Private Equity in Portugal: An analysis of post-exit portfolio companies´ operating performance and capital structure

Private Equity in Portugal: An analysis of postexit portfolio companies´ operating performance and capital structure Sandra Oliveira [email protected] / [email protected] Dissertation Master in Finance Supervisor: Professor Miguel Augusto Gomes Sousa September 2013 i BIBLIOGRAPHIC NOTE Sandra Filipa Maia Oliveira was born on August 8, 1988 in Lavra, Matosinhos. In 2006 she joined the faculty of Economics of University of Porto, where in 2011 completed her graduation in Economics. In the same year, she joined the Masters in Finance at the same faculty. From September 2010 to March 2011, she worked in a filial of Deutsche Bank Group as a trainee. In May 2011 she started an Internship in the Rangel Group and since February 2012 she is a credit controller in the same group. ii ACKNOWLEDGEMENTS I´d like to thank those who supported me in completing the presented work here, including my supervisor Miguel Sousa for their help throughout the process and the availability at all stages of development of this dissertation. I would like also to thank everyone who directly or indirectly contributed to this work, including my family, friends and co-workers. iii ABSTRACT Over the last decade the private equity (PE) industry has experienced an important growing in the process of value creation in portfolio companies. However, in Portugal, this process seems not to be yet sufficiently developed in many aspects. Although all stages (entry, holding and exit) of the PE process are important, it is also very important to understand whether portfolio companies continue to sustain themselves and generate value/growth for all its stakeholders after the PE investor leaves the company. Despite the vast literature on the topic about the impact of value creation by the PE activity during the holding stage, there are no studies about the impact of PE after an exit strategy in Portugal, in terms of operational performance and capital structure. This dissertation seeks to fill this gap and develop a deepen study about this subject on the Portuguese companies. We intend to analyse the impact of the PE exit on the operating performance of Portuguese PE industry, using a self-collected sample of 30 companies exited (disinvested) by a PE between 2005 and 2012. The results show that target companies experienced a significant increase in their total assets and turnover after PE leaves the company. However, the target companies faced a decrease in earnings before interest, taxes, depreciations and amortizations (EBITDA) and a deterioration of the operating performance measures. The worst operating performances persist even after being adjusted for industry changes, suggesting that this can only be very partially explained by time and industry effects. Key-words: Private Equity, Exits, Operational performance, Leverage JEL-Codes: G24, G32, G34 iv Contents 1. INTRODUCTION .................................................................................................................. 1 2. LITERATURE REVIEW ........................................................................................................ 2 2.1. THE DIFFERENT PHASES OF A PE TRANSACTION ................................................................ 2 2.1.1. ACQUISITION PHASE .................................................................................................... 2 2.1.2. HOLDING PHASE .......................................................................................................... 2 2.1.3. EXIT / DIVESTMENT PHASE ......................................................................................... 3 2.2. PRIVATE EQUITY (PE) AND THE MAIN VALUE DRIVERS ..................................................... 4 2.2.1. OPERATING PERFORMANCE .................................................................................. 5 2.2.2. LEVERAGE / FINANCIAL ENGINEERING ................................................................. 7 2.3. EXIT / DIVESTMENT ....................................................................................................... 9 2.3.1. DIFFERENT TYPES OF EXIT TRANSACTIONS ........................................................... 9 2.3.2. EUROPE VS PORTUGAL ........................................................................................ 11 3. AN ANALYSIS OF POST-EXIT PORTFOLIO COMPANIES IN PORTUGAL –EMPIRICAL STUDY16 3.1. DATA AND SELECTED SAMPLE ..................................................................................... 16 3.2. METHODOLOGY ........................................................................................................... 18 3.3. STATISTICAL DESCRIPTION OF THE SAMPLE ................................................................ 20 3.4. POST-EXIT PORTFOLIO COMPANIES´ ANALYSIS – OPERATING PERFORMANCE AND CAPITAL STRUCTURE ............................................................................................................... 