Based on multiple case studies of the transactions in China by private equity funds, this paper attempts to explore the value-creation capabilities of private equity funds at the transaction/deal level.

Previous studies on financial performance of PE funds utilized data collected from publically traded companies in European/US markets. By measuring financial performance of both “pre- and post-transactions,” these studies researched two questions: 1) Do buyout funds create value? 2) If they do, what are the sources of value creation? In general, studies conclude that private equity/buyout funds do create value at both the deal level and investor level. They also identified four possible sources of such value creation: 1) undervaluation, 2) leverage effect, 3) better governance, and 4) operational improvement.

However, relatively little is known about the process of value creation. In this study, I attempt to fill that gap, revealing the “secret recipe” of value creation.

By carefully looking into the process of value creation, this study suggests five propositions covering capabilities at 1) deal selection/screening, 2) deal structuring, 3) operational improvement, 4) investment exit, and 5) Top Management Team (TMT). These capabilities at private equity/buyout funds are critical factors for value creation. In a thorough review of the value-creation process, this paper hopes to:

1) Share real-life experiences and lessons learned on private equity transactions in China as a developing economy.

2) Reveal the process of deal/transaction to observe measures taken place within deal/transaction for value creation.

3) Show how well-executed strategies and capabilities in deal selection/screening, deal structuring, operational improvement, and investment exit can still create value for private equity firms without financial leverage.

4) Share the experience of State-Owned Enterprises (SOE) reform participated in by private equity firms in China. This could provide valuable information for policy makers in China.