Private Equity’s Role in Value Creation

Private Equity’s Role in Value Creation
Student’s Name
Institutional Affiliation
Private Equity Buyouts and Portfolio Firms Proposal
The global economy has undergone a significant shift in the ownership structure over the past few years. Most firms are shifting their ownership to the private equity (PE) sector out of the desperateness to benefit from the higher returns that PE managers appear to derive from the markets (Coleman-Lochner & Ronalds-Hannon, 2019). The move is not expected since some previous researchers have suggested that PE investors are only focused on short term gains at the expense of long term benefit. As the companies focus on improving their sustainability, most of them are adopting long-term value creation, which has financial, social and environmental benefits (Schoenmaker & Schramade, 2018). This study hopes to unravel the mystery surrounds the concept of value creation in the PE sector. It aims to put to rest the debate on whether to adopt or not to adopt the PE strategy in value creation. This debate spans some four centuries back when leveraged buyout (LBO) funds became an alternative investment asset for investors seeking private funds.
Research Question
1 How does PE investment lead to long term value creation among organizations that have embraced the strategy?
Conceptual Framework
Several valuation methods exist that assist in determining the value of companies. One of the main approaches is the Discounted Cash Flow (DCF) (Hayes, 2020). The DCF technique estimates the value of an investment based on the expected future cash flows. According to Vo and Marks (2018), the method uses projected cash flows to assist an entity know the amount of money that it can spend in an investment to earn a specific desire return. Another approach is the Multiples Approach, a technique that assesses one financial metric as a ratio of another to facilitate various companies’ comparison. According to this approach, a firm’s value can be achieved by changing the multiple, the EBITDA, or the net debt.
An increase in the multiple, which is also called multiple expansion, may arise from positive market timing or negotiation skills by the PE professionals. When this case occurs, the PE fund attains a higher sales price per unit of profit for the firm. Consequently, the company increases in value. Similarly, an improvement in its operating performance (EBTDA) or paying off a debt, boosts the firm’s value. Therefore, most value assessments utilize either of these approaches in comparing the performance of multiple firms. However, this study will not focus on comparing one firm’s performance against another but will focus on assessing the value that firms generate from PEs.
Objectives
* To evaluate the value creation of Private Equity in active trading
Literature Review
Value creation, according to this paper, refers to increasing the financial value of an entity. PE firms are believed to utilize their industry expertise and operational knowledge to identify lucrative investments and create value for their investments. As the economy continues to experience the changing dynamics, economists and other researchers increasingly debate about the long-term...