Private Equity Business Model Research Articles

Business Strategy as Human Rights Risk: the Case of Private Equity

In this article, we apply the UN Guiding Principles on Business and Human Rights to the private equity (PE) business model. PE firms often adopt a controversial, ‘value extractive’, business model based on high debt and extreme cost-cutting to generate investor returns. PE firms own large numbers of companies, including in many rights-related sectors. The model is linked to increased human rights risks to workers, housing tenants, and in privatized health and social care. We map these risks and analyse the human rights responsibilities of PE firms. Our analysis has major implications for understandings of human rights responsibility. We argue that value extractive methods are the root cause of eventual harm to human rights, even though they may not harm rights directly. To respect human rights, PE firms must mitigate the risks of these value extractive methods. We define how human rights due diligence (HRDD) could achieve this and argue that given the extent of harm and the lack of a business case for adopting such a view of human rights responsibility, business strategy level HRDD should be a core component of forthcoming HRDD laws.

New perspectives on private equity performance and impact - Jeffrey Hooke, The Myth of Private Equity: An Inside Look at Wall Street's Transformative Investments, New York, Columbia Business School Press, 2021, 240 pp., $35.00 (hbk), ISBN 978-0-231-19882-0 - Laura Katz Olson, Ethically Challenged: Private Equity Storms US Health Care, Baltimore, MD, John Hopkins University Press, 2022, 425 pp., $34.99 (hbk),

Two new books, Jeffrey Hooke’s The Myth of Private Equity (2021) and Laura Olson’s Ethically Challenged (2022), address the private equity business model as one avenue through which the financialization of our societies is occurring. While based on US data and examples, they provide lessons for those in countries around the world who are concerned about the antics of global finance that often skirt existing regulatory frameworks.

Buy low, sell high? Do private equity fund managers have market timing abilities?

When investors commit capital to a private equity fund, the money is not immediately invested but is called by the fund manager throughout an investment period of up to five years. The private equity business model allows fund managers to invest and divest the committed capital during the fund's lifetime at their own discretion, which gives them the flexibility to time the markets. Based on 7,591 private equity deals, which are benchmarked against 14,390 M&A transaction multiples, we find evidence that on average private equity funds are able to create value by timing the financial markets. Market timing ability is not captured by performance measures such as the PME, yet it is a potential source of returns for investors.

Private Equity Meets Antitrust....Complications Ensue

Private Equity is simply a way in which an investment company is structured. What the term usually means, however, is an entity that seeks to make an investment, quickly make changes in the company, and then sell out. Antitrust gets involved to determine whether the acquisition of stock or assets leads to a lessening of competition in any market. As part of that process, potential acquirers must give notice to the antitrust agencies and observe a waiting period. The private equity business model seeks to minimize, or avoid, such waiting. The approaches taken by private equity investors, and the agencies’ responses, have created an interesting legal landscape.

Inorganic growth strategies and the evolution of the private equity business model

This paper investigates inorganic growth strategies in PE buyouts where the portfolio firm, which has been acquired in the initial buyout, serves as a platform for subsequent add-on acquisitions. We analyze a comprehensive sample of 9548 buyouts and 4937 add-on acquisitions spanning 16years of buyout activity in 86 countries. We find that the probability for add-on acquisitions is high if the PE sponsor is experienced and has reputational capital, if the portfolio firm is large, has M&A experience at entry and operates in an industry with moderate degree of fragmentation, as well as in case of favorable financing conditions. Similar factors also explain higher add-on productivity and faster add-on execution. On average, cross-border/industry diversifying inorganic growth strategies are most likely if the portfolio company already draws upon international/inter-industrial M&A experience at entry and if the PE sponsor frequently invests across borders/industries. Furthermore, our results indicate that add-on acquisitions increase the probability for exiting through IPO and secondary buyout. The effect on secondary buyouts is driven by deals where the subsequent PE owner continues the inorganic growth strategy of the previous buyout.

Financialisation, ownership and employee interests under private equity at the AA, part two

AbstractThis article examines a theoretically informed case study of the effects of financialisation at the workplace. It focuses in particular on trade union de‐recognition and trade union recognition in the furtherance of ownership interests. The paper reports on the continued diffusion of investor‐owner interests under the private equity business model which has recently witnessed the AA re‐listed on the stock market. It addresses two research questions. One, how are investor‐owner interests secured by trade union de‐recognition and re‐recognition? Two, how and why, as a de‐recognised trade union, does the GMB continue to campaign for and represent GMB members in the AA when the IDU (the independent democratic union) has sole recognition at the firm?

Templates for financial control? Management and employees under the private equity business model

The term ‘private equity business model’ (PEBM) refers to private equity investors that delist publicly quoted firms, managing them as private equity‐controlled portfolio firms. But how and in what form do these investors diffuse a preferred template for the PEBM in portfolio firms? Is diffusion codified, institutionalised or merely tacit? What is the difference between these forms of diffusion? As a method of financial control, how is diffusion evident for managers and workers? Theoretically, while ‘financialisation’ is a contemporary pressure on the British economy, there is a ‘disconnection’ between competitive pressures for financialisation and the diffusion of practices to manage these pressures in portfolio firms. Forty‐two interviews in eight portfolio firms and five associated private equity firms concludes that potentially transformative and decisive restructuring for managers and workers is more evident than a defined template.

