Success Factors of Private Equity Investments in the Retail Industry

Abstract or Introduction

This thesis examines the relationship between private equity firm and fund level characteristics and the performance of leveraged buyouts in the retail sector. More specifically, the three dimensions general partner experience, fund size, and the fund’s retail specialization are analyzed.

The impact of the three characteristics on the investment performance proxied by money multiples and internal rates of return, as well as by the write-off probability of the buyout, is assessed by analyzing a sample of 10,376 buyouts conducted since 1993, of which 614 deals are transactions in the retail sector.

According to Bloomberg News, the year of 2017 was known as the "Retail Apocalypse" with more U.S. retailers filing for bankruptcy than during the year of the financial crisis. By taking a closer look at the reasons for these defaults, one will quickly understand that the culprit might not solely be Amazon Inc. tapping on market share. Before their bankruptcies, numerous retail companies were bought and highly levered by private equity firms who neither were able to implement adequate operational improvements, nor product and sales innovations.

The resulting collapses like the one of toy giant Toys"R"Us in September 2017, twelve years after its leveraged buyout by the mega funds of Bain Capital and KKR, lead to numerous store closings and job losses. Hence, there is certainly a need to understand the factors determining the success of private equity investments in the retail industry. This thesis aspires to establish a causal relationship between macroeconomic, firm, and fund level characteristics and buyout performance in the retail sector.