Beyond the Deal: Private Equity Firms Becoming More Strategic in Their Portfolio Construction

Abstract

This thesis examines the industry allocation within Private Equity (PE) portfolios and compares it to the allocation in the overall Mergers and Acquisitions (M&A) market. Moreover, it explores how effectively the M&A market serves as a proxy for predicting PE acquisitions. The study analyzes a sample of 11,000 acquisitions conducted by 460 PE firms across 48 industries over a period of 25 years (1998- 2023). Through constructing a predictive variable using a Markov chain, our Linear Probability Model (LPM) reveals a strong relationship between M&A market predictions and actual PE acquisitions. This relationship has significantly strengthened over time, indicating that PE firms have become more strategic in their portfolio construction, with an emphasis on synergies and long-term growth potential.