Beyond Agency Theory: Resource-based value creation by private equity firms

Abstract

A central issue in research on buyouts is the question of whether private equity firms can take actions during the holding period of a private equity investment which add value to their portfolio companies through improvements in operating performance. Our analysis of unique survey data on 271 European buyouts using partial least squares structural equation modeling indicates that private equity firms can add value not only through governance mechanisms which control and incentivize top managers of portfolio companies to increase organizational efficiency, but, interestingly, also by providing them with access to strategic resources to generate competitive advantage. In particular, the human resources of private equity firm’s representatives who serve on the supervisory board and the network of private equity firms have a positive impact on the operating performance of portfolio companies. By taking a dual theoretical perspective and by supplementing established agency-theoretic logic with arguments from resource-based theory to develop our hypotheses, this article helps to advance the theoretical discussion on value creation through private equity firms beyond the dominant perspective of agency theory.