Instinctively, we all believe that a company’s ownership and governance affects its performance, positively or negatively. For institutional investors investing in private equity, there is no question that one’s choice of general partner (“GP”) matters… a lot. As many high profile limited partners reduce the number of private equity managers they invest in, resulting in the creation of more concentrated portfolios, we’re left with the question of exactly how much does manager selection really matter?
New research published by PERACS’ Oliver Gottschalg and Francesco Castellaneta of the Catolica Lisbon School of Business and Economics dives deeper into this question. By utilizing a unique database of 6,950 buyouts realized by 255 PE firms between 1973 and 2008 in 78 countries, they have been able to calculate how much the choice of GP, and the style of ownership and governance it practices, impacts each investment’s performance. Their research focused on the private equity form of governance because it is distinctly different from the more widely studied public and corporate forms of governance. Private equity GPs manage their investments independently from one another and try “to maximize the standalone market value of buyouts” and “remain closer to operations and management than a traditional conglomerate headquarters or a public company’s board of directors would.”
Gottschalg and Castellaneta came to some thought provoking conclusions. By utilizing four main variables (date of investment, duration of investment, state of economic development and infrastructure of investment’s location, and GDP growth) and three control variables (investment size, PE fund size, and PE fund industry experience), they found that specific firm ownership explains a 4.6% variance in an investment’s performance and that, in fact, the value of PE ownership becomes more significant over time.
The result implies that PE firms are endowed with heterogeneous resources, like competences, assets, information, and knowledge, and that some firms have significantly better resources than others.
Their paper, entitled “Does Ownership Matter in Private Equity? The Sources of Variance in Buyouts’ Performance”, was recently published in the Strategic Management Journal.