Active Involvement of Private Equity Firms in Portfolio Companies and its Performance Effects

Abstract

Private equity firms are characterized by active involvement in their portfolio companies. A key question in the literature on buyouts is the one of whether involvement of private equity firms increases the performance of portfolio companies i.e., whether active ownership adds value. Using partial least squares structural equation modeling, this paper analyses a data set consisting of survey data on 271 European portfolio companies and complementary secondary data on 31 portfolio com-panies. We find that active involvement is significantly associated with performance increases in portfolio companies. On the one hand, private equity firms can add value through governance mechanisms which control and incentivize top managers of portfolio companies to increase mana-gerial and organizational efficiency. These findings are in line with the long established agency-based view on buyouts and private equity firms. On the other hand, our results reveal that private equity firms can add value beyond a reduction of agency conflicts. The provision of strategically relevant resource shows to improve the competitive position and performance of portfolio compa-nies. The provision of resources is in particular driven by the skills and capabilities of the private equity firm’s representatives on a portfolio company’s board and their personal and institutional networks. This more entrepreneurial perspective on value addition helps to extend the classic effi-ciency-based view buyouts and private equity firms.