Selection Determinants for Private Equity Investments

Abstract

This study examines a global universe of public companies and identifies some properties of companies to become takeover targets. The analysis shows that low headcount-related ratios, low advanced performance ratios, and low leverage ratios are most likely to be associated with becoming a takeover candidate for private equity investors. Further, grouping private equity investors into different levels of risk aversion leads to an even more granular description of potential selection determinants of specific types of private equity investors.

TOPICS: Wealth management, private equity

Key Findings

• • The key properties of public companies to become takeover targets by PE investors are found to be low leverage, low personnel-related profitability, low cash ratio, low return on equity and return on assets, and the potential to improve the existing inefficiencies.

• • Long-term-oriented PE investors look for companies with a strong growth potential and a high asset base.

• • Risk-seeking PE investors focus on factors like return on equity and return on assets, but also look for a high trading turnover of the target company’s stock.