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Minority and majority private equity investments: firm performance and governance

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Abstract

This paper adds to the literature on the determinants of the effects of private equity (PE) investments. Using an original dataset of 191 target firms in Italy, we study the effects on performance and governance of the stakes acquired by the PE investor. We employ a difference-in-differences approach and compare target and control firms sharing similar characteristics and performance in the years preceding the deal. We find that PE investment has a positive effect on profitability, sales, and employment; these effects are larger for minority investments. We argue that this signals effective governance that follows from complementing rather than substituting incumbent managers in minority investments.

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Notes

  1. We exclude early-stage ventures (seed and start-up) from our study (i.e., the subset of investments where PE, usually referred to as the venture capital firm, funds companies in their primary development stage).

  2. MINs and MAJs in our sample are statistically identical in the years before the deal for ownership, sector, age, sales, profitability, leverage, capital expenditure, number of employees, and growth opportunities measured by change in sales, EBITDA, and EBITDA margin (see Table 3, Panel C). To the extent that all these dimensions are strong predictors of future growth, we conclude that our analysis is robust to the effect of unobservable features of the firm determining the share acquired by investors.

  3. For the sake of simplicity, we use the terms board and directors interchangeably in the following. However, our study is focused on a subset of directors, namely, those serving as CEO, chairperson, and vice chairperson.

  4. The relations between founding family ownership and firm performance has been studied by, among others, Anderson and Reeb (2003), Barontini and Caprio (2006), Maury (2006), Villalonga and Amit (2006, 2010), and Miller et al. (2007). While still partially contrasting, these contributions are generally positive regarding the role of the founding family.

  5. See also Eurostat (http://ec.europa.eu/eurostat/statistics-explained/index.php/Business_economy_-_size_class_analysis).

  6. Wright et al. (1992) report that the share of investments in family and private firms accounts for 50% of investments in Italy, slightly higher than the 44.8% of France and the 38.9% of Germany and almost double of the UK 29.7%.

  7. Private Equity Monitor (PEM) is a yearly publication on PE transactions completed in Italy. Mergermarket is a news service that provides, among others, information on PE investments realized worldwide. The two databases allowed the identification of PE investments. To determine the legal entities involved in the deals and to collect financial information we then relied on official data obtained from services administered by the Italian Chamber of Commerce system (see below).

  8. Telemaco contains a broad range of financial and non-financial information about Italian limited liability companies. Among others, Telemaco provides individual and consolidated financial statements from 1993 onward and information on shareholders, the board, merger plans, and the like from 1996 onward.

  9. Cerved is an Italian information provider. Its offer includes financial information about all the Italian firms, via the financial reports that all the Italian firms are obliged to deposit annually to the Chamber of Commerce.

  10. PE investments gained substantial ground in Italy after 1995. The time span covered is constrained by data availability.

  11. To cross check the representativeness of our sample, we used as benchmark the population of deals that is collected in Capital IQ, since this database is employed as a control or as one of the primary sources of data by other empirical studies on PE investments and LBOs (Boucly et al. 2011; Chung 2011). In analysis not displayed in the paper for the sake of brevity, we find that the evolution of our sample over time mirrors the evolution of PE deals listed in Capital IQ, therefore confirming the representativity of our sample.

  12. In two out of 191 deals, the PE firm acquires an equity stake of 50%. Even if technically these two transactions are neither a MAJ nor a MIN, we classify them as majority deals to underline the relevant influence exerted by the PE investor in the target.

  13. We run regressions for industry and ownership type on a dummy for MIN controlling for calendar year fixed effects. For both outcomes the coefficient on the dummy is never statistically different from zero at the conventional levels.

  14. In those cases in which the number of controls falling within the caliper was larger than 25, we selected 25 of them at random. For those targets with less than 25 controls, we retained them all in the final sample. An alternative strategy, often used in empirical studies, would have been that of considering all controls within 1 % distance of a target’s propensity score. This is known as “caliper matching”.

