“Working Capital Management is an important value creator in a Leveraged Buyout”

2013 BVA Essay Award

Brussels, 27 March 2013 – Since 2007, the Belgian Venture Capital & Private Equity Association vzw/asbl (BVA) grants its annual BVA Essay Award in co-operation with Deloitte. In its 7th year, the BVA Essay Award for best essay about the venture capital & private equity industry went to Enrique Martinez of HEC©ULg.

The winning essay was presented for the degree of Master in Management Sciences at HEC©ULg (Year 2010-2011) under the direction of Professor Séverine Plunus and investigates the impact of working capital management in creating value in companies after their leveraged buyout through private equity investment.

The particular form of a Leveraged Buyout, company takeovers by using a high level of borrowed debt, has intrigued the academic world and has been the subject of many studies.  Among other things, it has been demonstrated that companies under leveraged buyout enjoy greater growth, better operational performance and profitability.  The impact of working capital management on LBOs has been studied on other markets, namely the United States and United Kingdom, but these are showing different characteristics than our Belgian credit oriented market.

The aim of this dissertation is to analyse whether the working capital in Belgian companies is managed better after having completed a leveraged buyout than before, whereby the link is made to the management of the working capital with some performance indicators of LBOs.

After having developed research hypotheses, these were tested empirically with a sample of 34 Belgian companies having completed an LBO between 2002 and 2007.  The outcome of the analytical model reveals that LBOs manage working capital better after the transaction than before.  Regarding the specifics of the working capital management and the performance of LBOs, the results show that value is created by reducing working capital through reducing the number of days of outstanding receivables and by increasing the number of days of outstanding payables. A specific impact on the number of outstanding inventory days was not noticed.

The results of the study contribute to the literature on the valuation relevance of buyouts backed by private equity investments.

Through this award, the BVA and Deloitte wish to stimulate the academic research about venture capital (VC) en private equity (PE). This should lead to a better understanding of the discipline and its added value to society especially for entrepreneurs, employees, works councils and various governmental organizations.

The BVA-Jury in 2013, that consisted of Prof. Em. Charles Van Wymeersch, Prof. Em. Dirk Heremans and five representatives of the private equity and venture capital industry, received three essays this year.

The essay of Enrique Martinez was selected based upon four scoring criteria:

  1. Academic Quality: For the careful literature analysis and formulation of research hypotheses leading to the formulation of testable hypotheses.
  2. Originality: Relevant analysis on original Belgian data, whereby the influence of Working Capital behaviour as a result of LBO is not often investigated.
  3. Accessibility: Easy to read, well written, very understandable for methodology and hypotheses.
  4. Usefulness for the industry: Excellent sense of usability of research results and relevance for company practice, after LBO working capital gets better managed.

The winning essay can be consulted on the BVA website, together with the two other essays reviewed by the BVA jury.