Private equity (PE) firms are often said to use their industry expertise and operational know-how to identify attractive investments, to develop value creation plans for those investments, and to generate attractive investors returns by implementing their value creation plans. Although many studies refer to such value creation plans, there is no systematic evidence on what these plans typically look like or whether they help improve company operations or investor returns.
In a recent paper, we open up the black box of value creation in private equity with the help of confidential information on value creation plans and their execution. We find that plans are tailored to each portfolio company’s needs and circumstances and have become more hands-on. Successful execution varies systematically across funds and is a key driver of investor returns. Company operations and profitability improve in ways consistent with successful execution, even beyond PE funds’ exit.