24 3.4.1. GROWTH .................................................................................................................. 24 3.4.2. OPERATING PERFORMANCE ..................................................................................... 25 3.4.3. CAPITAL STRUCTURE .............................................................................................. 28 3.5. OPERATIONAL PERFORMANCE AND CAPITAL STRUCTURE ANALYSIS BY EXIT ROUTE. ………………………………………………………………………………………..29 4. CONCLUSIONS ................................................................................................................. 33 REFERENCES ................................................................................................................................ 35 APPENDIX ..................................................................................................................................... 39 v Contents of tables Table 1: Divestment in Portugal by exit route ................................................................ 12 Table 2: Divestment in Europe by exit route .................................................................. 15 Table 3: Distribution of the number of operations per entry year .................................. 20 Table 4: Holding Period characteristics.......................................................................... 21 Table 5: Distribution of number of operations by sector / economic activities (CAE) .. 21 Table 6: Distribution of the number of operations by general partner ........................... 22 Table 7: Distribution of number of operations by exit route .......................................... 22 Table 8: Portfolio companies´ characteristics in the exit/divestment year ..................... 23 Table 9: Growth changes results (median variance) ...................................................... 25 Table 10: Operating performance ratios results (median variance) ............................... 27 Table 11: Autonomy ratio results (median variation) .................................................... 28 Table 12: Financial autonomy ratio results by exit route (median variation) ................ 29 Table 13: ROA results by exit route (median variation) ................................................ 30 Table 14: EBITDA margin results by exit route (median variation) .............................. 31 Table 15: Turnover ratio results by exit route (median variation) ................................. 31 vi Contents of Figures Figure 1: Comparison of divestment activity between Europe and Portugal (%) (EVCA. 2012) ............................................................................................................................... 13 Figure 2: Distribution of the number of exit transactions by year ................................. 20 vii List of abbreviations BV – Book value ratio CAPEX – Capital expenditures DE – Debt-to-equity ratio EBITDA – Earnings before interest, taxes, depreciations and amortizations EVCA - European private equity venture capital association FCF – Free-cash-flow IPO –Initial public offering IRR – Internal rate of return LBO – Leverage buyout PE – Private equity SBO – Secondary buyout SME – Small medium enterprises 1 1. INTRODUCTION The financial crisis sweeping global markets is reshaping the landscape of private equity (PE) investing. The credit reduction by banking institutions has limited the availability of leverage leading to the search for other sources of funding. Thus, in recent decades, the PE activity has come to mark your place in the Portuguese market as an important source of funding. It is essential not only for the development and growth of small medium enterprises (SME), but also to the stability of any business. The academic discussion of value creation in PE exit transactions still has not been sufficiently analyzed in the Portuguese PE industry. The aim of this dissertation is to provide a better understanding of value creation/growth in PE transactions, more specifically to analyse in terms of capital structure and operational performance, and to compare the period’s post-exit strategy with the previous full fiscal year before the exit. There are several studies on the topic about the impact by the PE companies during the holding stage, but research related with the impact after the exit / divestment strategy is not seem to be sufficiently developed in Portugal. In essence, the goal of this dissertation is to analyse the effect of the PE ownership in a company after an exit strategy (in the long term perspective), filling this gap in the literature and to develop a deeper study with Portuguese companies that have gone through by an exit strategy, comparing the years after exit with the full fiscal year before the exit. By doing this we intend to understand and answer two main questions: Will the normal improvements expected by PE firms stands after an exit strategy or, instead, are easily eliminated? What happens to the capital structure of the company and operational performance after the exit strategy? The remainder of this dissertation is organized as follows. In section 2, a review of the academic literature is presented. Section 3 explains the methodology, namely the sample selection process and all the empirical results regarding the portfolio companies’ post-exit operating performance and capital structure. An analysis by exit route was also performed. Section 4 concludes. 