Private Equity (PE) firms often don´t have specific knowledge of the industry when they invest in a firm, but have in many cases a positive impact on the performance of the firm. E.g. in case of medium-sized German firms, a lack of capital is usually not the problem, so what do PE firms make different than (owner)-managers, for example in case of medium-sized firms? What can managers learn from PE companies?
PE firms invest money in companies. They do this with respect to future success for the company and for themselves. I, and I can imagine managers too, would like to know how these PE firms evaluate the companies they invest in. I'm currently starting research about investements based on business plans.
Nicola,
The win-win collaboration between a PE company and a manager/owner depends on the human resources background, if for instance the PE company is made of senior consultants themselves serial entrepreneurs versus a fresh-started young manager/owner the contribution is kind of obvious and as the purpose of the PE company is the highest short term return they have all incentives to give advices to the young manager. Whereas older managers won't generally pick this type of money. For some literature on the role of the ‘owner’ as a determinant figure in the use of external funds you can have a look at following authors: Vos 2007; Vos & Roulston 2008; Beck & Demirguc-Kunt 2006.
This framework may help, though it is critical of private equity.
Article Private Equity and the Public Good
I think you must separate out human capital and financial capital firstly. PE potentially brings both, if the PE management team or board level involvement adds to the entrepreneurial human capital already accumulated, although PE often get rid of the original team quite quickly. But the real fundamental difference between the entrepreneur as an owner-manager and PE is in their objectives (objective function). Entrepreneurs (a) have a multitude of objectives some of which are non-pecuniary, and, (b) have a longer-term horizon for achieving these objectives. PE has one objective. To walk away from the firm when they have made a positive return from their investment. These differences (a) lead to different strategic decision-making, and (b) different behaviours. At the extreme, entrepreneurs trade-off short-term profit for non-pecuniary objectives and PE trade off long-term growth for short-term profit. Hope this helps? Cheers, Marc
HI,
I tagree with Marc, and think that private equity firms have their own problems to solve. You could benefit from these two papers:
S Arcot, Z Fluck, J M Gaspar, U Hege, "Fund managers under pressure: Rationale and déterminants of Secondary buyouts", 2015 journal of Financial Economics, 115, p 102 - 135.
F Degeorge, J Martin, L Phalippou, "On secondary buyouts", 2016, Journal of Financial economics, 120, p 124-145.
Moreover, the new LBO management is sometimes at a loss to increase performance:
S Guo, E Hotchkiss, W Song, "Do buyouts (still) create value?", 2011 journal of finance, 66, p479 -517.
multiple increases on the stock market and the very low cost of debt have sometimes helped to boost the overall results.
Best regards
Hi,
It is true also that PE firms bring a new governance and some advices. You may benefit from this paper:
P Gompers, S N Kaplan, V Mukharlyyamov "What do private equity firms say they do?",
Journal of Financial Economics, 2016, forthcoming.
Best regards.
Hi,
Finally I think you have two kinds of private equity firms: the first category may be involved at the regional level in improving efficiency (EQT), and in diversifying the activities of the target firm, and the second category will be involved in external growth investing (4 billion) at the international level (Carlyle and Providence Equity Partners)
I think you have to read this paper becauise they take the example of the "COM HEM Story" and this in intetresting to understand the complementarities.
F Degeorge, J Martin, L Phalippou, "On secondary buyouts", 2016, Journal of Financial economics, 120, p 124-145.
Best regards.
Dear Nicola,
Probably, professional PE investors have the required distance between the company they invest into and their emotional state. An owner-manager, who happens to be the founder of the middle-size company you have in mind, may be sometimes lacking such a distance. His emotional connection to the firm may force him into risky decisions a professional PE investor would not make.
Perhaps you are familiar with the recent case of the German company Unister. Its founder and CEO died under suspicious circumstances while trying to save his company, which in technical terms may have been bankrupt for a long period of time before his tragic ending.
Paul
Hi,
You may be interested by this paper:
Politically Connected Private Equity and Employment
Journal of Finance, April 2017, volume 72, (pages 539–574)
MARA FACCIO and HUNG-CHIA HSU
Best regards
Hi,
Here is another one:
Rewarding risk-taking or skill? The case of private equity fund managers
Journal of banking and finance, July 2017, volume 80, Pages 14-32
Axel Buchner, Niklas F. Wagner
Best regards
Recall, PE imposes a new environment. Typically, that new environment is intricately international. With that environment comes a discipline of urgency. That is how PE succeeds. The success does not come from some deep and rich knowledge of corporate and technical management absent in the past regime. You will notice that when international prowess counts little, PE struggles. We see that on some PPP projects. Cf. Preprint Public-Private Partnerships on the Limit Cycle: Excitation o...
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