equity firms tend to utilize their executive networks more frequently. When asked to summarize these sources, the PE investors considered almost 48% of their closed deals to be proprietary in some way. Unfortunately, we have no way of evaluating
26 exactly what proprietary means nor can we validate the extent to which the deals truly are proprietary or advantaged. Nevertheless, we think these results indicate that the PE investors explicitly consider the extent to which their potential investments are proprietary, and attempt to invest in deals that are. 6.2. Deal Selection In order to better understand how PE investors select and differentiate among investments, we asked them to rank the factors they considered in choosing their investments. Table 21 reports these results. The most important factor in choosing an investment is the business model / competitive position of the company. The management team, the PE investor’s ability to add value and the valuation are the three next most important factors and are roughly of equal importance. The industry or market of the company and the fit with the PE investor’s fund are of least importance. Two of these results are notable. First, the PE investors put somewhat more weight on the business than on the management team. This result is highly consistent with the work of Kaplan, Sensoy, and Strömberg (2009) that shows that at least within the venture capital world, the business strategies of firms remain far more stable (and hence are more important) than the stability of management. Second, the importance of the ability to add value suggests that PE investors take operational engineering and adding value seriously. This also suggests that different private equity firms are likely to target and value investments differently. Private equity firms often have particular industry experience and focus. A successful track record in a particular industry is likely to lead to greater investment focus on a particular sector. The survey asked the selection question in another way by asking what drivers of return PE investors bet on in making investments. Table 22a reports the percentage of PE investors
27 who view a return driver as important while table 22b reports the ranking of those return drivers. Growth in the value of the underlying business is mentioned as a return driver by 100% of the PE investors and is the highest ranked return driver. Operational improvements are close behind, ranked second and mentioned by 97% of the PE investors. Leverage and industry-level multiple arbitrage—selling at a higher multiple than buying—are mentioned by 76% and 65%, but rank well-behind growth and operational improvements. These results suggest that PE investors invest with the expectation or hope of growing the value of the business and improving operations. Leverage as well as buying low and selling high are viewed as less important.
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- Fall '15
- Harvey, Steven N. Kaplan, PE investors