8 Jensen et al. (1992) show evidence of operating risk reductions in a case study of a leveraged buyout developed by Loos (2005). Opler and Titman (1993) prove that a larger percentage of LBO firms use more debt than is needed to eliminate taxes, which means that the role of debt rather relates to the incentive problems associated with FCF and the cost of financial distress are therefore considered to be much lower. They also argue that FCF problems as well as potential financial distress costs are important determinants of which firms undertake LBO and in some periods of time they found out that firms undertaking LBO are more diversified than other firms in the economy. Achleitner et al. (2010) found evidence in a sample of 206 European buyouts between the period 1991 and 2005 that 32% of the value created in these operations was explained by effects on leverage. They also showed that this effect was greater for larger deals given their greater debt capacity. On the other hand, they found that the median debt-to-equity ratio (DE) decreased from 1.4 at the time of operation to 0.6 at the time of divestment, which proves the strategy of creating value in this type of operations. Acharya et al. (2013) in a study involving 66 businesses in the United Kingdom reached similar results, namely, a median ratio of 1.6 at the time of operation and 0.6 at exit. They also described similar developments in debt / EBITDA ratio: register 5.1 at operation time and 4.0 in the divestment / exit time. 9 2.3. EXIT / DIVESTMENT In line with the strong growth in Europe over the past decades, PE in Portugal as a form of financial intermediation has become a focus interest for academic research. However, even in Europe, only few studies to date concentrate on the divestment stage of portfolio companies, the so-called, exit process. 2.3.1. DIFFERENT TYPES OF EXIT TRANSACTIONS According to the definition of many authors in this field, there are five main types of PE portfolio company exits: trade sales, secondary buyout, IPO, buy-backs and write-offs (Cumming and Macintosh, 2001, 2003a, 2003b; Gompers and Lerner, 1999; Wright and Robbie, 1998). The trade sale is a sale of a portfolio company to a trade buyer and is usually referred as “mergers or acquisitions exit”. Several academic authors analyze this common exit route for European venture capital and PE industry (e.g., Wright et al., 1993). On the other hand, secondary buyout is a transaction where a company is sold from one financial sponsor to another. The key difference to a trade sale is that only the PE fund sells its interest to a trade buyer, while the entrepreneur or management and other investors retain their stakes in the company (Povaly, 2007). The third type of exit, IPO, represents a sell of the company shares to public investors and has many studies in the literature, such as, Cumming and Macintosh (2003b). Regarding the buy-backs, in this form of exit transaction a PE fund sells its shares back to the company or entrepreneur that sold the originally shares. Otherwise, the last type of exit route, write-off, occurs when a venture capitalist walks away from its investment, not able to realize initially expected returns (Povaly, 2007). Gompers and Lerner (1998) show that in order to maximize stated returns, PE firms distribute shares of portfolio companies to their investor following IPO rather than selling shares themselves. They also refer that PE firms have preference in distributions which allow them to lock-in stated returns which are relevant for their compensation before negative impact on stock prices occur. 10 Bascha and Walz (2001) prove that convertible securities, debt securities with an option to be converted into equity, are superior to a pure mix of debt and equity in a portfolio firm’s capital structure and leads to optimal exit decisions. Convertible securities minimize conflicts of interest between the venture capitalist and the entrepreneur or manager of the company. Cumming and Macintosh (2003a) show, by doing a statistical analysis of survey data, that the link between information asymmetry is not only the choice of exit route but also the degree of the divestment (partial vs. total). Shepherd et al. (2003) found that inexperienced investors’ unfamiliarity with the decision structure contributes to errors in judgment. Highly experienced investors are often driven by intuition and heuristic processing which makes decisions susceptible to forms of bias and error. Lieber (2004) shows that a proactive exits process planning (from the time of the acquisition) is crucial and that the co-operation between PE investors and portfolio company management is necessary to ensure an overall process success. 