Study: More buyouts succeed in ‘red states’

June 7, 2012, 9:43 PM UTC

FORTUNE — The majority of American private equity firms are headquartered in left-leaning environs like Massachusetts, New York, Connecticut and California. But the industry has found its greatest success in “red states,” according to research conducted by French business professor Oliver Gottschlag.

Gottschlag examined nearly 11,000 buyout investments made between 1980 and 2003, by more than 1,300 different private equity firms. He then identified each target company as being in a “red state” or “blue state,” based on the local results of the presidential election that immediately preceded the transaction. For example, a 1997 buyout of a Florida-based company would be classified as “blue” due to President Clinton’s local victory, whereas a 2001 buyout of a Florida-based company would be classified as “red” due to President Bush having edged out Gore.

Before continuing, let me clearly acknowledge that the above framework is anything but perfect. For example, Democrats maintained control of Congress in 1984 — and actually gained seats in the Senate — even though President Reagan won all but one state. Hard to say that state-level sentiment had turned “red,” when the actual results seem far more ambiguous. Nonetheless, virtually every buyout done between 1985 and 1988 gets crimson treatment in Gottschlag’s study.

And what he finds is that the level of buyout activity and buyout performance is better in red states over the 23-year period he examines.  Volume is obviously determined by number of transactions, while the top level of success is classified as achieving an exit within five years of investment (via either IPO or M&A). Specific levels of success (internal rates of return, cash-on-cash multiples, etc.) are not considered.

Gottschlag argues that the discrepancy is related to higher transactional costs in blue states, due to Democratic support for such things as a higher minimum wage, increased paid leave and “industrial policies that sustain unionized manufacturing jobs.” From the paper, originally published by Strategic Management Journal:

Local political beliefs do indeed have a statistically significant and economically meaningful impact on the volume and performance of buyouts… Consistent with the view that the transaction costs related to the implementation of buyout value-creation strategies are lower in red states, we fine a higher likelihood of buyout transactions and a greater buyout success rate in states where, at the time of the investment, the dominant political beliefs are Republican rather than Democratic.

Gottschlag also found particularly low levels of private equity activity after a state shifted from the red to blue column.

Very interesting findings, given that the 2012 Republican Party nominee for president is a former private equity executive. Conventional wisdom is that the typical red stater is going to support Romney and argue that his background is a virtue, while the typical blue stater will support Obama and view private equity as a vice.

But perhaps such views toward private equity are about more than pure partisanship. Or even economic ideology. Maybe those in red states have a greater familiarity with private equity, and have seen it succeed more often. Perhaps more of the horror stories are from blue states, and the sting lingers. Obviously not the driving force, but a subconscious driver…

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