http://blogs.wsj.com/privateequity/2012/05/25/study-buyout-firms-win-in-republican-states/

The buyout industry in the U.S. has sometimes been linked with the political right, most recently via Republican candidate Mitt Romney, a founder of Bain Capital. Now, a collaboration between French and American academics has concluded that private equity firms do indeed thrive under more right-leaning administrations.

The research analyzed a total of 10,746 U.S. buyout investments made between 1980 and 2003. The investments were spread across 4,633 target companies and made by 2,396 different funds, managed in turn by 1,300 different private equity firms.

“Drivers of Successful LBOs: Factors To Watch Out For When You Are Betting Your Career On Private Equity” was compiled by Professor Oliver Gottschalg of the HEC Business School in Paris, Professor Aviad Pe’er of Rutgers University in New Jersey and Simon Francis, a partner at executive search specialist Lancor.

The research showed that private equity firms that bought companies based in states where the last presidental election campaign was won by a Republican candidate had a 7.2% higher chance of a successful exit than those which bought companies based in Democratic states.

Gottschalg and Pe’er argued in a separate piece of research that Republican or right-of-center values including “a general opposition to labor unions” were better aligned with buyout value-creation strategies than those on the political left. Such alignments might include outsourcing labor and shutting down less efficient units.

In the earlier research, entitled, “Business And Politics: How Political Beliefs Influence Volume And Performance Of Leveraged Buyouts,” the academics noted that the Republican party has closer ties to Wall Street than do the Democrats. They added that the Republican party predominantly “supports low tax rates that can be regarded as analogous to the corporate view that profits should be distributed to shareholders.”

In the more recent study, the academics created hypothetical funds based on real U.S. buyout data. Using this model, the fund that invested only in companies located in Republican states achieved a 9% higher annual net internal rate of return than a fund investing only in Democrat-run states.

Gottschalg said that the trend was likely to be replicated in Europe: “The evidence is U.S.-based, but it leads us to assume that the recent shift towards the political left [in Europe, particularly France] would lead to decreased private equity activity and lower private equity returns going forward.”

Gottschalg and Pe’er argue that developing “location-specific valuation skills” is important for private equity firms that want “to generate higher returns than their counterparts who lack such skills.” Many private equity firms sell themselves based on specialisms such as opting to invest only in particular industries. Perhaps the new research will prompt more systematic investment based on political climate.

For additional information, please visit http://www.capitalroundtable.com/masterclass/Capital-Roundtable-Overseeing-Portfolio-Companies-Conference-2011.html.

During the upswing of the last economic cycle, which saw global funds under management soar to $2.5 trillion, “best practice” in private equity embraced the concept of bolstering investment teams by hiring senior executives from the business world into portfolio operations groups. What began as a novel, sporadically deployed idea a decade ago has evolved to be an accepted feature of a contemporary firm’s toolkit. The thesis is that financial engineering alone does not maximize return, and that operational transformation across a fund’s portfolio companies is essential to success.  One managing director at a well-known pension told us, “We don’t have religion about what type of PortOps philosophy works best, but we do expect funds to have a story.”

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