11 2.3.2. EUROPE VS PORTUGAL Table 1 presents the amount exited by PE investors by exit type in Portugal during the years 2011 and 2012. In 2012 the amount of divestment in PE-backed companies decrease to €91 million (from 49 divestments) from € 99 million (from 48 divestments) in 2011. The exit strategy in terms of number of operations focused primarily in buyback transactions (to the management team or shareholders), trade sales and write-off. All accounted for 73% of the number of divestiture. The trade sale accounts for €53 million due largely to an important operation that skews the average amount divesture from the trade sale. The buyback transactions involved € 14 million while increasing the number of transactions from 18 to 26. Regarding write-off operations, the amount involved increase from 0.3 million (in 2011) to 12 million euros in 2012. As in previous years, the divestment of stakes in companies financed by Portuguese PE investors via IPO was once again absent. 12 Table 1: Divestment in Portugal by exit route 2011 2012 Amounts in € thousands Amount at cost % Number of companies % Amount at cost % Number of companies % Exit route Divestment by trade sale 7 683 7.7 4 8.0 52 616 57.8 8 14.5 Divestment by public offering 0 0.0 0 0.0 0 0.0 0 0.0 Divestment by write-off 304 0.3 5 10.0 12 106 13.3 6 10.9 Repayment of silent partnerships 0 0.0 0 0.0 1 0.0 1 1.8 Repayment of principal loans 3 795 3.8 13 26.0 2 033 2.2 7 12.7 Secondary buyout (SBO) 5 486 5.5 2 4.0 1 606 1.8 4 7.3 Sale to financial institution 0 0.0 0 0.0 0 0.0 0 0.0 Sale to management 1 938 2.0 18 36.0 14 075 15.5 26 47.3 Divestment by other means 80 120 80.7 8 16.0 8 554 9.4 3 5.5 Total divestment 99 325 100.0 48 100.0 90 991 100.0 49 100.0 Source: EVCA(2013) 13 Figure 1 compares the exit routes used by Portuguese and Europeans investors. Figure 1: Comparison of divestment activity between Europe and Portugal (%) (EVCA. 2012) Like in Portugal, the IPO in Europe is also the exit strategy less used. However, contrary to Portugal secondary buyout (SBO) gained greater relevance. Divestments / exits in Europe, in terms of number, increase in 2012 compared to 2011 and remained strong as the second highest ever recorded level in Europe. However, in terms of amount at cost, exits in Europe reached € 21.6 billion in 2012 compared to €30.3 billion in 2011. The amount for 2012 was driven by a very large transaction, which by itself accounted for more than 60% of the total exit value. Already in 2011 two large transactions accounted for 63% of the total. In 2012, trade sale stood out as the most notable exit route in Europe. The amount of exit value recorded in this category was driven significantly by the one large exit noted earlier and caused trade sales to account for 36.4% of the total exit amount. It is also important to notice that secondary buyout appears as the second exit route more important with a total amount in 2012 of € 5.5 billion (25.7% of the total). Public offering exits in Europe in 2012 suffered a slight increase to14.8% in the total amount compared to11.6% in 2011. Europe has historically experienced very few write-offs and sales to management. Both together explain 11.2% of the total amount at cost. 14 A survey carry out by Price Waterhouse Corporate Finance (EVCA, 2010) shows that European PE consider IPO as the ideal exit and consequently do not devote enough attention to trade sales and also that many PE do not plan for exit from the date of investment. They also prove that most PE does not promote their investments widely enough and many do not make full use of intermediaries to help them. The management of a company is considered by them an obstacle to a profitable exit. 15 Table 2: Divestment in Europe by exit route 2011 2012 Amounts in € thousands Amount at cost % Number of companies % Amount at cost % Number of companies % Exit route Divestment by trade sale 11 326 038 37.3 456 21.4 7 858 264 36.4 365 16.8 Divestment by public offering 3 504 469 11.6 118 5.5 3 203 528 14.8 93 4.3 Divestment by write-off 3 877 200 12.8 322 15.1 1 928 099 8.9 402 18.6 Repayment of silent partnerships 307 549 1.0 430 20.1 235 578 1.1 470 21.7 Repayment of principal loans 1 120 581 3.7 192 9.0 1 042 103 4.8 232 10.7 Secondary buyout 7 855 466 25.9 285 13.3 5 545 439 25.7 268 12.4 Sale to financial institution 1 433 905 4.7 45 2.1 754 543 3.5 77 3.6 Sale to management 660 791 2.2 213 10.0 482 612 2.2 182 8.4 Divestment by other means 243 211 0.8 74 3.5 552 587 2.6 78 3.6 Total divestment 30 329 210 100.0 2 057 100.0 21 602 754 100.0 2 100 100.0 Source: EVCA(2013) 16 3. AN ANALYSIS OF POST-EXIT PORTFOLIO COMPANIES IN PORTUGAL – EMPIRICAL STUDY In this section the sample and the methodology will be presented as well as the main findings concerning the capital structure and operational performance change after a PE investor leaves the company. First of all, the main criteria used in defining the sample will be explained and all the characteristics of the companies backed by PE firms that performed the divestment / exit in Portugal will be presented. Subsequently, the methodology adopted as well as the main key indicators of the companies included in the sample is explained. Finally, the results regarding the impact of a PE exit / divestment strategy (comparing to the previous full fiscal year before de exit) will be presented. This impact will be analysed in terms of (i) operational performance and (ii) capital structure. 