Sources of Value Gains in Minority Equity Investments by Private Equity Funds : Evidence from Block Share Acquisitions

Using block share acquisitions made by private equity (PE) funds, we examine the sources of value gains in PE minority equity investments. We find that the targets in PE acquisitions, particularly poorly performing targets, targets with high R&D intensity, and targets whose boards have PE-appointed directors, experience both higher announcement returns and better post-acquisition operating performance than do targets in non-PE acquisitions. The value creation is also more pronounced when PE-appointed directors have experience in the target's industry. These findings suggest that the governance and operational engineering that PE acquirers apply to their targets constitutes important sources of value creation