The Eternal Fight Against Bugs

Abstract: Our thesis aims to highlight strategies for long-term value creation in private equity, evaluate the performance of extended funds and discuss the dynamics around the decision to extend or exit investments. In order to achieve this, we perform a single case study of EQT's investment in Anticimex and a quantitative analysis of returns for a larger sample of US and EU private equity funds. We find that EQT adopted a very different approach than previous financial buyers in Anticimex, scaling up internationally through a highly active acquisition agenda, reaping the benefits of increased local density. They simultaneously invested heavily in digital solutions, which improved the value proposition and margins. It also facilitated the buy-and-build strategy as there was a strategic appeal for smaller competitors to join the group as they could not match the development. Several factors gave rise to the long-term value creation in Anticimex and hence EQT's decision to keep the company. This was primarily the support of megatrends increasing the need for pest control, multiple expansion for pest control companies and the fact that EQT was uniquely positioned to extract value and would not be fully compensated by a buyer due to asymmetric information. As for the performance of extended funds, we find that extended funds outperform normal funds by approximately 6 p.p. in terms of internal rate of return. However, the extended part (beyond year 10) actually underperforms by almost 5 p.p. compared to the internal rate of return between year one and year ten for the same funds. This may indicate that successful funds more often receive approval for extensions but do so for less successful investments.