3.1. DATA AND SELECTED SAMPLE In order to select our sample, the Capital IQ database 2 was used. This database is commercialized and managed by Standards & Poor’s and provides information of the company name, acquisition date and the buyers/investors. First, we select all transactions that fulfil the follow requirements: (i) the portfolio company must have its headquarters in Portugal; (ii) the investors (buyers) must meet one of the following criteria: “Private Investment Firm”, “Financial Service Investment Arm”, “Public Investment Firm”, “Public Fund”, “All investment Firms” or “Private Fund (Special Purpose Issuer Trust)”; (iii) the type of transaction is “Private Placements”; and (iv) the transactions occurred between the years 2005 and 2012. According these requirements 87 transactions were selected. Then, 16 transactions were dropped since they were “cancelled” or simply “announced” transactions. After that, transactions that included the same company (in particular new capital injections and listed companies) and where the buyer was a state (or related) company were excluded, since these types of transactions may pursue other 2 Capital IQ description and potential biases on sample selection are discussed in detail in the appendix. 17 goals than strictly wealth-maximizing objectives, such as territorial development and employment growth (Mendes, 2011). By doing this, the sample was reduced to 56 transactions. Subsequently, and in order to do the analysis of a company after exit / divestment strategy, 11 recent exit transaction occurred in 2012 and 2013 were also dropped because we do not have a complete fiscal year after that. Thus, the sample decreased to 47 transactions. After selecting the sample we used the SABI databases 3 , data provided by Bureau Van Dijk, which contains financial information for over 20.000 Portuguese companies from 1999 onward in order to obtain accounting information of each company, as well as the information to the industry level. We could not gather accounting information for the year following the exit year for 17 companies and they were excluded and so, our final sample was reduced to 30 exits. 3 SABI description and potential biases on sample selection are discussed in detail in the appendix. 24 3.4. POST-EXIT PORTFOLIO COMPANIES´ ANALYSIS – OPERATING PERFORMANCE AND CAPITAL STRUCTURE With the aim of measuring the impact and dimension of changes / growth in portfolio companies after exit, we will calculate the change in the main accounting indicators, including: assets, turnover and EBITDA. These will allow us to answer the following research questions: Will the normal improvements expected by PE firms stands after an exit strategy or, instead, are easily eliminated? What happens to the capital structure of the company and operational performance after the exit strategy? 3.4.1. GROWTH Table 9 reports the median growth in total assets, EBITDA and turnover for the four post-exit years. The results show a steady and significant growth in total assets, reaching its peak at 39.15% in fourth year post-exit. To all the years we get statistically significant results to a level of significance of 5%. The median increase in total assets over the three-year period equals 29.5% and is significant at the 5% level. Adjusted to industry we see the same tendency and with higher values all the years. However, unlike the analysis without industry adjustment, the results are not statistically significant. Turnover also exhibits a growth in all four post-exit years and a median three-year period average growth of 14.82%. These results are significant at least at the 10% level till the third year post-exit. Results adjusted to industry also show a growth all the years except in the last one (t+4). Although not statistically significant, portfolio companies exhibit a decrease in EBITDA over the three-year period post-exit of -24.21%. In all the years we see a higher decrease that gets worse year by year. However, once again these results are not statistically significant. 