the role of private equity firms in the board of …
TRANSCRIPT
THE ROLE OF PRIVATE EQUITY FIRMS IN THE BOARD OF DIRECTORS OF THEIR PORTFOLIO COMPANIES
Word count: 23960
Stan Jeanty Student number: 01204505
Supervisor: Prof. dr. Regine Slagmulder
Master’s Dissertation submitted to obtain the degree of:
Master of Science in Business Economics
Academic year: 2016 - 2017
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CONFIDENTIALITYAGREEMENT
PERMISSION
I declare that the content of this Master’s Dissertation may be consulted and/or reproduced,
provided that the source is referenced.
Stan Jeanty
Signature
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ForewordandAcknowledgementsThis dissertation is written as finalization of the Master of Science degree in Business
Economics, at Ghent University during the academic year 2016-2017. Since October of last year
I have researched the topic "The role of private equity firms in the board of directors of their
portfolio companies".
The research and analysis were difficult, but I managed to achieve a satisfactory goal. Thanks
to this investigation, I gained an absorbing insight into this extremely fascinating, ubiquitous
industry that became the private equity industry for me.
This gained insight and result would not be possible without the support and instructions of
my supervisor professor Regine Slagmulder. She advised me about the content, the direction I had
to take and the design of my thesis. After every intervention of her, I was excited to take a next
step.
I would also like to express my gratitude to my dearest family, who, with their wise counsel
and kind words, assisted me as they always do.
Above all, I want to express my appreciation and love for my girlfriend Jolien who kept an
eye on me. When my focus threatened to weaken, she was there to motivate and encourage me.
I also want to thank all respondents without whose assistance I could not perform this
analysis.
With this thesis, I thankfully end a chapter of my life and look forward to a next one. I am
confident that the next few years will be as exciting as I have experienced so far.
I hope you enjoy reading on.
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TABLEOFCONTENTSCONFIDENTIALITYAGREEMENT...................................................................................................I
FOREWORDANDACKNOWLEDGEMENTS...................................................................................III
TABLEOFCONTENTS.................................................................................................................IV
LISTOFUSEDABBREVIATIONS.................................................................................................VII
LISTOFFIGURES.....................................................................................................................VIII
INTRODUCTIONANDMOTIVATION............................................................................................1
LITERATUREREVIEW...................................................................................................................3
1.PRIVATEEQUITY.....................................................................................................................3
1.1WHATISPRIVATEEQUITY?................................................................................................................3
1.2TYPESOFPRIVATEEQUITY..................................................................................................................3
1.3ACTORSINTHEPRIVATEEQUITYDEAL..................................................................................................4
1.3.1Limitedpartner(LP)..........................................................................................................4
1.3.2Generalpartner(GP)........................................................................................................4
1.3.3Portfoliocompany............................................................................................................5
1.4THEPRIVATEEQUITYMARKET............................................................................................................5
1.4.1Currentlandscape.............................................................................................................5
1.4.2Futureevolutions..............................................................................................................6
1.4.3Whatcriticssay................................................................................................................6
1.5VENTURECAPITAL.............................................................................................................................7
1.5.1Whatisventurecapital?...................................................................................................8
1.5.2Whyventurecapital?........................................................................................................8
1.5.3Whatistheroleofventurecapitalistsandhowdotheywork?.......................................8
1.6BUYOUTS......................................................................................................................................10
1.6.1Whatarebuyouts?.........................................................................................................10
1.6.2Typesofbuyouts.............................................................................................................11
1.6.3Whendobuyoutfirmsintervene?..................................................................................12
1.6.4Howarebuyoutsstructured?.........................................................................................12
1.6.5BuyoutProcess...............................................................................................................13
1.6.6Valuecreation................................................................................................................15
1.6.7Exit..................................................................................................................................16
2.BOARDOFDIRECTORS..........................................................................................................17
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2.1CORPORATEGOVERNANCE(CG).......................................................................................................17
2.2THEORIESANDROLESOFGOVERNINGBOARDS....................................................................................17
2.2.1LinkingroleandResourceDependencyTheory..............................................................18
2.2.2CoordinatingroleandStakeholderTheory.....................................................................19
2.2.3ControlroleandAgencyTheory.....................................................................................19
2.2.4StrategicroleandStewardshipTheory...........................................................................20
2.2.5MaintenanceroleandInstitutionalTheory....................................................................20
2.2.6SupportroleandManagerialHegemony.......................................................................21
2.2.7Conclusion......................................................................................................................21
3.ROLEOFPRIVATEEQUITYINTHEBOARDOFDIRECTORS......................................................22
4.RESEARCHQUESTION............................................................................................................24
4.1STAGEINCOMPANY’SBUSINESSLIFECYCLE(BLC)...............................................................................25
4.2FUNDSIZE.....................................................................................................................................27
4.3THESECTORTHEFUNDINVESTSIN.....................................................................................................27
4.4GEOGRAPHICALLOCATION...............................................................................................................27
4.5PHASEINBUYOUTPROCESS..............................................................................................................28
