Do Buyouts Create Value? Measuring Value Added in Private Equity

Abstract

In Do Buyouts Create Value? Measuring Value Added in Private Equity (2025), Braun et al. use administrative data on 7,385 leveraged buyouts and a structural model to separate value creation from selection effects, exploiting differential distance between target firms and funds as an instrument. Their findings challenge conventional wisdom by documenting two distinct paths to PE success: “cherry-pickers” who excel at finding attractive opportunities and “turnaround specialists” who create value in challenging situations. These strategies are nearly independent (ρ = 0.045), meaning excellence in selection doesn’t predict value creation ability. While raw performance shows mean PME of 2.15x, controlling for selection reveals true value-added of 1.57x. Nearly all funds still outperform public markets after adjusting for selection. Smaller and industry-specialized funds generate higher value-added despite larger funds showing better raw returns through superior selection.

Introduction

Understanding whether leveraged buyouts create value beyond simply selecting better targets is fundamental to corporate finance and policy debates around PE taxation and regulation. With trillions allocated based on historical performance metrics, distinguishing between true operational improvements and cherry-picking ability has immediate practical implications for LP investment decisions.

The authors address the fundamental identification challenge that PE funds likely acquire firms that are unobservably different and may time exits strategically, making it difficult to separate treatment effects from selection.

Methodology

Braun et al. draw on the Munich Dataset (MDS) covering 7,385 buyouts by 755 PE funds (2000–2020), with deal-level gross cash flows at monthly frequency, geographic information for funds and targets, and company-level Public Market Equivalents (PME).

Identification strategy:

The model decomposes PME into fund-level value-added ability (αⱼ), unobserved company quality (hᵢ), and fund-specific selection advantage (ψⱼSᵢⱼ). The instrument — differential distance Δdᵢⱼ measuring how much farther company i is from fund j compared to j’s nearest alternative — satisfies the exclusion restriction: relative distance affects selection but not value creation conditional on absolute distance. The first stage is strong (F-statistic = 2,634).

Key Findings

• Performance decomposition: Raw PME of 2.15x drops to 1.57x after controlling for selection. Selection effects account for only 0.17% of total performance variance; true value-added explains 99.83%.
• Two paths to success: Funds excel through either superior selection (“cherry-pickers”) or operational improvements (“turnaround specialists”), with near-zero correlation between these skills (ρ = 0.045).
• Ranking upheaval: 51.3% of funds change more than 50 ranks after selection adjustment; 16% of top-quartile funds drop out when selection is controlled.
• Universal value creation: Even after removing selection effects, 91% of funds outperform public markets.
• Fund characteristics: Larger funds show better raw returns through superior selection, while smaller and industry-specialized funds generate higher true value-added despite lower headline performance.

Implications for Practice

The independence of selection and value-creation abilities has profound implications:

• LP evaluation: Raw performance metrics conflate two distinct skills; LPs should separately track persistence in selection versus operational improvement abilities.
• Fund strategy: Success doesn’t require excellence in both dimensions — funds can specialize as either deal-finders or value-creators.
• Performance attribution: The 51% of funds experiencing major ranking changes suggests widespread misallocation based on raw returns.
• Market structure: Larger funds’ superior returns stem from better access and selection rather than operational expertise, questioning scale advantages in value creation.

Conclusion

This paper fundamentally reframes how we evaluate private equity performance by cleanly separating selection from value creation. The finding that these represent independent skills challenges the notion of generally “good” PE managers and suggests the industry consists of specialists with distinct competencies.

Nearly all funds create value beyond public market returns even after controlling for cherry-picking, validating PE’s economic role beyond financial engineering. However, the dramatic reranking of funds after adjusting for selection reveals that investors using raw performance metrics may systematically misallocate capital, favoring skilled selectors over true value creators. This distinction becomes crucial as PE markets mature and competition for deals intensifies.