The Evolution of Swedish Private Equity Portfolio Companies: An Accounting-Based Performance and Valuation Approach

Abstract: This study provides a comprehensive overview of operating and financial performance, bankruptcy risk, and accounting conservatism in 95 Swedish portfolio companies acquired by Private Equity (PE) firms between 2001 and 2015. It further investigates whether equity value is created on a Swedish portfolio company level. Contrary to a large body of research, evidence suggests that operating profit margins and returns decrease, sales growth matures, and operating leverage declines significantly from pre-holding to holding period. Similar to previous studies, financial leverage doubles and remains sticky over the holding period. At the same time, bankruptcy risk in portfolio companies increased after the buyout, and there is no evidence of a systematic shift in accounting conservatism or release of hidden reserves under PE ownership. Moreover, PE firms seem to select companies with better operating business prospects, more leeway in the capital structure, and lower bankruptcy risk, but their performance trends towards non-PE-owned companies over the holding period. Using a novel Residual Income Valuation-based approach shows that not more or less equity value is created or destroyed in portfolio companies than in a comparable Swedish market portfolio.