How do oil price shocks affect private equity investments? A thesis investigating private equity in the Nordic oil and gas sector

Abstract

In this thesis, we explore the relative performance of private equity owned portfolio companies in the Nordic oil and gas sector, during the recent oil price shocks. Our research has identified the drivers of performance of these portfolio companies, uncovered characteristics of these drivers during oil price shocks, and we have applied theory and performed interviews to explain our findings through reasoning. We have compared the performance of 51 portfolio companies with that of both public and nonprivate equity backed private companies, and have uncovered consistent results for the oil price shock of 2008 and 2014. Our results indicate that portfolio companies have a unique sales growth outperformance, before, during and after oil price shocks, when compared to both public and non-private equity backed private companies. Through a series of interviews, we have found support for our reasoning regarding these distinct and consistent patterns. We believe private equity firms can both strategically and financially support their portfolio companies in a way that leads to superior growth. On average, portfolio companies’ sales growth, outperforms public and private companies by almost 40 percentage points the year after an oil price shock. In addition, the private equity firms’ focus leads to relatively lower EBITDA margins and current ratios compared to public and private peers, respectively. We believe these results predominantly originates from an increased monitoring effort towards portfolio companies, a willingness to provide growth capital, and an ability to provide favorable loans to portfolio companies, during oil price shocks.