Stian Sandvik

Copenhagen Business School Stian Sandvik Private equity in Norway: Impact and determinants of private equity ownership. Master thesis submitted in partial fulfillment of the requirements for the degree of MSc. in Economics and Business Administration. Study programme: Applied Economics and Finance. Supervisor: Palle Nierhoff Copenhagen, 18th of june, 2008 Abstract This paper aims at overcoming some of the shortcomings of previous research on private equity investment in Norway. In particular, it examines the Norwegian private equity market and attempts to identify the characteristics that determine the flow of domestic and foreign capital. Further it examines the potential impact of domestic and foreign private equity ownership on portfolio firms operating in a premature private equity market. Private equity is a relatively new phenomenon in Norway. The alternative asset class is gaining grounds in the Norwegian market and the national industry is experiencing exponential growth in fund-raising activities and investments. Currently, the Norwegian market is largely concentrated in terms of domestic investment activities and a low representation of foreign investors. Foreign investment activity is expected to increase in the coming years, and as of this the thesis aims to shed light on the effect of private equity ownership. First, a descriptive analysis outlines and discusses the main characteristics of the Norwegian private equity market and compares with other Nordic markets. The identified characteristics provide suggestions as to why the Norwegian market is relatively underdeveloped. Second, an extensive literature review discusses empirical findings on the financial returns of PE ownership. The underlying drivers and mechanisms that influence abnormal operating performance are identified and compared across several empirical studies. Third, a quantitative study incorporates a sample of 16 buyout transactions and analyzes the operating performance of portfolio firms where new owners are private equity firms. Additionally, it analyzes and compares the operating performance of portfolio firms under domestic and foreign private equity ownership. Lastly, the results of the analysis are summarized and discussed. The thesis concludes by suggesting areas for future research. Table of contents 1.0. Introduction.........................................................................................................................1 1.1. Notes on the private equity controversy.............................................................................................1 1.2. European private equity. .......................................................................................................................2 1.3. A brief look at the Norwegian private equity evolution...................................................................4 1.4. Problem formulation .............................................................................................................................8 1.5. Research problem and objectives.........................................................................................................9 1.6. Delimitation ..........................................................................................................................................10 1.7. Thesis methodology.............................................................................................................................11 1.8. Key concepts and definitions .............................................................................................................12 1.8.1. What is private equity and how is it organized?..........................................................................12 1.8.2. Private equity and venture capital definitions...........................................................................15 1.8.3. PE investment and portfolio firms. ...........................................................................................17 1.8.3.1. LPs, GPs and portfolio firms...................................................................................................17 1.8.3.2. The investment cycle.................................................................................................................18 1.8.3.3. Exit options ................................................................................................................................18 2.0. Literature review. .............................................................................................................. 19 2.1. A retrospective view of the international PE industry....................................................................20 2.2. Determinants of abnormal performance. .........................................................................................22 2.2.1. Capital structure. ...........................................................................................................................22 2.2.2. Active ownership. .........................................................................................................................24 2.3. Returns & performance of PE & LBOs...........................................................................................26 2.3.1. Fund returns. .................................................................................................................................27 2.3.2. Operating performance of portfolio firms................................................................................28 2.4. Summary of empirical evidence. ........................................................................................................31 3.0. Descriptive analysis of the Norwegian PE market...........................................................34 3.1. Fund raising and investment activities in Norway and the Nordic region. .................................34 3.2. Summary and main trends. .................................................................................................................41 4.0. Quantitative analysis.........................................................................................................43 4.1. Methods description. ...........................................................................................................................43 4.1.1. Performance measures. ................................................................................................................46 4.1.2. Data collection and sample construction. .................................................................................47 4.1.3. Sample description........................................................................................................................48 4.1.4. Statistical method & hypotheses.................................................................................................53 4.2. Empirical results...................................................................................................................................55 4.2.1. Aggregate sample analysis............................................................................................................55 4.2.1.1. Summarized results from the aggregate sample analysis......................................................60 4.2.2. Two-sample analysis.....................................................................................................................60 4.2.2.1. Summarized results from the two-sample test. .....................................................................64 4.2.3. Results summary ...........................................................................................................................64 4.2.4. Critical reflections .........................................................................................................................64 5.0. Reliability and validity of results. .....................................................................................66 6.0. Conclusions.......................................................................................................................68 6.1. Results summary and conclusions. ....................................................................................................68 6.2. Reflections and suggestions for future research. .............................................................................71 7. References............................................................................................................................73 8. Appendices…………………………………………………………………...……………….77 Table 1 p. 10 Table 2 p. 15 Table 3 p. 46 Figure 1 p.4 Table 4 p. 47 Figure 2 p.17 Table 5 p. 51 Figure 3 p.34 Table 6 p. 52 Figure 4 p.35 Table 7 p. 56 Figure 5 p.37 Table 8 p. 58 Figure 6 p. 39 Table 9 p. 61 Figure 7 p.41 Table 10 p. 63 Figure 8 p.50 1.0. Introduction. 1.1. Notes on the private equity controversy. Private equity has grown from being a relatively perplexing concept among common people, to a source of much fervor and controversy among industry commentators within the European financial markets. In 2007, the European private equity industry was subject to much criticism from the public. The industry faced accusations of destroying jobs, it was considered as one of the constituent drivers for the 2006/2007 credit crunch, and the industry’s disclosure standards was under heavy debate. One of the major opponents, The Party of European Socialists (PES) of the European Union 1, mainly directed their

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