  15. Since we match controls to targets with replacement, the same firm in the same calendar year can be matched to more than one target. Therefore, the number of unique firm–year controls is slightly lower (2509).

  16. The degree of similarity between the targets and the selected controls is confirmed by running a multivariate (probit) regression of a dummy for the target firms on the various dimensions considered. For both MINs and MAJs, the variables considered do not serve as good predictors of being a target versus a control firm. Results, not reported for sake of brevity, are available upon requests.

  17. In unreported results we investigate the possible sources of post-deal growth. We find significant changes in capital expenditures, particularly in the first year after the deal. On the contrary we do not detect any major effect for outsourcing of target production, compensation and working capital management. Moreover, PE investors appear to approach majority and minority targets in the same way at the operational level. Overall these results provide support to the conclusion that PE investors enhance the value of target firms more promoting growth than through efficiency seeking measures.

  18. PE investments can be carried out through a capital increase, the acquisition of incumbent owners’ shares or a combination of the two. The amount of new resources brought to the target company with a capital increase can affect the subsequent growth and therefore affect our results, especially if PE investors treated MAJs and MINs differently (48% of MAJ and 61% of MIN are characterized by a capital increase). To investigate this source of effect heterogeneity in Table 4, we add to Eq. (1) one additional variable consisting of the interaction between p it , d i and a dummy that takes value one if the PE investment was carried out through capital increase. The coefficient on this new variable identifies differences between investments with and without capital increase. The results from this specification, available upon request to the authors, are obviously less precise but convey the following message. Effects on EBITDA and EBITDA margin are largely independent of capital increase. The same conclusion applies if we estimate regressions separately for MINs and MAJs. Also PE investment effect on employment appears to be independent of capital increase, as it is positive and significant both with and without it. On the other hand, the effect on sales appears to be driven by investments with a capital increase.

  19. For control firms we gathered data on directors serving as CEO, chairperson, and vice chairperson one year before and one year after the deal of the corresponding matched target, while for targets we have data about all the directors serving on the board from two years before to three years after the deal. Given the constraint on the data about controls’ boards, we performed our analysis on the subset of data available for both targets and controls, i.e. the directors serving as CEO, chairperson and vice chairperson. It is worth underlining that according to the Italian law, the board can delegate executive tasks to one or more directors. This is the reason why more than one director can be labeled as CEO.

  20. If a chairperson serves also as CEO, that individual is counted as the CEO.

  21. In our sample of 191 PE targets, we find that localness is 30% higher in family firms than in non-family firms and this difference is statistically significant at the 1% level. This evidence is corroborative of localness being a good proxy of firms run by families.

  22. In Italy, partnerships may be formed in forms approximately equivalent to a general partnership (società in nome collettivo, SNC) or limited partnership (società in accomandita semplice, SAS).

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Authors and Affiliations

  1. School of Economics and Finance, Queen Mary, University of London, Mile End Road, London, E1 4NS, UK

    Erich Battistin

  2. Istituto per la Ricerca Valutativa sulle Politiche Pubbliche, Trento, Italy

    Erich Battistin

  3. Institute for the Study of Labor, Bonn, Germany

    Erich Battistin

  4. Center for Economic and Policy Research, London, UK

    Erich Battistin

  5. University of Padua, Via del Santo 33, 35123, Padua, Italy

    Paolo Bortoluzzi & Fabio Buttignon

  6. Department of Management, Ca’ Foscari University of Venice, Cannaregio 873, 30121, Venice, Italy

    Marco Vedovato

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  1. Erich Battistin
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  2. Paolo Bortoluzzi
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  3. Fabio Buttignon
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  4. Marco Vedovato
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Correspondence to Marco Vedovato.

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Battistin, E., Bortoluzzi, P., Buttignon, F. et al. Minority and majority private equity investments: firm performance and governance. J Manag Gov 21, 659–684 (2017). https://doi.org/10.1007/s10997-016-9364-2

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