Managing Diversified Portfolios: What Multi-Business Firms Can Learn from Private Equity Book

List of Figures xv

List of Tables xvii

1 Introduction 1

1.1 Research Motivation 2

1.1.1 Practical Relevance 2

1.1.2 Theoretical Relevance 3

1.2 Research Objective 5

1.2.1 Diversification and Performance 5

1.2.2 Managing Diversified Portfolios 6

1.3 Structure of Dissertation 7

2 Diversification in Corporations 9

2.1 Definition of Diversification 9

2.1.1 Diversification as Process 10

2.1.2 Diversification as Status 10

2.2 Overview of Academic Research on Corporate Diversification 11

2.2.1 General Overview of Academic Research 12

2.2.2 Motives for Diversification 14

2.2.3 Entry into New Businesses 19

2.2.4 Structure of Multi-Business Firms 22

2.2.5 Management of Multi-Business Firms 24

2.2.6 Financial Implications of Diversification 27

2.3 Diversification and Performance 28

2.3.1 Measures of Diversification 29

2.3.2 Influence of Diversification on Valuation 32

2.3.3 Influence of Diversification on Financial Performance 35

2.4 Managing Diversified Portfolios 38

2.4.1 Value of the Parent Company 39

2.4.2 Governance Model in Multi-Business Firms 41

2.4.3 Availability of Central Functions and Resources 45

2.4.4 Leverage of Resources and Competences across Businesses 47

2.4.5 Portfolio Management in Multi-Business Firms 49

3 Introduction to the Private Equity Industry and the Role of Diversification 53

3.1 Overview of the Private Equity Industry 53

3.1.1 Definition of Private Equity 54

3.1.2 Development of the Industry 55

3.1.3 Structure of the Industry 59

3.2 Profile of the Leveraged Buyout Segment 65

3.2.1 Key Characteristics of Leveraged Buyouts 65

3.2.2 Leveraged Buyout Landscape 71

3.2.3 Value Creation Techniques72

3.2.4 Performance of Leveraged Buyout Investments 80

3.2.5 Industry Trends and Future 84

3.3 Diversification in Private Equity 86

3.3.1 Diversification and Performance 87

3.3.2 Managing Diversified Portfolios 88

3.4 Comparison of Private Equity Firms and Diversified Corporations 91

3.4.1 Acquisition and Diversification Strategy 92

3.4.2 Portfolio and Divestiture Strategy 92

3.4.3 Role of the Parent 93

3.4.4 Role of the Operating Unit 94

4 General Research Design 97

4.1 Starting Position in Academic Literature: a Synthesis 97

4.1.1 Diversification Research in Corporations 98

4.1.2 Diversification Research in Private Equity 99

4.2 Direction of Research 100

4.2.1 Research Direction "Diversification and Performance" 100

4.2.2 Research Direction "Managing Diversified Portfolios" 101

4.3 Empirical Research Design 103

4.3.1 Research Design "Diversification and Performance" 103

4.3.2 Research Design "Managing Diversified Portfolios" 106

5 Empirical Part I: Diversification and Performance 111

5.1 Hypotheses 111

5.1.1 Performance: Private Equity vs. Public Corporations 112

5.1.2 Diversification and Performance in Private Equity 113

5.1.3 Diversification and Performance: Private Equity vs. Public Corporations 114

5.2 Methodology 115

5.2.1 Data Sample 115

5.2.2 Diversification Measures 122

5.2.3 Performance Measures 126

5.3 Empirical Results 129

5.3.1 Performance: Private Equity vs. Public Corporations 130

5.3.2 Diversification and Performance in Private Equity 135

5.3.3 Diversification and Performance: Private Equity vs. Public Corporations 151

5.4 Discussion of Results 162

5.4.1 Diversification in Private Equity 163

5.4.2 Performance Drivers in Private Equity 165

5.4.3 Comparison Private Equity vs. Public Equity 170

5.4.4 Limitations of Research 172

6 Empirical Part II: Managing Diversified Portfolios 175

6.1 Exploratory Framework 176

6.1.1 General Structure 176

6.1.2 Influencing Factors 177

6.1.3 Firm Conduct 179

6.1.4 Private Equity Performance 181

6.1.5 Feedback Mechanisms 181

6.2 Methodology 182

6.2.1 Sample for Exploratory Research 182

6.2.2 Sources of Information 185

6.2.3 Structure of Interview 187

6.2.4 Design for Data Analysis 188

6.3 Empirical Results 188

6.3.1 Management Models in Private Equity 189

6.3.2 Characteristics of Opportunistic Financial Investors 191

6.3.3 Characteristics of Interventionist Managers 196

6.3.4 Hybrid Management Models 203

6.3.5 Trends in the Private Equity Management Model 204

6.4 Discussion of Results 208

6.4.1 Comparison of Management Models and Impact on Performance 209

6.4.2 Key Success Factors of Private Equity Management Model 217

6.4.3 Private Equity as Role Model for Multi-Business Firms 223

6.4.4 Limitations of Research 230

7 Conclusion and Outlook 233

7.1 Implications for Private Equity Managers 234

7.1.1 Portfolio Strategy 234

7.1.2 Management Model 234

7.2 Implications for Investors 236

7.3 Implications for Corporate Managers 237

7.3.1 Portfolio Strategy 237

7.3.2 Management Model 238

7.4 Outlook for Academic Research 239

7.4.1 Research in Private Equity 240

7.4.2 Research in Corporate Management 241

Appendices 243

Bibliography 273

About the Author 295