25 Table 9: Growth changes results (median variance) t-1..t+3 (3y avg.) t-1...t+1 t-1...t+2 t-1...t+3 t-1...t+4 PANEL A: Assets Variation (median) 29.5%** 12.71%** 22.06%** 33.32%** 39.15%** nº observations 20 28 24 20 17 Variation (median) adjusted to industry 40.21% 27.51%** 39.83% 54.04% 45.39% nº observations 18 26 21 18 14 PANEL B: Turnover Variation (median) 14.82%** 19.19%*** 4.15%* 4.75%* 20.18% nº observations 17 24 20 17 15 Variation (median) adjusted to industry 13.05%* 29.03%** 13.33%* 16.76%* -5.29% nº observations 16 23 19 16 13 PANEL C: EBITDA Variation (median) -24.21% -19.80% -25.15% -31.58% -50.39% nº observations 20 28 24 20 17 Variation (median) adjusted to industry -95.58% -17.80% -79.68% -89.26% -61.34% nº observations 18 26 21 18 14 *,**,*** significantly different from zero at 10%, 5% and 1%, respectively These findings post-exit strategy show us that portfolio companies become larger not only during the holding period (results of Chung (2011) reveal that private targets become larger after the buyout), but also after an exit strategy, which means that companies after a divestment strategy continue to grow their business. 3.4.2. OPERATING PERFORMANCE The Table 10 shows the change in the operating performance after the exit. As we can see in Panel A, there is a decline of productivity in all the years comparing with the last full year before the exit, which leads to the conclusion that after an exit strategy the companies have less capacity to generate cash flows with their assets. In fact, after the exit the productivity falls in all four post-exit years: -0.04 p.p., -0.03 p.p., -0.04 p.p. and -0.03 p.p. in years t+1, t+2, t+3, and t+4, respectively. Adjusted by industry changes and during the same period the decrease of productivity after the exit strategy is even more severe in the years t+2, t+3 and t+4. This situation could be 26 explained by the absence of synergies previously created by the PE firms in their target companies that disappear after that. Nevertheless, none of these results are statistically relevant. However, even if profitability deteriorates, companies can still create value by increasing the productivity of their assets, for example by selling non-productive assets (Guo et al., 2011). Panel B show us the portfolio companies EBITDA margin and in all the years we have a decrease (median of -0.02, -0.03, -0.04 and -0.09 percentage points). This means that the operating margin of the company has a consistent annual decrease, but short. Thus, after an exit strategy we can say that companies continue to have a great EBITDA margin but with a low negative variations year by year. However, none of these variations is statistically relevant, revealing that the negative performance of portfolio companies´ post-exit can´t be justified by industry or by the companies itself. These findings are consistent with Mendes (2011), who says that companies that have intervention by PE firms faced a performance in terms of profitability that after the investment has been deteriorating. The same applies after the exit. Finally, panel C presents the evolution of the assets rotation ratio (ratio between turnover and total assets). Analyzing the asset turnover ratio allow us to recognize if the changes in productivity are only the result of lower margins or also the result of a decrease in portfolio companies post-exit efficiency in using its assets to generate sales. The analysis of this indicator show us that in the first year after the exit strategy and comparing to the year before exit, there is an increase in the efficiency of the use of companies’ assets, while in the following years we assist to a little decrease (median of - 0.05, -0.04 and -0.09 percentage points in t+2, t+3 and t+3, respectively). These results lead us to the conclusion that there is a significant improvement in efficiency in the first year after the divestment, remaining relatively constant but with slight decreases thereafter. Considering the values adjusted by industry, the results are similar. However, and once again, none of these results are statistically significant except to the first year post-exit (adjusted by industry) with a level of significance of 10%. 27 Table 10: Operating performance ratios results (median variance) Year relating to the exit transaction t-1...t+1 t-1...t+2 t-1...t+3 t-1...t+4 PANEL A: ROA Variation (median) p.p. -0.04 -0.03 -0.04 -0.03 nº observations 28 24 20 17 Variation (median) adjusted to industry p.p -0.03 -0.07 -0.06 -0.07 nº observations 26 21 18 14 PANEL B: EBITDA margin Variation (median) p.p. -0.01 -0.02 -0.03 -0.05 nº observations 24 20 17 15 Variation (median) adjusted to industry p.p -0.03 -0.06 -0.07 -0.07 nº observations 23 19 16 13 PANEL C: Turnover ratio Variation (median) p.p. 0.07 -0.05 -0.04 -0.09 nº observations 24 20 17 15 Variation (median) adjusted to industry p.p 0.09* -0.10 -0.14 -0.06 nº observations 23 19 16 13 *,**,*** significantly different from zero at 10%, 5% and 1%, respectively. These results show us that there is a decrease in ROA and EBITDA margin in the years after the exit strategy. However, the small decrease is not sufficient to get the conclusion that companies will not survive after the exit. Instead of that, we can conclude that despite slight negative variations of median, companies managed to maintain an operational performance within the normal and desirable values after the PE investor leaves the company. Regarding the turnover ratio (measure of efficiency) the results show that in the first year after the exit, turnover ratio increase and when adjusted to industry this median variance is statistically significant. However, there is a slight decrease in all the following years. In sum, it appears that after the PE investor leaves the company they continue to create value, although slightly less. The decline is essentially the result of a strong decline in the companies’ margins. However, is important to mention that among the 30 companies in the sample five of them are dissolved nowadays. 