent till

the spring of 2009. Large investments have been done along with the increasing oil

price, leading to high growth until the price turned in 2008. In 2011 and early 2012,

the oil price is once again rising and the oil industry is “booming”, but this upswing is

not captured in our data material as our sample size ends in 2010. When looking at

profitability, capital management and debt levels the results are similar to the results

obtained before excluding oil related companies.

12.3 Five year holding period

To further test our results, we performed a robustness test where we only include

target companies which fulfill the mentioned two criteria. As we found weak

profitability for the targets, compared to their peers, in our results, we argued that the

PE-firms needed several years in order to implement changes that increased the

performance of their targets. Consequently, this test was performed.

Figure 21: Profitability when the firms are held in minimum 5 years

*** 1% level


Sales Cagr (no oil) 0,0879 0,3938 0,3059 *** -0,019 -0,0197 -0,0007

EBITDA Cagr (no oil) 0,2308 0,2892 0,0584 -0,066 -0,0896 -0,0236

Sales Cagr 0,0898 0,4328 0,3430 *** -0,0198 -0,0266 -0,0068

EBITDA Cagr 0,2227 0,365 0,1423 -0,0428 -0,0952 -0,0524

1 GROWTHPRE-RECESSION PERIOD (03-07) RECESSION PERIOD (08-10)

*** 1% level


EBITDA-Margin (5 year +) 0,0891 0,0847 -0,0044 * 0,0709 0,076 0,0051

ROE (5 year +) 0,3486 0,0981 -0,2505 *** 0,2269 0,0808 -0,1461 ***

ROA (5 year +) 0,0966 0,0226 -0,074 *** 0,0722 0,0176 -0,0546 ***

EBITDA-Margin 0,0892 0,0847 -0,0045 0,0709 0,0631 -0,0078 **

ROE 0,3486 0,0708 -0,2778 *** 0,227 0,0326 -0,1944 ***

ROA 0,0966 0,0133 -0,0833 *** 0,0722 0,001 -0,0712 ***

2 PROFITABILITYPRE-RECESSION PERIOD (03-07) RECESSION PERIOD (08-10)


49

Our results indicate that the growth is lower both in pre-recession and in the recession

period for the target companies being backed for a minimum of five years. Only the

results from the pre-recession period are significant. When looking at profitability we

found that the modified group of targets performs better than our original sample.

However, they still underperform the peer companies when looking at ROE and ROA

in both periods. The modified group does outperform the peer group slightly when

looking at EBITDA margin during the recession, but the result is not significant.

Concerning capital management and debt the industry adjusted differences show the

same signs, negative, but they have improved slightly in terms of capital

management. Consequently, we may have to discard our original explanation for this

phenomenon, namely that they need time to implement necessary changes. However,

as they have minimum two years of holding in the recession, where margins are low,

this might outweigh their potential performance increasing actions.


50

13 SURVEY

In this chapter we will present our findings from the survey we sent to all Norwegian

PE buyout companies. These results will enable us to build on the results found in the

performance part, giving a broader picture of the impact of the “financial crisis” on

the Norwegian PE industry. The surveys reveal potential changes in rationale for

investing, the attractiveness of industries, financing, underlying factors for value

creation and exits that are caused by the recession.

To rank the answers we used a Likert scale from 1-5 where 1 is most important.

Further, we ranked the answers into 3 categories, important 1-2, ambivalent 3 and not

important 4-5. In addition, some explanations given by the PE-firms are highlighted

in the results.

The average age of the companies is 10 years which supports what we have pointed

out earlier – that the PE-industry in Norway is quite new. In terms of capital under

administration, the total is found to be NOK 30.700 million. There is a huge

discrepancy in size of the PE firms, as the minimum capital is NOK 150 million and

the maximum is NOK 18.000 million. Further, the average capital under management

is about NOK 4.000 million.

Figure 22: Countries that Norwegian PE companies operate and invest in

The companies mainly operate and invest in Norway, but also in Sweden, Denmark

and outside Scandinavia.

53 %

16 %

21 %

10 %

Countries they operate in

Norway

Denmark

Sweden

Other

32 %

23 %

26 %

19 %

Countries they invest in

Norway

Denmark

Sweden

Other


51

13.1 Rationale for investing

Figure 23: Norwegian PE companies rational for investing in target companies

The participants argue that they have made few new investments and rather shifted

their focus towards add-ons and developing their existing portfolio, due to uncertain

market conditions and more competition for the best targets. This is in line with the

relationship we illustrated in chapter 3. The quote below shows a typical answer from

the survey.

“We were not very active in making new acquisitions during the financial crisis. Low

access to debt capital needed to yield sufficient returns and limited companies

available for acquisition due to depressed performance”

One change that we do see, and that is mentioned in the feedback from the buyout

companies is that there is more focus on exit strategies in an early phase, even before

acquiring a company. Potential buyers are already found and evaluated when looking

at possible acquisition candidates. Further, there is a 10 percent change from

“ambivalent” to “important” on cash flow - this is less than what we anticipated. Our

expectation was that solid target companies with stable cash flows that allow for a

more secure repayment of debt would be more desirable under market uncertainty.

What the participants said was that instead of focusing on new targets with solid cash

flows or other attributes, that in theory would be desirable under recessions, they

chose to develop existing portfolio companies instead.

0 %10 %20 %30 %40 %50 %60 %70 %80 %90 %

100 %

Rationale for investment in target (before)

Important Ambivalent Not Important

0 %10 %20 %30 %40 %50 %60 %70 %80 %90 %

100 %

Rationale for investment in target (during)



52

13.2 The attractiveness of industries

The charts below clearly illustrates that the oil industry dominates in terms of

attractiveness both before and during the recession - 90 percent of the companies list

this industry as attractive.

Figure 24: Attractiveness of industries for Norwegian PE companies

Many of the companies only focus on this segment, which in turn is not very

surprising as their main focus of investing is in Norway. The shift towards oil has

become even stronger in 2011 and the start of 2012, as there has been high

investment activity in the oil industry. In 2011, oil and other energy investments

represented about 50 percent of initial buyout investments and over 50 percent of

follow up investments. The quote below shows a typical answer from the survey.

“Some industries prove more resilient than others”

In terms of the largest changes, Consumer Trade/Retail and IT&Telecom distinguish

themselves. Consumer Trade/Retail has become less attractive during the crisis,

which reflects the low consumption following the credit crunch. Retail is indeed very

cyclical so the shift was as expected. This point was also supported by some of the

parties in the survey. IT&Telecom experience a shift towards being more attractive,

indicating that the world is becoming more digitalized and the need for smart and

time-efficient solutions is becoming more important. As an illustration, Accel

Partners, an American venture capital company, finally convinced Mark Zuckerberg

to let them invest $12.7 million for a 15 percent stake in Facebook in April 2005;

today Accels 190 million B shares are worth a staggering $9.0 billion. The major

0 %10 %20 %30 %40 %50 %60 %70 %80 %90 %

100 %

Attractiveness of industries (before)

Attractive Ambivalent Not Attractive

0 %10 %20 %30 %40 %50 %60 %70 %80 %90 %

100 %

Attractiveness of industries (during)

Attractive Ambivalent Not Attractive


53

established players in the industry, like Apple, IBM, Microsoft and Google, enjoy

high returns and have surpassed most of the industrial companies in terms of market

value. Apple even surpassed Exxon Mobile to become the world’s most valuable

company during late 2011 and early 2012. A reason for a low change in the other

industries might indicate that there has been a low investment activity in general, and

that many of the companies only choose add-ons to their existing portfolio rather than

investing in new projects.

