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.
Table of Contents
1. Introduction
2. Characteristics of Retail Private Equity
2.1 Determinants of the Industry Environment
2.2 Private Equity Value Creation in Retail
3. Literature Review and Development of Hypotheses
3.1 General Partner Experience
3.2 Private Equity Fund Size
3.3 Retail Industry Specialization
4. Data and Methodology
4.1 Data Compilation and Restrictions Applied
4.2 Data Quality
4.3 Descriptive Statistics
4.4 Methodology
4.5 Variables
4.5.1 Dependent Variables
4.5.2 Independent Variables
4.5.3 Control Variables
4.5.4 Fixed Effects
5. Empirical Results
5.1 Performed Regressions
5.2 Tests of Model Specifications
5.3 Review of Hypotheses
5.4 Discussion of Limitations and Scope for Future Research
6. Conclusion
Research Objectives and Themes
This thesis investigates the determinants of success for private equity investments within the retail sector, specifically analyzing how general partner experience, fund size, and retail industry specialization influence investment performance and the probability of business failure.
- Analysis of the retail private equity market environment.
- Evaluation of private equity value creation levers in retail.
- Investigation into the impact of fund characteristics on investment outcomes.
- Examination of performance drivers using quantitative regression models.
- Assessment of retail-specific risks and bankruptcy probabilities.
Excerpt from the Book
3.1 General Partner Experience
Research on the impact of a PE firm’s experience on the investment outcome has grown within the emerging strand of literature on PE performance. Kaplan and Schoar (2005, p. 1803) provide early evidence of a significant positive relationship between PE experience - measured by the sequenced number of funds raised by a firm - and superior returns. Phalippou and Zollo (2005, p. 14), Gottschalg and Phalippou (2008, p. 25), Aigner et al. (2008, p. 72) as well as Achleitner et al. (2011, p. 155) and Thaker (2014, p. 46) confirm those findings on either fund or deal levels. Thus, existing literature is reasonably conclusive about the positive impact of a PE firms experience on overall performance, yet imprecise about its effects on sector-specific investment outcomes. In order to derive a hypothesis with respect to retail investments, it is the aim of this section to comprehensively illustrate factors differentiating experienced firms from their inexperienced competitors. The structure follows the three key levers of PE value creation, namely multiple expansion (split in investment entry and exit multiples), financial leverage, and operating improvements (Achleitner et al., 2011, p. 147).
Summary of Chapters
1. Introduction: This chapter contextualizes the research within the "Retail Apocalypse" and defines the study's goal to establish causal links between firm/fund characteristics and retail buyout performance.
2. Characteristics of Retail Private Equity: This chapter provides an overview of the global retail environment and discusses value creation levers and potential drawbacks in the retail private equity sector.
3. Literature Review and Development of Hypotheses: This chapter reviews academic research on performance drivers and derives hypotheses concerning GP experience, fund size, and retail specialization.
4. Data and Methodology: This chapter outlines the data sources, sample selection, regression models, and variables used in the empirical investigation.
5. Empirical Results: This chapter presents the regression findings, tests for model robustness, and discusses the implications of the results in relation to the developed hypotheses.
6. Conclusion: This chapter summarizes the main findings and provides implications for both practitioners and future academic research.
Keywords
Private equity, retail sector, leveraged buyouts, investment performance, fund size, general partner experience, industry specialization, money multiples, internal rate of return, write-offs, financial engineering, operating improvements, retail bankruptcy, retail investment, empirical analysis.
Frequently Asked Questions
What is the primary focus of this research?
The research examines the success factors of private equity investments in the retail sector, analyzing the influence of GP experience, fund size, and industry specialization on performance and investment failure.
What is the main research question?
It seeks to determine how macroeconomic, firm, and fund-level characteristics affect the performance of leveraged buyouts specifically within the retail industry.
Which scientific methods were employed?
The author performs multivariate linear and logistic OLS regressions to test hypotheses using a sample of individual retail transactions derived from Preqin data.
What are the key thematic areas covered?
The study covers retail market trends, the mechanics of value creation in private equity (financial engineering, operations), and factors influencing bankruptcy risks in retail buyouts.
Who are the target audiences for this thesis?
The findings are highly relevant for private equity practitioners, fund managers, and retail company boards evaluating takeover offers.
Which specific variables characterize the analysis?
The study focuses on Money Multiples, IRR, and write-off probabilities as dependent variables, controlled against fund sequence, fund size, and sector-specific focus.
Does the size of a private equity fund impact its performance in retail?
Yes, the data suggests that in the retail sector, larger funds often underperform and face a higher probability of write-offs due to diseconomies of scale and monitoring challenges.
Do retail-focused funds perform better?
The study finds that funds specialized in retail achieve higher returns in their retail transactions, though they simultaneously face a higher probability of these specific retail investments resulting in bankruptcy.
- Quote paper
- Louisa Blum (Author), 2020, Success Factors of Private Equity Investments in the Retail Industry, Munich, GRIN Verlag, https://www.grin.com/document/1301650