28 3.4.3. CAPITAL STRUCTURE Table 11 shows the evolution of financial autonomy ratio after the exit and we can verify that the ratio decreases in the first and second year (median of -0.02 and -0.01 percentage points, respectively) but increases in the third year (median of 0.01 percentage points). However, none of these variations is statistically relevant. These results show us that after the PE exit there is an increase on debt to financing of assets on target companies and then, in the third year after the exit strategy, a replacement of debt by equity. When adjusted the ratio to industry, the results are a little different. As we can see below, the financial autonomy has an increase in the first year after the exit (median of 0.004 percentage points), following a decrease in the next three years (-0.08, -0.09, -0.11, in t+2, t+3 and t+4, respectively). Thus, these results indicate that in the first year after the divestment the target companies continue to have equity to finance their own business but after that, in t+2, t+3 and t+4, the autonomy ratio seems to be decreasing leading to the replacement of equity by debt. This negative change is not surprising since the divestment by PE firms necessarily imply an increase in the debt capital, thereby decreasing the percentage of assets financed by equity. Also, none of these variations is statistically relevant. Table 11: Autonomy ratio results (median variation) Year relating to the exit transaction t-1...t+1 t-1...t+2 t-1...t+3 t-1...t+4 Autonomy ratio Variation (median) p.p. -0.02 -0.01 0.01 -0.02 nº observations 28 24 20 17 Variation(median) adjusted to industry p.p. 0.004 -0.08 -0.09 -0.11 nº observations 26 21 18 14 *,**,*** significantly different from zero at 10%, 5% and 1%, respectively 29 3.5. OPERATIONAL PERFORMANCE AND CAPITAL STRUCTURE ANALYSIS BY EXIT ROUTE In Table 12 we present the financial autonomy ratio by exit route. The results show that in the first year after the exit the financial autonomy drops more after a buyback reflecting the necessity of new funds to buyback the shares belonging to the PE investors. However, in the long term the financial autonomy increases consistently. After a trade sale there is a constant evolution year by year with slight negative variations but not relevant. The evolution of the financial autonomy after a secondary buyout – a decrease in financial autonomy ratio – is consistent with the fact that the new PE fund will used even more debt to follow its strategy. Table 12: Financial autonomy ratio results by exit route (median variation) Financial autonomy ratio t-1...t+1 t-1...t+2 t-1...t+3 t-1...t+4 Buyback Variation (median) p.p. -0.06 0.09 0.07 0.01 nº observations 10 8 6 4 Variation (median) adjusted to industry p.p. -0.24 -0.12 -0.02 -0.13 nº observations 8 5 4 1 SOB Variation (median) p.p. -0.01 -0.07 -0.08 -0.03 nº observations 5 4 4 4 Variation (median) adjusted to industry p.p. -0.01 -0.05 -0.19 -0.13 nº observations 5 4 4 4 Trade sale Variation (median) p.p. -0.03 -0.01 0.01 -0.01 nº observations 13 12 10 9 Variation (median) adjusted to industry p.p. 0.10 -0.08 -0.09 -0.09 nº observations 13 12 10 9 *,**,*** significantly different from zero at 10%, 5% and 1%, respectively 30 Table 13, shows that after a buyback the company has a more favorable evolution of the ROA when comparing with the previous year before exit (t-1) with median of 0.02, 0.09 and 0.08 percentage points, respectively. After industry adjustments we can conclude also that in all the years the sample selected has a better performance than the ones in the same sector. Thus, companies that have intervention of PE firms have a greater performance when compared with all the sector companies. Table 13: ROA results by exit route (median variation) ROA t-1...t+1 t-1...t+2 t-1...t+3 t-1...t+4 Buyback Variation (median) p.p. -0.05 0.02 0.09 0.08 nº observations 10 8 6 4 Variation (median) adjusted to industry p.p. -0.06 -0.06 0.03 0.09 nº observations 8 5 4 1 SOB Variation (median) p.p. -0.07 -0.08 -0.07 -0.07 nº observations 5 4 4 4 Variation (median) adjusted to industry p.p. -0.08 -0.16 -0.12 -0.08 nº observations 5 4 4 4 Trade sale Variation (median) p.p. -0.02 -0.01 -0.04 -0.03 nº observations 13 12 10 9 Variation (median) adjusted to industry p.p. -0.001 -0.02 -0.07 -0.08 nº observations 13 12 10 9 *,**,*** significantly different from zero at 10%, 5% and 1%, respectively Table 14 and 15 present the EBITDA margin and turnover, respectively. The results in both tables suggest us the same conclusions. The buyback is the exit route that allows the company a better operating performance and capital structure after the divestment of PE firms. This result suggests some asymmetric information between the entrepreneur and the private equity investor that leads the entrepreneur to benefit more after regain the full control in the company. This is not surprise if we believe that the entrepreneur have a better knowledge than the PE investor of the situation and future problems of the company. 