13.3 Financing We wanted to examine how the financing of the deals had changed with the downturn

of the economy. Thus, we asked what type of financing is used in the two periods.

Equity and bank loans are as we suspected the preferred forms of funding, while

management is used to some extent. The quote below shows a typical answer from

the survey.

Figure 25: Types of financing used by Norwegian PE companies

“Limited availability of attractively priced debt financing led to a higher degree of

equity capital being deployed in the interim period. Previously deployed equity

capital is now being partly replaced by debt securities as the debt markets are once

again “open” at reasonable prices”

The major change in financing before and during the “financial crisis” is the use of

bank loans. The feedback from the questioner shows that it has been harder and more

expensive to obtain bank financing during the recession and hence the amount of

equity used in percent of total financing has increased. In addition, in the later stages

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

Type of financing (before)

Yes No

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

Type of financing (during)

Yes No


54

of the economic downturn, bank financing has stayed scarce as the sector has been

focusing on the Basel III implementation and the capital reserves needed to meet the

regulations. In addition, most add-ons and further investments in existing portfolio

companies seem to have been made with equity. The quote below shows a typical

answer from the survey.

“Banks were much more cautious to lend during the financial crisis as visibility on

macroeconomic factors was highly uncertain. Uncertainty equals higher prices

(lending rates), less total debt and stricter covenants. Bank liquidity has also been an

issue, though not a major issue in Norway”

Several PE-firms mention that the difference in available debt financing before and

during the recession was much bigger in more established markets in Continental

Europe i.e. England. The participants also note that the difference in available

leverage changed more in for example England due to the better possibilities of

leverage (more debt products) before the recession. The quote below shows a typical

answer from the survey.

“The debt capital market in Norway was and is still far less sophisticated and pre-

financial crisis the available range of products would typically only include senior

financing - mostly one or two plain vanilla tranches secured through cash flow. As

such, with a limited debt offering available in the Norwegian market, you could never

get as high total leverage as you could in e.g. London”

Before the “financial crisis” 40 percent of the asked buyout firms used 4xEBITDA or

less as average size of debt financing. During the recession the amount increased

drastically to 90 percent of the companies using 4xEBITDA or less.

13.4 Underlying factors for value creation As oil was dominant both before and during the crisis, management of the target and

the PE-firm is dominant in both periods in regards to what is seen as the underlying

factors for value creation. The quote below shows a typical answer from the survey.

“In booming markets, one typically tends to sell off investments sooner often because

of strong interest in the market - in poor markets, the PE firm would focus more on


55

developing the company to a certain stage and fulfillment of milestones before

initiating an exit process”

This is of importance for PE firms as they often apply active ownership and try to

align the organization to focus on a common set of performance objectives. They are

primarily majority owners in their target companies and are able to implement a

series of transformation initiatives that form the foundation for creating a shift in

performance. They often keep the internal management that is present and supply it

with external workforce especially in the fields of economy and marketing.

Furthermore, and as mentioned, the focus is shifted more towards the existing

portfolio rather than new investments. In poor markets, the firms emphasize more on

developing the target companies to a certain stage.

Figure 26: Underlying factors for value creation for Norwegian PE companies

As for changes, exit possibilities have become more important during the crisis

whereas possibilities for gearing have become less important. The quote below

shows a typical answer from the survey.

“More and more focus on identifying appropriate buyers when we look for an exit

before we even invest”

Since there is so little capital being pushed into the market when there is a credit

crunch, the PE-firms spend more time on discovering possible exit strategies during

the crisis than before. This is probably because it is harder to sell the portfolio

0 %10 %20 %30 %40 %50 %60 %70 %80 %90 %

100 %

Underlying factors for value creation (before)


0 %

20 %

40 %

60 %

80 %

100 %

Underlying factors for value creation (during)



56

companies in severe financial crisis due to lack of funding, risk aversion and poorer

performance of companies (yielding low returns) – buyers are much more cautious

and the market is much more selective. This has led to PE managers LPs accepting a

longer time horizon before it is possible to liquidate the investment. The expected

return on investments has also been downgraded in numerous buyout funds. The

quote below shows a typical answer from the survey.

“Portfolio companies which were previously headed for an exit in the years when the

crisis hit have been devalued. Total returns on PE funds raised in the 2005 - 2007

period have been downgraded, as they simply will not be able to generate target

IRRs. Fund managers and limited partners are accepting this reality, and the ROI

needed to trigger an exit is generally lower than original target return.”

Arbitrage is no longer important in the survey, even if the results are weak; this is as

expected when exit markets are more difficult. As for the gearing possibilities, strict

capital markets do not allow for high gearing. This again points towards more value

creation than financial engineering.

13.5 Exit As expected, trade sales are the dominant exit strategy before the crisis and even

more dominant during the crisis.

Figure 27: Exit strategies used by Norwegian PE companies

This might indicate, and as pointed out by participants that if debt markets are easily

accessible, sale to other financial sponsors may be more likely and if debt markets are

“closed”, trade buyers may be in a more valuable position, as they may not need

0

2

4

6

8

10

Trade salesIPO/flotation

9

1

10

0

Exit strategies

Before the crisis

During the crisis


57

external financing in order to finance the acquisition. The quote below shows a

typical answer from the survey.

“The IPO market has changed dramatically over the last four - five years”

Furthermore, the IPO market has suffered during the crisis; investors require larger

market capitalization and higher liquidity nowadays than previously. In addition,

investors are more critical to investment opportunities than when all arrows were

pointing upwards. With more critical investors we also see that exit factors in general

have become more important, with macroeconomic factors increasing the most.

Figure 28: Deciding factors for exit for Norwegian PE companies

The feedback is that PE companies put more weight on market conditions during the

crisis when choosing exit strategies. Downstate markets require exits to be more

revised in advance and targets do not get bought without having a clear strategy for

potential buyers or other exit options. In addition, the structure of the company is

more important due to uncertain market conditions. The value of the targets is not as

easy to extract, hence how the target company is structured will influence the exit

strategy and potential buyers, as investors are more specific.

13.6 Summary survey

The survey reveals that the PE-firms have made few new investments and rather

shifted their focus towards add-ons and developing their existing portfolio, due to

0 %10 %20 %30 %40 %50 %60 %70 %80 %90 %

100 %

Deciding factors for exit (before)

Important Not Important

0 %10 %20 %30 %40 %50 %60 %70 %80 %90 %

100 %

Deciding factors for exit (during)

Important Not Important


58

uncertain market conditions, financing availability and few attractive targets during

the recession. As a result of this, the PE firms’ holding periods have expanded.

Considering attractive industries, the majority of the companies list oil as an attractive

industry both before and during the crisis. Consumer Trade/Retail and IT&Telecom,

however, have experienced large shifts in attractiveness as a consequence of the

crisis. Consumer Trade/Retail has become less attractive during the crisis, while the

opposite is true for IT&Telecom.

