What do private equity firms say they do?

We survey 79 private equity (PE) investors with combined assets under management of more than $750 billion about their practices in firm valuation, capital structure, governance, and value creation. Investors rely primarily on internal rates of return and multiples to evaluate investments. Their lim...

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Bibliographic Details
Published in:Journal of financial economics 2016-09, Vol.121 (3), p.449-476
Main Authors: Gompers, Paul, Kaplan, Steven N., Mukharlyamov, Vladimir
Format: Article
Language:English
Subjects:
Business valuation
Capital structure
Corporate governance
Investment advisors
Market timing
Private equity
Rates of return
Studies
Valuation
Value creation
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Summary:We survey 79 private equity (PE) investors with combined assets under management of more than $750 billion about their practices in firm valuation, capital structure, governance, and value creation. Investors rely primarily on internal rates of return and multiples to evaluate investments. Their limited partners focus more on absolute performance as opposed to risk-adjusted returns. Capital structure choice is based equally on optimal trade-off and market timing considerations. PE investors anticipate adding value to portfolio companies, with a greater focus on increasing growth than on reducing costs. We also explore how the actions that PE managers say they take group into specific firm strategies and how those strategies are related to firm founder characteristics.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2016.06.003