Driving value from the backseat

University essay from Handelshögskolan i Stockholm/Institutionen för redovisning och finansiering

Abstract: This paper investigates operational value creation in private equity (PE) using management control systems (MCS) to achieve acceptance of stretch targets, a relatively unexplored topic in prior literature. The study has been conducted as a single-case study to facilitate an in-depth understanding of the processes and interplay between a PE firm and its portfolio company. By applying the theoretical lens of different comfort zones, the study explores the perceived stress levels arising from PE ownership and the stretch targets they implement. The findings contribute to three literature areas. First, we provide a deeper understanding of the PE value creation process by investigating essential components of the PE firm's target-setting process. Second, we find that PE companies use controls as complements rather than substitutes and that there can be interdependence between the controls, contradicting prior literature on MCS in PE firms. Additionally, we nuance the understanding of social controls by identifying particular social control mechanisms a PE company uses. Third, we add to the existing stretch target literature by identifying components to ensure acceptance and implementation of stretch targets.

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