As for financing, the main result is that the PE-firms use less debt during the crisis

because it is harder and more expensive to obtain bank financing during the credit

crunch.

Management of the target is dominant in both periods with regards to what is seen as

the underlying factors for value creation. Further, and as mentioned, in poor markets

the firms emphasize more on developing the target companies to a certain stage,

rather than new acquires. In addition, exit possibilities have become more important

during the crisis. During the downturn, most PE-firms identify an exit even before

they invest as buyers are much more cautious and the market is more selective. As for

types of exits, trade sales dominate both periods.


59

14 LIMITATIONS AND FURTHER RESEARCH

This study covers the recession in the Norwegian PE market. The limitations in our

study offer suggestions for further research.

Firstly, our data induce some limitations. As the Norwegian PE-market is quite new,

the number of observations in our pre-recession period is quite low compared to the

number of observations in the recession period. In addition, this fact leads us to not

having many targets with a holding period stretching through the entire pre-recession

period. Consequently, many of the observations that result in the pre-recession

median values are concentrated in 2005 to 2007. Furthermore, we do not account for

potential add-ons or divestitures and by that assume that the actions of the target

companies and peers in these strategies are the same. This is perhaps not likely in

reality, and hence some of our results could be biased.

Secondly, the assignment of peer groups has limitations. If our peers had been

through an ownership change, e.g. had an equity investment, they probably would

have been more comparable. Being acquired by a PE-firm is not what we mean by an

ownership change in this context, as this actually would make the peers a part of our

sample. In addition, a criticism and a possibility for further research is that we do not

look at peers with the same age as our target companies, and hence they might not be

in the same period of the firms’ lifecycle. Moreover, one could have assigned the

peers to the targets by using other, or more, criteria than industry codes and revenues.

Thirdly, we only look at the holding period of the PE-firms. We could have had a

better possibility to compare the changes we found during the holding, if we had pre-

or post-holding period changes as well. The holding period changes are, however,

only to add depth to the analysis as our research question is focused on the recession.

Finally, even though we do not consider it a limitation of our thesis, a suggestion for

further research is comparing the IRR of the PE-funds in a pre-recession period and a

recession period. If this data were available, even though that is not likely, this

analysis would be of high interest.


60

15 CONCLUSION

Our results suggest that PE is not special. That is, they are not constantly

outperforming peers, and particularly not in periods with higher risk. Several

robustness tests are performed, and they did not change our conclusions.

This main conclusion is supported as the target companies are outperformed by their

peers in both periods on all financial indicators regarding profitability. In addition, we

found evidence of a negative change in target profitability throughout the holding

period. We do find, however, that PE is able to generate higher growth and improve

efficiency for their targets. These results are as anticipated as PE-firms repeatedly

target high growth companies and that they possess the necessary expertise to

negotiate better terms for their targets.

Further, a remarkable result is that the targets’ leverage ratios, compared to peers, is

lower in the pre-recession and consequently challenge the view that buyouts are

heavily leveraged.

The main findings from the survey is that the PE-firms use less debt because of

availability, and that they use more time on discovering exit possibilities because of a

challenging exit market due to the financial crisis. As a consequence of these features,

the PE firms use more time on their existing portfolio, and accordingly expand their

holding period.

Our findings challenge the results presented by Saga (2011), which is the only paper

previously published on the Norwegian PE-industry that takes the financial crisis into

account, as they provided evidence that their portfolio companies show superior

profitability and that they are more leveraged compared to their listed reference

companies. Consequently, our paper contributes to existing literature and adds further

understanding to the Norwegian PE market.


61

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Goold, Michael, Andrew Campbell and Marcus Alexander. 1998. "Corporate

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Phalippou, Ludovic and Oliver Gottschalg. 2009. "The Performance of Private Equity

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http://www.nvca.no/




64

17 EXHIBITS

Exhibit 1 – All Norwegian funds per mars 2011


65

Exhibit 2 – Analysed PE-companies

ANALYSED PE-TARGETS

07 Gruppen AS Estrella Maarud Holding AS Plugging Specialist International ASA

Aarbakke Group AS European Beds ProBio ASA

Abletec Exie AS projectiondesign

add energy AS eZ Systems QuestBack

Agito Nordic AS Folla Tech AS Read

Aibel Gothia Financial Group AS RenoNorden AS

Alliero Holding AS Grenland Group ASA Resman AS

APL ASA Handicare Revus Energy ASA

Apply AS Hatteland Display Ross offshore AS

ArtLink Norway AS Helly Hansen Scan Geophysical ASA

Axcellia Pharmaceuticals AS Hitec Products Drilling Scandinavian Electric Systems

Banqsoft Industriverktøy AS Sense EDM AS

Basefarm AS Infocare AS SmartMotor AS

BecoTek Holding AS Intelecom Software Innovation ASA

Beerenberg Holding AS Malthus AS Solkraft Mounting Systems AS

Bluecom Master Marine ASA Spring Energy

Blueway AS Metronor AS SPT Group AS

BNS Consent AS MicroMatic Norge AS Stream Invest AS

Brubakken Music Retail Holding Subsea Technology Group AS

c360 grader Holding AS Nevion Europe AS Teamtec Invest AS

Cardinal Foods Bryn AS Nille AS Technor Holding AS

Collett Pharma Noral Teck Skotselv AS

Constructor Group AS Noratel Teres Medical Group AS

Curato AS Nordic Paper Tilbords

Datarespons ASA Nordic Vision Clinics AS TusenFryd AS

DOF Subsea Norlandia Omsorg AS Unitech Ship Service AS

Drilltronics Rig AS Norman Vector International AS

Edvantage Group AS Norse Cutting & Abandonment AS VIA Travel Group ASA

EFG Hov + Dokka AS Norstat ASA Viju AS (Tidligere Infoteknikk)

Ellipse Klinikken AS Norwegian Energy Company ASA Vizrt Norway Holding AS

Epax Online Services Wema Group

Espira Gruppen AS Panorama Gruppen AS


66

Exhibit 3 - Survey

The Norwegian Private Equity Market As mentioned, we want to see how the financial crisis has influenced the Norwegian private equity market. “Before” the financial crisis is one period and “during” the financial crisis is the other period. Before the financial crisis is defined to end January 1 2008, while during the financial crisis covers the period from January 1 2008 till today. Consequently, most of the questions are repeated twice so that both periods are covered. This fact makes the survey look large and time consuming, which it is really not because most of the questions are just for you to tick off. As for the questions where you should explain potential differences, we only expect very brief answers. Again, thank you for your time.

1) Which private equity fund do you represent?

2) Which countries do you operate in (tick one or more) Norway Denmark Sweden Other

3) Which countries do you invest in (tick one or more) Norway Denmark Sweden Other

4) Investment categories Buyout Venture Both

5) If venture, which category? Seed Start-up Expansion All

6) Age of private equity company (in years)? 5 or less 5-10 10-15 15 or more

7) Capital under administration (in mill. NOK)?

