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Private Equity experienced dramatic flutuations in investment activity in line with the turbulences of financial markets in recent years. Claudia Sommer develops a theoretical framework of factors driving private equity investment activity and the resulting performance implications. Using a data set of more than 40,000 European transations between 1990 and 2009 she applies a variety of econometrial approaches and shows how neoclassical aspects, information asymmetries, agency conflicts, and market timing contribute to the dynamics in the private equity market. In a performance analysis of more than 1,300 European private equity funds, she reveals how fund performance is linked to investment activity. ​



1. Introduction

Private equity experienced a period of impressive global growth at the beginning of the 21


century, gaining tremendously in importance in Europe. According to the European Venture Capital Association (EVCA), private equity activity peaked in 2006 with EUR 74.3 billion funds raised and EUR 68.3 billion channeled into equity investments. Given that both figures had been single-digit-billion amounts just ten years earlier, private equity had clearly established itself as a permanent and influential asset class in Europe (Chew and Kaplan 2009, p. 12) providing financing for about 25,000 European companies (Frick 2010).

Claudia Sommer

2. Background

Private equity can be defined as any non-public equity investments in private or public firms (Fenn, Liang and Prowse 1998, p. 2). Following the definition submitted by Thomson Venture Economics, the term private equity comprises all types of venture investing, buyout and mezzanine investing (EVCA 2004: p. 27). Depending on the stage of investment, private equity is commonly split into venture capital and buyouts.

Claudia Sommer

3. Theoretical Framework

The boom in private equity as an investment class and its recent bust in the turmoil of the global credit crunch have inspired a lot of research in this field. After rising from less than EUR 7 billion worth of European investments in 1996 to a peak of more than EUR 70 billion in 2006, the private equity investment volume slipped back to less than EUR 54 billion in 2008 EVCA (2009).

Claudia Sommer

4. Data and Methodology

Two types of data are needed if the research questions are to be answered properly. First, transaction data are needed to define the level of investment activity. Second, performance data are needed to establish a correlation between performance and deal activity.

Claudia Sommer

5. Empirical Part I: Drivers at Aggregate Level

The aggregate analysis uses time series regressions to tackle the research question with the number of deals as dependent variable and proxies for potential drivers as independent variables. First, in order to determine legitimate statistical tests, the time series characteristics of the dependent variables is analyzed in section 5.2. Then, hypotheses are formulated and proxies are developed in section 5.3. This is followed by univariate and multivariate time series regression in sections 5.4 and 5.5. Finally, the results are summarized in section 5.6.

Claudia Sommer

6. Empirical Part II: Drivers at Industry Level

The aim of this section is to investigate the drivers of private equity investment activity at industry level. This approach is motivated by the established view that waves of mergers are also driven to a large extent by industry dynamics (see Mitchell and Mulherin 1996, Harford 2005 and Bartholdy et al. 2009, for example). This part of the study focuses on drivers that are considered to be particularly sensitive to industry-specific developments.

Claudia Sommer

7. Empirical Part III: Performance Implications

This final empirical part of the study sheds light on the question of whether periods of considerable deal activity are associated with superior or substandard performance. The investigation of the relationship between deal activity and returns has two main objectives. First, it serves as a robustness check for the driver analysis. As outlined in Figure 10, each of the competing theoretical viewpoints predicts a positive or negative activity-return relationship.

Claudia Sommer

8. Practical Implications

The contribution of this study for practitioners had been betokened for general partners, limited partners as well as target companies and their respective stake holders. This sections aims to derive practical strategies from the findings presented above.

Claudia Sommer

9. Summary and Conclusion

Over the past two decades, private equity has established itself as a permanent asset class in Europe (Chew and Kaplan 2009). To some extent, it has also reshaped corporate financing culture. However, neither the influence wielded by private equity in Europe nor the number and volume of transactions have plotted a steady upward course. On the contrary: Since buyout and venture capital firms began committing to continental Europe in the mid-1990s, the private equity market has experienced tremendous fluctuations in deal activity in line with market cycles worldwide.

Claudia Sommer


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