The private equity business model: On terra firma or shifting sands?

This paper reveals how the financial crisis undermined the performance of Private Equity Partnerships (PEPs). The private equity business model depends upon leveraged finance coupled with corporate transformation from market arbitrage that, in turn, delivers inflated market valuations and exit multiples. Private equity partnerships conjoin corporate productive and financial activity with speculative capital market demands where liquidity, risk appetite and market value appreciation matter. It is a business model where productive transformation of acquired firm's is often disappointing because leverage inflates balance sheet capitalization ahead of cash earnings capacity. It is also a volatile business model because capital market valuations and fair value reporting amplify holding gains and losses for limited equity partners. It is a business model constructed on shifting sands not terra firma.

Private equity and the flight of the phoenix four-- the collapse of MG Rover in the UK

This paper explores the nature of the co-called ‘private equity business model’ (PEBM) and assesses its shortcomings, using the illustrative example of the role of private equity in structuring the finance and subsequent collapse of MG Rover, as the automotive industry has been a significant destination for private equity financing. The paper outlines the nature of the PEBM. It then details how the PEBM extracts value, before stressing how this can affect workers in a portfolio business. We argue that the emergence of the PEBM changes the basis of competitive rules in organizations and the running of erstwhile going concerns, necessitating a need for further regulation—particularly, how to secure wider stakeholder oversight without reducing the efficiency of PEBM concerns.

Value Creation Drivers in Private Equity Buyouts: Empirical Evidence from Europe

Most of the existing research on value creation drivers in private equity buyouts is restricted to the U.S. and the U.K. In addition, most of the generally applied methods for measuring the importance of different value creation drivers do not comprehensively account for all relevant aspects, such as a clear separation between operating and financial risk. This article tries to fill these research gaps and analyzes value creation drivers in European (continental Europe and U.K.) buyouts from the perspective of private equity sponsors using a unique dataset of 206 realized transactions. The methodology used allows the authors to separate the value contribution of leverage on private equity sponsors’ returns from operational improvements and market effects. The results of the empirical analysis show that one-third of the private equity sponsors’ returns can be attributed to the use of leverage, whereas two-thirds are due to operational and market effects. Moreover, value creation drivers are analyzed with respect to different time periods, transaction sizes, and general market conditions. The results provide important insights into the private equity business model in Europe. <b>TOPICS:</b>Private equity, developed, statistical methods, analysis of individual factors/risk premia

Owners and managers

The ‘disconnected capitalism’ thesis constructs an argument that structural tendencies within capital markets disrupt established patterns of relations between employers and labour. This ar ticle develops this argument by conceptualizing how the ‘private-equity business model’ (PEBM) further diffuses these connections and trends.This diffusion is so extensive that the interests of owners are now paramount in all types of business system to the relative exclusion of other stakeholders. The article defines and explains the term ‘PEBM’ and identifies the theoretical importance of management in managerial capitalism. The ar ticle then goes on to outline how the PEBM disconnects the evaluation of institutional capability and managerial discretion at firm level from the economics of information and direct ownership interests at business system level.

The private equity business model and associated strategies for HRM: evidence and implications?

Are private equity firms significant actors in the UK market for corporate control? Do they represent a new organizational form befitting a new business model? What are the direct and indirect pressures on management that flow from the diffusion of this business model and its associated organizational form? In terms of human resource management does acquisition by private equity have a significant or negligible effect? This paper looks at the development and diffusion of private equity and the ‘take private’ private equity business model (PEBM) and the effects of these on the management of HR. In addition to this the paper evaluates the PEBM within comparative institutional approaches to international business and HRM.

Private Equity in Australia

Private equity investment in Australia has changed in both extent and nature over the last few years. In particular, transactions where a private equity fund buys out a mature publicly listed company have increased. The targeting of ‘iconic’ companies such as Qantas by private equity heightened the concerns held in some quarters of the possible impact of private equity ownership on corporate stability and employment conditions in these companies. This article provides an overview of private equity transactions in Australia. It also reviews the major concerns with the private equity business model, which were presented by various parties to a senate enquiry in 2007. It argues that a window of opportunity was open during 2006 and 2007 for private equity owners to extract returns on their investment by reducing employment costs using the Work Choices legislation. That such an approach was not pursued suggests that private equity funds realize returns through a number of avenues, not just by reducing running costs or rationalizing productive assets.

Private Equity in the UK: Job Regulation and Trade Unions

Private equity represents a ‘new actor’ in the British business system with the capacity to have a significant impact on industrial relations. However, while private equity and its associated business model appear as significant factors in corporate governance and industrial relations, neither the sector nor the business model has been evaluated theoretically or empirically. Indeed, for the UK at firm level the ways in which business strategy and job regulation are shaped by private equity are unclear other than by references made to institutional configuration in the business system — short-termism. This article outlines what private equity is, details its associated business model, describes how the sector affects workers and summarizes how trade unions have responded to the private equity business model.