8) Capital allocated to buyout (%)

9) Capital allocated to venture (%)


67

10) Rationale for private equity investments in target companies (before

the financial crisis)? Rank the possible explanations for picking and

investing in target companies from 1 to 5, where 1 is best:

1 2 3 4 5

Stage of business Country/Region Cash Flow Industry Market leader Growth potential Size (value) Ownership situation Exit strategy Management Other

11) Rationale for private equity investments in target companies (during

the financial crisis)? Rank the possible explanations for picking and


1 2 3 4 5

Stage of business Country/Region Cash Flow Industry Market leader Growth potential Size (value) Ownership situation Exit strategy Management Other

12) If the rationale is different, why?


68

13) Which industries you find most attractive to invest in for Norway

(before the financial crisis)? Rank the possible explanations for picking and


1 2 3 4 5

Oil service Health care Consumer Trade/retail service IT & Telecom Energy Clean Tech Life science Generalist Other

14) Which industries you find most attractive to invest in for Norway

(during the financial crisis)? Rank the possible explanations for picking

and investing in target companies from 1 to 5, where 1 is best:

1 2 3 4 5

Oil service Health care Consumer Trade/retail service IT & Telecom Energy Clean Tech Life science Generalist Other

15) If the attractiveness is different, why?

16) Have you invested relatively more/less in Norway after the financial

crisis? More Less No change

17) If different, why?


69

18) What type of financing is used in the acquisitions (before the financial

crisis)? Bank loans High yield bonds Equity Mezzanine Bridge loan Management External owners Other

19) What type of financing is used in the acquisitions (during the financial

crisis)? Bank loans High yield bonds Equity Mezzanine Bridge loan Management External owners Other

20) If the financing is different, why?

21) Average size of leverage used in financing the investments, as a multiple

of EBITDA (Total debt/EBITDA) (before the financial crisis) 4 x EBITDA or less 4-5 x EBITDA 5-6 x EBITDA 6-7 x EBITDA 7-8 x EBITDA 8-9 x EBITDA 9-10 x EBITDA 10 x EBITDA and above


70

22) Average size of leverage used in financing the investments, as a multiple

of EBITDA (during the financial crisis) 4 x EBITDA or less 4-5 x EBITDA 5-6 x EBITDA 6-7 x EBITDA 7-8 x EBITDA 8-9 x EBITDA 9-10 x EBITDA 10 x EBITDA and above

23) If the average size of leverage is different, why?

24) How the fund expects the financial performance of the target to develop

after exit compared to the industry? Above industry average Equal to industry average Below industry average

25) How the fund expects the financial performance of the target to develop

after exit compared to under the ownership? Above industry average Equal to industry average Below industry average

26) Underlying factors for value creation in the target company (before the

financial crisis)?

1 2 3 4 5

Management of target Management of private equity fund Arbitrage Exit possibilities Posibilities for gearing/leverage Operational improvements Expansion opportunities Networks Other


71

27) Underlying factors for value creation in the target company (during the

financial crisis)?

1 2 3 4 5

Management of target Management of private equity fund Arbitrage Exit possibilities Posibilities for gearing/leverage Operational improvements Expansion opportunities Networks Other

28) If the underlying factors are different, why?

29) Most used exit strategy (before the financial crisis)? IPO/flotation Trade sales Repurchase by management or company Other

30) Most used exit strategy (during the financial crisis)? IPO/flotation

Trade sales

Repurchase by management or company

Other

31) If the exit strategies are different, why?

32) What factors decide which exit strategy to use (before the financial

crisis)? Macroeconomical factors such as stage of economic cycle, etc. Development of industry Structure of company Other


72

33) What factors decide which exit strategy to use (during the financial

crisis)? Macroeconomical factors such as stage of economic cycle, etc. Development of industry Structure of company Other

34) If the factors are different, why?

35) What influences the time of exit (before the financial crisis)? Realization of fund Potential realized from the target Decided before investment Approached by buyers Other

36) What influences the time of exit (during the financial crisis)? Realization of fund Potential realized from the target Decided before investment Approached by buyers Other

37) If the exit strategies are different, why?

38) What is your time horizon for your investments (in years)(before the

financial crisis)?

39) What is your time horizon for your investments (in years)(during the

financial crisis)?

40) If the time horizon is different, why?

© Copyright www.questback.com. All Rights Reserved.

http://www.questback.com/


73

Exhibit 4 – Results testing 1 PRE RECCESION PERIOD – MEDIAN LEVELS

SALES CAGR

EBITDA-CAGR


74

EBITDA-MARGIN

LEVERAGE RATIO


75

WC/SALES

ROE


76

ROA


77

2 RECESSION PERIOD – MEDIAN LEVELS

SALES CAGR

EBITDA CAGR


78

EBITDA-MARGIN

LEVERAGE RATIO


79

WC|SALES

ROE


80

ROA


81

3 HOLDING PERIOD

SALES CAGR

EBITDA CAGR


82

CHANGE EBITDA MARGIN

CHANGE LEVERAGE RATIO


83

CHANGE WC|SALES

CHANGE WC


84

CHANGE ROE

CHANGE ROA


85

4 ROBUSTNESS TESTING

4.1 LAGGED EQUITY IN ROE CALCULATION

4.1.1 LAGGED ROE PRE-RECESSION

4.1.2 LAGGED ROE RECESSION


86

4.2 REMOVAL OF OIL-RELATED COMPANIES

4.2.1 PRE RECESSION PERIOD (WITHOUT OIL)

SALES CAGR

EBITDA CAGR


87

EBITDA-MARGIN

LEVERAGE RATIO


88

WC/SALES

ROE


89

ROA


90

4.2.2 RECESSION PERIOD (WITHOUT OIL)

SALES CAGR

EBITDA CAGR


91

EBITDA-MARGIN

LEVERAGE RATIO


92

WC/SALES

ROE


93

ROA


94

4.3 HOLDING 4 YEAR + AND IN BOTH PERIODS

4.3.1 HOLDING PERIOD

SALES CAGR

EBITDA CAGR


95

CHANGE EBITDA-MARGIN

CHANGE LEVERAGE RATIO


96

CHANGE WC

CHANGE WC/SALES


97

CHANGE ROE

CHANGE ROA


98

4.3.2 MEDIAN LEVELS – PRE RECESSION

SALES CAGR

EBITDA CAGR


99

EBITDA-MARGIN

LEVERAGE RATIO


100

WC/SALES

ROE


101

ROA


102

4.3.3 MEDIAN LEVELS – RECESSION

SALES CAGR

EBITDA CAGR


103

EBITDA-MARGIN

LEVERAGE RATIO


104

WC/SALES

ROE


105

ROA


106

Exhibit 5 – Preliminary Thesis Report

Fredrik Falkendal Nilsen 0858253

Kenny Strandberg 0817741

Supervisor: Bogdan Stacescu

Study Programme: Business and Economics

Major: Finance

GRA 1902

Preliminary Thesis Report - BI Norwegian Business

School

- HOW THE FINANCIAL CRISIS HAS

INFLUENCED THE STRATEGIES OF

NORWEGIAN PE-FUNDS AND THE

PERFORMANCE OF NORWEGIAN

TARGET COMPANIES –

BI OSLO

Date of submission:

16.01.2012


107

Table of contents

1 Background and motivation 3

2 The Topic (and methodology) 5

3 Private Equity 7

3.1 What is Private Equity 7

3.2 Why Private Equity 7

3.3 Types of Private Equity 7

3.4 The Investment Process 8

3.5 The Private Equity Organization 9

4 Theory 11

4.1 Agency Theory 11

4.1.1 The Incentive realignment hypothesis 11

4.1.2 The control hypothesis 11

4.1.3 The free cash flow hypothesis 11

4.2 Leverage 12

4.3 Wealth transfer hypothesis 12

4.4 Parenting advantage 12

5 Previous research 13

5.1 “Competitive advantage 14

6 The PE Market 15

6.1 The Nerdic Market 16

6.2 The Norwegian Market 16

7 Performance Measures 18

7.1 Growth 18

7.2 Cash flow variables 18

7.3 Leverage 18

8 References 20

Exhibit 2 All Norwegian funds per mars 2010 22


108

1 Background and motivation for the topic

Private Equity (PE) has experienced an explosive growth in recent years and

influence today much of the international economy. Despite the growth, PE does not

get a lot of attention, and there seem to be few who have knowledge of it – especially

in Norway, including us. However, we find the topic interesting and after reading

related articles and other theses we decided that PE performance should be our main

focus for our thesis.

There are not many studies concerning the Norwegian market for PE transactions – it

has not had a significant academic focus. In Norway, PE is not a common and

exposed asset class, but it seems like it is increasing in popularity. That is, there is an

increasing focus on this type of investment. In addition, there is actually an attractive

private equity environment in the Norway. “Venture Capital and Private Equity in

Norway recorded its highest level of fundraising ever, overshooting the record year

of 2006 by EUR 350 million. This is a clear signal of investors’ trust in the industry’s

ability to create real values through active long-term ownership in companies,

looking beyond and seeing the opportunities in the financial crisis” (NVCA yearbook

2009).

PE is important as an asset class throughout Europe and in the US. PE-backed

companies, as we will mention, has had great success in outperforming peers and

relevant stock market indices. This success also made us interested in the topic, and

we wanted to find out whether the same was true for the Norwegian market, and how

the Norwegian market performed compared to other PE markets.

Even though we will not go deep into the reasons for the PE-backed companies’

success, we find these reasons interesting. Markets are maybe not of the strong form

that Professor Eugene Fama emphasizes, but they seem reasonable efficient. Hence, it

should not be easy for PE managers to find mispriced firms. Furthermore, there are

many other PE companies and other investors, both private and public, wanting the

same targets, and hence there is actually a higher probability that PE actually overpay

for the assets of their target company, than that they underpay. That is, PE does not

perform better than the market because of mispricing. There are other reasons.


109

Richard Lambert, Director-General the Confederation of British Industry (CBI) said

that, and we quote, “the spectacular returns generated by some private equity houses

over the past half dozen years have been derived from three sources. High leverage,

rising asset prices, and a business model that cuts out the agency problem inherent in

listed companies, by aligning exactly the interests of owners and managers”(White

Space Insight). However, he added that the credit crunch and global economic

slowdown had brought those days to an end, temporarily at least

(http://www.dofonline.co.uk/content/view/1693/116/).

When you have high leverage and/or depend on rising asset prices you are exposed to

business cycles. Phalippou and Zollo (2005) actually document that fund performance

co-varies with both business cycles and stock-market cycles. They find that to be an

unattractive property. Given that they correlate with business cycles, PE houses

perhaps real – and often overlooked – source of success is the governance model they

apply to the companies they own. That is, they manage the principal agency problem

(align the interests of owners and managers) in a way that public companies cannot

do. This is an advantage that public companies find hard to emulate (Kehoe, Conor et

al. 2005), and that may be the reason why they manage to outperform relevant stock

market indices and their peers.


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2 The Topic (and methodology)

The topic for this master thesis will be the performance of Norwegian PE-backed

firms. Further, we will investigate whether the financial crisis has had an impact on

the performance and strategy of PE-backed firms. We will compare the performance

in a period before the financial crisis with a period defined as the financial crisis. Our

goal is to find out if the performance has changed compared to industry peers, and

also if the strategy of the PE-backed firms has changed. There are not many studies

that take this into account and this will serve as our greatest motivation in this thesis.

To answer the strategy part of the thesis, we will send out a questioner (see exhibit 1)

to all the Norwegian funds (exhibit 2). This survey will hopefully help us in

answering the questions we are interested in. For example, has the crisis made the

PE-firms change their strategies? Are they buying smaller firms? Are they buying

less complex firms? Do they have a shorter holding period? Are they using less/more

debt? These are a few of the questions we are interested in investigating with this

master thesis. Furthermore, we think that we can uncover some strategic changes by

looking at the different deals. We will find the deals through Argentum, or through

the different fund’s homepages. To get sufficient information on the firms involved in

the deals, Zephyr, Amadeus, Proff Forvalt, and other databases will be used.

The master thesis will cover the Norwegian market and not the entire Scandinavian

market as numerous earlier studies have has done. Data availability and the lack of

similar work is an important factor for limiting the thesis to only include the

Norwegian market. We will focus on both the buyout and venture capital categories

in this thesis, and separate the findings of the two types of private equity investments.

Venture capital will include seed, start-up and expansion, but seed and start-up will

serve as one classification of venture capital and expansion will serve as another. The

reason is the difference in growth trends, targets and priorities because they are at

different stages in their life cycle.

Further, how to define the mentioned peers will also induce some questions. There

are natural peers found in the same industry as the companies bought by PE-firms,

but they have probably not had an ownership change. It would have been interesting

to compare the performance with peers that also has had an ownership change, but in


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order to get a sufficient peer group (considering that we have limited the thesis to

only include the Norwegian market) we do not introduce that constraint. Hence, we

will assign one specific peer group to each of the target firms we choose to look at.

Industry codes will be used to make up the peer groups.

Another important question we have asked ourselves is whether to look at the pre-

holding period, the holding period, the post-holding period, or all of them. We choose

to look at all the periods. The pre-holding period will be defined as the three years

before the buyout, and it is included to see whether the firm’s performance deviate

from its peers before the buyout. In addition, Barber and Lyon (1996) claimed that if

a company had a high operating performance before a buyout, mean reversion could

make their performance in the next period seem artificially low. Of course, the

holding period has to be investigated because that is our main goal of the thesis. In

addition, we find also the post-holding period to be interesting. We want to look at

the post-holding period, to see whether performance is unchanged after the PE-exit.

What happens to the performance of companies after the PE-firm exit? Has the

ownership change resulted in sustainable growth or is the improved performance only

motivated by the PE-entry? The post-holding period will also be three years (after the

exit). Given that the financial crisis is not really over yet, or at least it is hard to say, a

post-holding period for the exits during the crisis will be harder to define and

investigate. That is, concerning the post-holding period, this will be most interesting

for the investments before the financial crisis.

Consequently, our model will look something like this:


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3 Private Equity

3.1 What is Private Equity?

Private equity is a source of investment capital from individuals and institutions for

the purpose of investing and acquiring equity ownership in nonpublic companies at

different development stages. Partners at private equity firms raise and manage funds

with the goal of achieving highest possible returns for their shareholders within the

risk profile of the fund. The investments horizon is usually medium to long term

(usually between 8-12 years) (NVCA.no).

