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The private equity business model: On terra firma or shifting sands?

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  • Andersson, Tord
  • Haslam, Colin

Abstract

This paper reveals how the financial crisis undermined the performance of Private Equity Partnerships (PEPs). The private equity business model depends upon leveraged finance coupled with corporate transformation from market arbitrage that, in turn, delivers inflated market valuations and exit multiples. Private equity partnerships conjoin corporate productive and financial activity with speculative capital market demands where liquidity, risk appetite and market value appreciation matter. It is a business model where productive transformation of acquired firm's is often disappointing because leverage inflates balance sheet capitalization ahead of cash earnings capacity. It is also a volatile business model because capital market valuations and fair value reporting amplify holding gains and losses for limited equity partners. It is a business model constructed on shifting sands not terra firma.

Suggested Citation

  • Andersson, Tord & Haslam, Colin, 2012. "The private equity business model: On terra firma or shifting sands?," Accounting forum, Elsevier, vol. 36(1), pages 27-37.
    • Handle: RePEc:eee:accfor:v:36:y:2012:i:1:p:27-37
    DOI: 10.1016/j.accfor.2012.01.002
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    References listed on IDEAS

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    1. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    2. Tord Andersson & Colin Haslam & Edward Lee & George Katechos & Nick Tsitsianis, 2010. "Corporate strategy financialized: Conjuncture, arbitrage and earnings capacity in the S&P500," Accounting Forum, Taylor & Francis Journals, vol. 34(3-4), pages 211-221, September.
    3. Andersson, Tord & Haslam, Colin & Lee, Edward & Katechos, George & Tsitsianis, Nick, 2010. "Corporate strategy financialized: Conjuncture, arbitrage and earnings capacity in the S&P500," Accounting forum, Elsevier, vol. 34(3), pages 211-221.
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    Cited by:

    1. Andersson, Tord & Lee, Edward & Theodosopoulos, Grigorios & Yin, Ya Ping & Haslam, Colin, 2014. "Accounting for the financialized UK and US national business model," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 25(1), pages 78-91.
    2. Haslam, Colin & Tsitsianis, Nick & Theodosopoulos, Grigorios & Lee, Edward, 2018. "Accounting for voluntary hospices in England: A business model perspective," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 54(C), pages 27-40.
    3. Beisland, Leif Atle, 2014. "Equity valuation in practice: The influence of net financial expenses," Accounting forum, Elsevier, vol. 38(2), pages 122-131.

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