31 Table14: EBITDA margin results by exit route (median variation) EBITDA MARGIN t-1...t+1 t-1...t+2 t-1...t+3 t-1...t+4 Buyback Variation (median) p.p. -0.04 0.06 0.17 0.19 nº observations 8 6 5 3 Variation (median) adjusted to industry p.p. -0.11 -0.09 -0.01 0.15 nº observations 7 5 4 1 SOB Variation (median) p.p. -0.003 -0.04 -0.03 -0.01 nº observations 5 4 4 4 Variation (median) adjusted to industry p.p. -0.06 -0.21 -0.15 -0.09 nº observations 5 4 4 4 Trade sale Variation (median) p.p. -0.02 -0.02 -0.03 -0.06 nº observations 11 10 8 8 Variation (median) adjusted to industry p.p. -0.02 -0.04 -0.06 -0.08 nº observations 11 10 8 8 *,**,*** significantly different from zero at 10%, 5% and 1%, respectively Table 15: Turnover ratio results by exit route (median variation) Turnover t-1...t+1 t-1...t+2 t-1...t+3 t-1...t+4 Buyback Variation (median) p.p. 0.07 -0.01 0.10 -0.09 nº observations 8 6 5 3 Variation (median) adjusted to industry p.p. 0.15 0.06 0.17 -0.06 nº observations 7 5 4 1 SOB Variation (median) p.p. -0.12 -0.36 -0.41 -0.20 nº observations 5 4 4 4 Variation (median) adjusted to industry p.p. -0.13 -0.45 -0.47 -0.20 nº observations 5 4 4 4 Trade sale Variation (median) p.p. 0.11 -0.04 -0.01 0.02 nº observations 11 10 8 8 Variation (median) adjusted to industry p.p. 0.12 -0.05 -0.11 0.03 nº observations 11 10 8 8 *,**,*** significantly different from zero at 10%, 5% and 1%, respectively Overall, we can conclude that buyback is the exit route with better performance following the trade sale and then the SBO. It seems not to be consistent with Cumming and Macintosh (2003b) that show that higher quality portfolio companies are likely to be exited, in order of probability, by an IPO, a trade sale, a secondary sale, a buyback and a 32 write-off. Buyback occupies just the third position (considering the absence of IPO in Portugal). 33 4. CONCLUSIONS In Portugal, studies that aim to analyze the impact of PE industry tend to focus on a qualitative analysis of this industry, especially by conducting surveys about companies of PE. Although in the last years efforts have been made, particularly by conducting dissertations on this topic. These studies have focus on the impact during the holding phase (analyzing operating performance and capital structure), and there are no analysis in Portugal regarding the impact that PE firms continue to have even after an exit strategy in portfolio companies. This dissertation studies the Portuguese PE industry and examines the change on operating performance and on capital structure of portfolio companies after the PE investor leaves the company. We use a self-collected sample of 30 companies between 2005 and 2012 (years with possible available data/information). Analyzing the transactions occurred in Portugal, we can conclude that the Portuguese PE market is still a market far from its maturity. The more relevant period for exit transactions emerged in 2007 and 2008. Furthermore, it is a market with little competition dominated and controlled by four major PE houses and where banks and bank affiliate institutions are the main players. Regarding the post-exit operating performance and capital structure, the results show a decline of EBITDA in the years after the exit. Concerning turnover and assets we have different evolutions. We get a steady and significant growth in total assets and only a small growth in all four post-exit years in turnover. These findings are consistent with Chung (2011), suggesting that PE investors look for private companies with larger profitability and growth opportunities, even in long term (post-exit strategy). Also Jensen´s theory can be proved here when refers that organizational changes play an important role in the efficiency gains. Although portfolio companies increase their assets and turnover significantly after the exit, their operating performance is very poor. The analysis of the three operating performance measures – return on sales as measure of profitability, return on assets as a measure of productivity and asset turnover as measure of efficiency – leads to the conclusion that the operating performance does not improve and even deteriorates in the years after the exit strategy. All the three measures exhibit an inferior performance when compared to the last full year before the