Another important aspect of private equity funds is that they engage in “active

ownership". This includes representation in the companies’ boards, counseling (both

outside consultancy and own expertise) and close monitoring of the company's

management, as well as supervising the operations and development of the acquired

companies.

3.2 Why Private equity?

For companies wanting to raise equity the total capital market consists of the private

and public market. If a private company wants to go public an initial public offering

(IPO) is made which enables the company to list on a stock exchange and raise

capital in exchange for equity ownership to the investors. Further if a public company

wants to acquire additional capital, more shares can be issued and sold in the stock

market. The public market is liquid and well organized, but it is expensive to do an

IPO and the costs of getting and staying listed is significant. Due to regulations, the

standards and costs of reporting are high. Hence these markets are unreachable for

most small and medium size companies, which accounts for the vast majority of all

businesses in the economy (Spilling et al. 1998). These companies also have the wish

and intent to grow and expand, and thus need capital to fulfill their ambitions. Here is

where private equity finds its place in the capital market. In addition, private equity

consists of buyouts of public companies, where the goal is to take the company

private, restructure, and capitalize on the value creation potential of the company.

3.3 Types of private equity

The term “private equity” is in Europe used as a collective term for both buyout- and

venture capital investments, while in the United States venture capital is referred to as


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investments in seed, start up and expanding companies.

Figure 1: The separation between buyouts and venture capital, and their different

subcategories

The buyout part of private equity investments is commonly divided into leveraged

buyouts (LBOs) and management buyouts (MBOs). LBOs is defined as “acquisitions

of public companies by private investors who finance a large fraction of the purchase

price with debt” (Brealey and Myers 2003). MBOs have many of the same

characteristics as other types of buyouts with the main difference being that the

management acquires the firm. In the venture phase the investments come as a result

of need of capital to develop and expand, while buyouts usually are of companies

with solid cash flows that can manage the amount of debt raised to buy the target

company. This lowers the risk compared to venture capital investments, but as the

investments are much larger and the amount of debt is huge, thus failure can have

catastrophically consequences for the PE companies. As mention, we further in this

paper only focus on the both the venture and buyout stage when evaluating

performance.


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3.4 The investment process

The fund manager usually manages several funds, and before a new fund is initiated,

issues, such as fund size, investment strategy, industry focus and geography is

decided9.

After the framework for the fund is set, the fundraising period starts and usually lasts

from 6 to 12 months, depending on the interest from investors10. When the

fundraising period is complete, the general partners (GPs) screen potential target

companies. When a candidate is found, the PE management approaches the company

either directly or through an intermediate part. The next step is to do a due diligence

to map out the target (legal, tax, technical and financial issues) and industry. After the

research is done, but before the final contract is signed, the negotiation starts and a

deal is lined up containing specific terms and conditions such as covenants and

warrants, containing the purchase price, management agreements, etc. After the deal

is signed the GPs restructure the company to extract its value potential while closely

monitoring both operations and financial performance. As the investment period

comes to an end, the PE fund exits either through an IPO, industrial sales,

management buybacks or other disinvestment strategies11.

3.5 The private equity organization

PE funds are organized differently from other types of investment funds. The funds

are usually divided into limited partners (LP) and general partners (GP). The majority

of capital raised from the LPs is from institutional investors such as banks, pension

funds, insurance companies, mutual funds etc., while private investors usually

represents a minority stake. The LPs have no direct impact on how the fund is

managed but the investments are made on strict guidelines about risk, time to

maturity, etc. that gives the investors indirect control of the way the fund is run

(Grünfeld and Jakobsen 2007). GP is the management company that is responsible for

the daily activity of the funds and the investments made by the LPs. The GPs get paid

9 http://www.argentum.no/Main-categories/Nordic-PE/Fundraising2/

10 http://www.evca.eu/uploadedFiles/Home/Toolbox/Introduction_Tutorial/EVCA_PEVCguide.pdf

(p9)

11 http://www.nvca.no/userfiles/NVCA_rbok_2010_web.pdf

http://www.evca.eu/uploadedFiles/Home/Toolbox/Introduction_Tutorial/EVCA_PEVCguide.pdf


115

from yearly management fees and success fees depending on the performance of the

fund or investment.

Further as shown in the PE organization structure presented by EVCA, there can be

outside advisors such as consultancy companies, industry experts, etc. in the

investment process12.

12http://www.evca.eu/uploadedFiles/Home/Toolbox/Introduction_Tutorial/EVCA_PEVCguide.pdf(p.9

)

http://www.evca.eu/uploadedFiles/Home/Toolbox/Introduction_Tutorial/EVCA_PEVCguide.pdf


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4 Theory

4.1 Agency Theory

The agency problem arises because of conflicting interests of shareholders and

management. That is, shareholders want to maximize share price and dividend yields,

while managers want to maximize personal returns, for example meet quarterly or

annual report deadlines in order to secure bonuses (White space insight).

Shareholders want the highest payout possible, but this payout limits manager’s

flexibility and power, and induce a need for monitoring of capital markets to gather

alternative capital (Easterbrook, 1984). If capital is withheld internally, this

monitoring is not necessary.

Lundgren and Nordberg (2006) argue that it is “essentially three different sources of

value creation in leveraged buyout transactions emanate from the basics of agency

theory and reduction of agency costs, (i) the incentives realignment hypothesis, (ii)

the control hypothesis and (iii) the free cash flow hypothesis”.

4.1.1 The incentives realignment hypothesis

The mentioned conflicting incentives of shareholders and managers can be aligned

through buyouts. For example, a management buyout results in management getting

equity share in the company and consequently get similar incentives as the

shareholders – increase share price. In order to that, managers need to maximize firm

value, and not necessarily accomplish personal goals. When managers having an

incentive to maximize performance, they have the incentives to work harder and be

more careful when choosing investment opportunities. That is, on can only maximize

value by investing in positive NPV projects. However, this need for choosing only

positive NPV project might lead to managers becoming to risk averse.

4.1.2 The control hypothesis

This is particularly relevant when a company is turning private. When companies are

public, they often have a dispersed ownership. When turning private, the second

market for selling shares is gone and they are more or less “stuck” with their shares.

This gives incentives to improve monitoring.

4.1.3 The free cash flow hypothesis


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There are both advantages and disadvantages of having debt. A high leverage ratio

leads to high interest payments. Consequently, one needs to allocate money to pay

these interests. This is a disadvantage in the sense that you reduce manager flexibility,

and it may lead to a short-term orientation. In addition, the high interest payments

increase the probability of default because you are more exposed to unfortunate

economic cycles. On the other hand, it can serve as an advantage; given that a lot of

the cash flows have to be set aside for interest expenses, it leaves less room for

insufficient use of the remaining capital. That is, debt reduces the agency costs of free

cash flow by reducing the cash flow available for spending at the discretion of

managers (Jensen 1986).

4.2 Leverage

The Miller-Modigliani theorem argues that under certain conditions, firm value will

not be affected by the capital structure. If there exists a well-functioned market (and

neutral taxes) and rational investors, firm value will only depend on the income

stream generated by its assets (Modigliani 1980). However, these conditions are

questionable in real life, and one expects increased leverage to give tax benefits. With

an increased debt to equity ratio, this will lower the tax payments and hence lead to a

higher firm value (up to a given level).

