Do the effects of private equity investments on firm performance persist over time?

Abstract

This study examines whether the effect of private equity (PE) investments persists over time or wears off after the PE investors exit. Unlike previous studies that focus on the PE-backed initial public offerings (IPOs), we constructed a unique and distinctive dataset comprising PE investments exiting both via IPO and other common ways (i.e., trade sale, secondary buy-out and buy-back). Consistent with Jain and Kini (1995), we observe that PE-backed firms outperform other firms. Our results shed light on existing literature because we find that whether PE investments continue to benefit the portfolio firms is strictly related to the type (venture capital versus buy-out) and length of the PE investment, the nature of the PE investor (bank-based versus nonbank based), and the exit strategy (IPO versus other exit strategies).

Keywords:

• private equity
• venture capital
• buy-out
• exit strategy
• operating performance

JEL Classification:

• G24
• G32
• G34

Notes

¹ According to the internationally accepted definition (e.g., AIFI, 2013; EVCA, 2013) PE is the provision of equity capital by financial investors – over the medium or long term – to nonlisted companies with high growth potential. Venture capital and buy-out, strictly speaking, are subset of PE and refers to equity investments made for the launch, early development or expansion of a business.

² In Europe the amount of investments was 27.6 billion of euros in the 2002 and 45.5 billion of euros in the 2011, while the amount of fund raised was 27.5 billion of euros in the 2002 and 39.8 billion of euros in the 2011. Source of data: EVCA.

³ The Wall Street Journal, ‘SEC Launches Inquiry Aimed at Private Equity’, 11 February 2012.

⁴ For example, in Europe from 2007–2011, the fraction of PE-backed firms going public was approximately 1.2%. Source of data: EVCA.

⁵ PEM is the observatory of the Italian Private Equity and Venture Capital Industry established by the University Carlo Cattaneo – LIUC. Through a partnership with AIFI (Italian Private Equity & Venture Capital Association), PEM has collected data on 1145 deals made in Italy between 1998 and 2011.

⁶ Over the period 2007 to 2011, in Europe, the average amount of investments was about 46.6 billion euros per year. Specifically, the UK recorded 12.14 billion euros per year, France 8.07 billion euros per year, Germany 6.61 billion euros per year and, in fourth place, Italy with 2.96 billion euros per year. Source of data: EVCA.

⁷ While US research analyses mainly focus on VC-backed firms, studies on non-US markets focus on PE-backed firms, which also include BO-backed firms (Cumming and Johan, 2009).

⁸ As underlined in the introduction, the main contribution of our paper is that we build a dataset comprising PE investments exiting via both IPOs and other common ways. As a consequence, while we are able to effectively test our research hypotheses by using operating performance, we cannot use the market returns because only a small part of our sample (less than 20%) is composed of listed firms.

⁹ The coefficient for PE backing may reflect the contribution of PE investments, as well as capture other factors such as macroeconomic upturns and industry-wide boosts in productivity.

¹⁰ The choice to use one matched firm for each PE-backed firm, although seemingly restrictive, avoids the selection of dissimilar firms as well as the introduction of potentially distorting factors.

¹¹ Bank-based PE investors are banks that have directly invested in a firm or PE funds whose management firms belong to a banking group. For firms backed by PE syndication, we identify the investor that provides the largest stake as the lead PE investor in order to segment our sample.

¹² In Model 9, the relationship between the dependent variable and the NPEI variable is positive but not significant.