4.3 Wealth transfer hypothesis

Eberhart and Siddique (2002) discuss the wealth transfer hypothesis and claim that

reducing leverage will reduce the probability of financial distress. Hence, there is a

transfer of wealth from stockholders to shareholders. Further, increased leverage will

increase the probability of financial distress, as the wealth transfer then goes in the

opposite direction. With their assumptions and a constant capital structure, the wealth

transfer hypothesis predicts that a change in leverage should be positively correlated

to future stock returns. In a study done by Bradshaw et al. (2006) they found the

opposite; that changes in leverage are negatively related to future stock returns

(contradictory to the wealth transfer hypothesis).

4.4 Parenting advantage

According to Alexander, Campbell and Goold, the parent “must help its businesses

address opportunities to improve their performance that they would fail to realize by

themselves”. Hence, a private equity sponsor may create value because of their

http://www.sciencedirect.com/science/article/pii/S0165410106000371#bib13


118

expertise and other benefits they have to offer. As mentioned, the governance model

they apply is a feature that public firms are struggling to copy. In addition, they

employ a time horizon that is long enough to implement drastic changes, but at the

same time short enough for them to have the motivation to complete all the changes.

5 Previous Research

As for previous theses, there are a few that look at the buyout segment. However,

most of these are looking at the Swedish buyout market. In a thesis written by

Lundgren and Norberg (2006), they looked at the operating performance of 67

Swedish leveraged buyouts between 1988 and 2003. Contrary to most other results,

they found no significant industry adjusted improvements in operating performance

in the first three years after the buyout. In the pre and post exit period, they did not

find any clear pattern, which indicates that performance was in line with the industry

peers. Another thesis, written by Grubb and Jonsson (2007), found that buyouts have

a significant positive impact on the companies’ operating performance. Hence, there

are different results concerning this topic. In addition, there have been written a thesis

at NHH about PE performance in Scandinavia, which concluded that PE backed

companies outperform their peers.

Concerning articles or other studies, a similar study to our intended study is the

Grünfeld and Jakobsen (2006) study where they compared value creation for

Norwegian PE-backed companies with other companies not PE-backed. In addition,

there are many studies looking at the performance of PE in other parts of the world,

especially in the UK and in the US. The Centre for Management Buy-out Research

(CMBOR) and the Credit Management Research Centre (CMRC) produced a report

that tracked the performance of a large sample of private equity-backed buyouts

between 1995 and 2010 and compares this to a sample of other private companies and

stock exchange listed companies. The report concluded that PE backed companies

show a stronger economic performance compared to private and listed peers (even

when there is a recession) (Wilson, Nick Et al. 2011).

McKinsey research shows that the top 25 percent of PE funds outperform the relevant

stock market indices. Moreover, they do so by a considerable margin – and

persistently (Kehoe, Conor et al. 2005). Other studies, like the portfolio company


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study conducted by SVCA in collaboration with Ernst & Young looking at both

venture capital and buyout, also confirm that PE outperforms the market in

Scandinavia. They found that PE backed companies had 2 percentage points higher

revenue growth and higher profitability compared to their peers.

In a large study, comprising almost 40percent of the U.S. Venture Economics

universe from 1984-2010, Robinson and Sensoy (2011) found that in their sample the

private equity funds outperformed public equities, on average. Furthermore, a study

by Robert Harris, Tim Jenkinson and Steven N. Kaplan from 2011, found that buyout

fund returns in the US have outperformed public markets for a long period of time,

while venture capital funds outperformed public market in the 1990s, but have

underperformed public equities in the 2000s. Overall their results suggests that –

contrary to some commentators’ expectations – PE-backed companies are not more

likely to fail than matched private companies and listed companies (Kaplan et al.

2011). This study is similar to ours and it will be interesting to discover whether we

find the same results.

Degeorge and Zeckhausen (1993) focused on the buyout category. Their findings

were that reverse LBO’s substantially outperform comparison firms in the period

before going public (IPO), but underperform them in the following period even

though net performance remains positive. Another study that is often referred to is

Kaplan (1989), where he looks at 48 large management buyouts where his main focus

is on operating income (before depreciation), net cash flows, and reductions in capital

expenditures. He found that in the three years after the buyout, these companies

experience increases in operating income, decreases in capital expenditures and

increases in net cash flow.

There are, however, studies that find the opposite; that PE backed companies do not

outperform their peers or the market. Kaplan and Schoar (2005) find that buyout and

VC funds underperform the S&P 500. Phalippou and Gottschalg’s paper (2006) sheds

light on the return distribution offered by the private equity industry over the 25 years

of its existence. They found evidence that the performance of private equity funds is

lower than the performance of the S&P 500 by as much as 3.8percent per year.


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5.1 “Competitive advantage”

As mentioned, there have been a considerable amount of previous research

concerning this subject, but none of these have looked at the influence the financial

crisis has had on the Norwegian PE market. In this way we will separate ourselves

from previous work. We want to highlight what the consequences of the financial

crisis have been. This will serve as our x-factor in this thesis.

Furthermore, we will emphasize on the different types of exits. We will identify how

the PE-firms choose to exit, and find out whether the types of exits change because of

the financial crisis, and also see if the magnitude of deals changes when markets

collapse. Our expectation is that there are fewer exits during the financial crisis. One

reason may be that there is a lower valuation of firms when there is a crisis, and

hence it is not profitable to sell. A report by Preqin found that buyout deals have

recovered from the low numbers of 2009, but decreased in both Q3 and Q4 in 2011 in

terms of volume (argentum). In addition, we want to look at the decisions for the exit.

What is the firm’s motivation to exit a deal?

When we have found the different types of exits, we will compare similar types of

exits. For example, an IPO-exit before the financial crisis will be compared with an

IPO-exit during the financial crisis. The private equity research firm Preqin reported

that before the financial crisis, the private equity market was characterized by a large

number of exits of all types. During the crisis, however, the exits made up another

composition. First of all, the number of exits fell. Second, trade sales are most


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common in Norway in 2010, representing about 25percent of total exits. Because of

the financial crisis, IPOs is no longer the main alternative.

The breakdown of PE buyout-backed exits is presented in the figure 2 above.

This report is relevant for our thesis, and it will be interesting to see whether the

Norwegian PE market is characterized by the same exit-pattern.


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6 The PE Market

6.1 The Nordic Market

As mentioned, the Nordic PE market is still quite fresh and not fully developed.

However, it seems to be a market with high potential that is yet to be extracted.

Further, this market is growing. It has experienced considerable development the past

few years with an increased investment volume (argentum). The Nordic PE market

has shown a great track record and serves several beneficial socio-economic factors,

which leads it to be an attractive investment opportunity (argentum).

6.2 The Norwegian Market

Norway is ranked in the top quartile in all the different categories on the last Global

Venture Capital and Private Equity Country Attractiveness Index (argentum).

However, Norway did not stand out in total and is currently ranked as the 13th most

attractive market for investments. Norway serves as an attractive investment

opportunity much because of its stable economic condition and high BNP per capita.

In addition, large portions of the investments are mature, leading to a significant

number of sell processes expected in 2011 and 2012 (IESE).

Figure 3: Number of PE investments separated in venture capital and buyouts.

In the 2010 activity report published by Menon Business Economics for the

Norwegian Venture Capital & Private Equity Assosiation (NVCA) it is found that the

activity of buyout investments has been stable at the amount of above 4 billion NOK

throughout the financial crisis, while there has been a decrease in seed and venture

investments over the last two years. Buyouts were the dominant segment in the first


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half of 2011, accounting for more than 50percent of the total investment value.

However, venture dominates buyouts in terms of the number of deals (see figure 3

above, source Argentum).

Figure 4: Total capital pool distributed on the different types of PE investments in the

period 2003-2010.

Another key point of the report is that most of the capital is from foreign investors

(60 percent). By the end of 2010, the Norwegian funds administer capital amounting

to 61.2 billion NOK. In the period between 2003 and 2008 there were a strong

increase in the capital pool managed by Norwegian funds, but after 2008 it has

stabilized around 60 billion NOK. See figure 4 above.

As mentioned, the buyout segment has stayed stable the last few years, and account

for over 2/3 of the total investments. In Europe, the development in the buyout

segment has actually been quite volatile, with a 100 percent increase from 2009 to

2010. The amount of capital invested in seeds has decreased dramatically the last

couple of years, and it is much due to the lack of funds in this segment. This is of

concern because these funds are critical for start-up companies’ future development.

The investments in the venture segment has decrease every year with two large drops

in 2008 and 2009 and in 2010 accounts for 1,2 billon NOK. This is quite similar to

the development in Europe.

Renewable energy and environmental technology together with petroleum are the

industries that are most attractive for investment in Norway. Renewable energy is the

industry with most new investments in 2010, while petroleum and IKT is the biggest

industries in terms of amounts invested. Nearly 70 percent of the companies in the

funds’ portfolios are located in Norway. However, most of the Norwegian based


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companies do have operations worldwide. Furthermore, about 15 percent is located in

Sweden, 6.5 percent in USA while the UK-located companies account for 3.2

percent.


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7 Performance measures

How we are going to measure the performance of the PE-backed companies will

perhaps be the most important issue in this thesis. There have, as mentioned, been

several studies covering this subject, and consequently there have been used several

alternative performance measures. However, we will limit these different measures

down to the ones we will mention, and base this decision on previous research and

our own knowledge of the measures.

7.1 Growth

As measures for growth we will look at the compounded annual growth rate (CAGR)

for both sales and earnings before interests, taxes, depreciation, and amortization

(EBITDA). Furthermore, we will also look at the EBITDA-margin, as it is natural to

analyse these measures together. In addition, Grubb and Jonsson (2007) find the

EBITDA-margin as highly relevant “as price and leverage are often quoted in terms

of multiples of EBITDA”.

7.2 Cash flow variables

As in Kaplan (1989), we will look at operating income, which equals net sales less

costs of goods sold (COGS) and selling, general and administrative (SG&A)

expenses before depreciation, depletion, and amortization. We want to include this

measure as this is before taxes, and hence is independent of capital structure.

In addition, we include capital expenditures. Kaplan (1989) found evidence of

decreasing capital expenditures after PE entry, and that was a signal of reduced

agency-costs, increased efficiency and a tendency of underinvestment after the

buyout. Furthermore, we also included change in working capital. Working capital is

found by subtracting current liabilities from current assets.

Furthermore, we will include all these cash flow variables as percentage of sales to

partially control for divestitures and differences in growth (Kaplan 1989).

7.3 Leverage

The effects of higher leverage have been discussed previously in this thesis, and it is

expected that the level of debt increase after the buyout. To measure if this is true, we

include a measure for interest coverage. Interest coverage is found by dividing

operating income by net interest expense. We will compare this ratio before the


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buyout with after the buyout with the objective to find out whether the leverage in the

PE backed companies increase after the buyout and if there is increased value through

higher interest payments.

In addition, we will include net debt to EBITDA. Net debt is defined as interest

bearing debt minus cash and cash equivalents. If net debt and EBITDA is held

constant, this ratio will tell how many years it will take for the company to repay its

debt. The ratio can also serve as an indicator for the readiness of a company to

provide specific debt instruments, in for example a leveraged buyout.


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8 References

Articles, studies or other theses

Svenska Riskkapitalföreningen and Ernst & Young, “PE Performance – A study of

PE owned portfolio companies in Sweden”.

Beroutsos, A., Freeman, A., and Kehoe, C (2007), “What Public Companies Can

Learn from Private Equity”, McKinsey on Finance (22), 1-6

Wilson, N., Wright, M., and Scholes, L. (2011), “Private Equity Portfolio Company

Performance through the Recession”.

Kaplan, S., Jenkinson, T. and Harris, R. (2011), “Private Equity Performance: What

do we know?”.

Kaplan, S. and Schoar, A. (2005), “Private Equity performance: Returns, persistence,

and capital flows”. Journal of Financial Economics, 24, 217-254

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

and value”, Journal of Financial Economics 24 (1989) pp. 217-254. North-Holland

Phalippou, L. and Gottschalg, O. (2006), “The Performance of Private Equity

Funds”.

Phalippou, L. and Zollo, M. (2005), “What drives private equity performance”.

White Space Insight (by Ben Lambert), “Does Private Equity Ownership Drive

Company Performance?”

Grünfeld, L. and Jakobsen, E., (2006), “Hvem eier Norge: Eierskap og verdiskapning

i et grenseløst næringsliv”, Universitetsforlaget.

Robinson, D., and Sensoy, B., (2011), “Private equity in the 21st Century: Cash

Flows, Performance, and Contract Terms from 1984-2010”.

Degeorge, F., and Zeckhausen, R. (1993), “The reverse LBO decision and firm

performance: Theory and Evidence”, Journal of finance, 48, 1323-48

Jensen, M. (1986), “Agency costs of free cash flow, corporate finance, and

takeovers”, The American review, vol. 76, No.2, pp. 323-329

Bradshaw, M., Richardson, S., Sloan, R. (2006), “The relation between corporate

financing activities, analysts’ forecasts and stock returns”,


128

Eberhart, A., Siddique, A. (2002), “The long-term performance of corporate bonds

(and stocks) following seasoned equity offerings”, The review of financial studies, 15

(2002), pp. 1385-1406

Barber, B. and Lyon, J. (1996), “Detecting Abnormal Operating Performance:

TheEmpirical Power and Specification of Test Statistics”, Journal of Financial

Economics 41(3), 359-399.

Spilling et al. 1998: “SMB 98 – fakta om små og mellomstore foretak I Norge”.

Fagbokforlaget, Bergen.

Brealey, R. And Myers, S. (2003), “Principles of corporate finance”. 7th edition.

McGraw-Hill/Irwin, Boston, Mass

Easterbrook, F. (1984), “Two Agency-cost explanations of dividends”. The American

Economic Review. Vol. 74, No. 4 (Sep., 1984), pp. 650-659

http://www.bvca.co.uk/assets/features/show/PrivateEquityportfoliocompanyperforma

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