4.6BACKGROUNDOFPEPLAYER............................................................................................................28
EMPIRICALRESEARCH...............................................................................................................31
5.METHODOLOGY....................................................................................................................31
5.1SAMPLEANDDATACOLLECTION........................................................................................................31
5.2QUESTIONNAIRE.............................................................................................................................33
5.3HYPOTHESESANDVARIABLES............................................................................................................34
5.4RESULTS........................................................................................................................................35
5.4.1Researchquestion1........................................................................................................36
5.4.2Researchquestion2........................................................................................................38
5.5REGRESSIONANALYSIS.....................................................................................................................49
5.6CONCLUSION.................................................................................................................................51
5.7LIMITATIONS,IMPLICATIONSANDFURTHERRESEARCH..........................................................................56
REFERENCELIST...........................................................................................................................I
ATTACHMENTS.......................................................................................................................VIII
ATTACHMENT1:CONTACTEDBUYOUTFIRM............................................................................................VIII
ATTACHMENT2:SURVEY........................................................................................................................IX
ATTACHMENT3:DISTRIBUTIONBUSINESSLIFECYCLE:PORTFOLIOCOMPANY(PC)ANDBUYOUTFIRM(BO).....XIV
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ATTACHMENT4:DISTRIBUTIONFUNDSIZE..............................................................................................XV
ATTACHMENT5:DISTRIBUTIONINDUSTRY:PORTFOLIOCOMPANY(PC)ANDBUYOUTFIRM(BO)....................XVI
ATTACHMENT 6: DISTRIBUTION GEOGRAPHICAL AREA: PORTFOLIO COMPANY (PC), BUYOUT FIRM (BO) AND
RESPONDENT..............................................................................................................................................XVII
ATTACHMENT7:DISTRIBUTIONBUYOUTPROCESS:PORTFOLIOCOMPANY(PC)ANDBUYOUTFIRM(BO).......XVIII
ATTACHMENT8:EXPERIENCEDISTRIBUTION.............................................................................................XX
ATTACHMENT9:LOGISTICREGRESSION..................................................................................................XXI
9.1Controlling&Monitoring..................................................................................................XXI
9.2Networking......................................................................................................................XXII
9.3ManagementIncentives&Recruitment.........................................................................XXIII
9.4Mentoring&ExpertiseAdvisor......................................................................................XXIV
9.5Strategic&Governing....................................................................................................XXV
9.6Maintenance&Coordinating........................................................................................XXVI
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LISTOFUSEDABBREVIATIONS • 2BO Secondary Buyout • BIMBO Buy-In Management Buyout • BLC Business Life Cycle • BO Buyout • BOD Board of Directors • CEO Chief Executive Officer • CG Corporate Governance • EBITDA Earnings Before Interest, Taxation, Depreciation and Amortization • ESG Environmental, Social and Governance • EVCA European Private Equity and Venture Capital Association • GF General Function • GP General Partner • HQ Headquarter • IM Investment Manager • IPO Initial Public Offering • KKR Kohlberg Kravis Roberts & Co. • LBO Leveraged Buyout • LP Limited Partner • MBI Management Buy-In • MBO Management Buyout • NVT New Venture Team • OECD Organization for Economic Co-operation and Development • PC Portfolio Company • PE Private Equity • RQ Research Question • RRS% Relative Role Selection Percentage • SPV Special Purpose Vehicle • Triple F Friends, Family & Fools • VC Venture Capital • VC’s Venture Capitalists
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LISTOFFIGURES • Figure 1 Buyout Structure (Fraser-Sampson, 2011) • Figure 2 Stage Model of The Buy Out Process (Kaumann, 2009) • Figure 3 Sources of Value Creation (Vanacker, N.D.) • Figure 4 Typology of The Theories of The Roles of Governing Boards (Hung, 1998) • Figure 5 Roles of Venture Capitalists (Uchigaco, N.D.) • Figure 6 The Business Life Cycle (Davis, 2013) • Figure 7 Theoretical Framework • Figure 8 The 6 Different Roles • Figure 9 Role Distribution (Portfolio Companies) • Figure 10 Role Distribution (Buyout Firms) • Figure 11 Maturity Stage • Figure 12 Growth Stage • Figure 13 Fund Size • Figure 14 Experience • Figure 15 Buyout Process • Figure 16 Experience • Figure 17 Logist Regression Model • Figure 18 Conceptual Model
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INTRODUCTIONANDMOTIVATIONPrivate equity is a peculiar and interesting way of financing a business. It is not a
conventional source of capital and therefore has some remarkable characteristics. Moreover, since
these private equity firms provide capital, they wish to have a say in what happens with it and how
the firm will be run. This has implications regarding the governance of private equity-backed
companies. One main implication is the role the board plays in its portfolio companies, which is
divergent from the traditional role. It is these roles that are the main focus of my master
dissertation.
The capital provided by private equity firms has been of great importance and this will
continue to be so for companies who are not able or willing to seek financing in the more typical
ways. As will be explained, venture capital and buyouts are the two most frequently used forms of
private equity. Despite the importance of these capital providers, there is still room for literature
that studies the methods private equity firms use to add value to their portfolio companies. This is
the first study to build a framework on the roles private equity firms play in the board of directors
and the determinants that affect these roles.
The importance of this thesis is backed by a significant number of suggestions on future
research in this domain. Despite the growth in private equity, it is striking that up till now only a
few studies have done research about the actions private equity investors actually take (Gompers,
Kaplan, & Mukharlymov, 2015). Furthermore, studies of venture capital activity tend to be
descriptive and somewhat a-theoretical. Less is known about how value is added and how it is best
measured (Sapienza, Manigart, & Vermeir, 1996).
There isn’t a complete gap when asking this question. For instance, Fried, Vance, Bruton
and Hisrich (1998) also examined these board roles, but even they conclude in their paper that
beside the roles they discovered, also other board roles should be further examined (Fried et al.,
1998). This is supported by Knockart and Ucbasaran (2011), who say that it would be interesting
to explore how and also through which types of activities boards contribute most to which type of
ventures (Knockart & Ucbasaran, 2011). Specifically, when talking about venture capital,
Rosenstein (1993) puts forward that academic studies of the relationships between the venture
capital organizations and the start-up firms have concentrated more on investment decisions rather
than on what Tyebjee and Bruno (1984) characterize as post-investment activities (Rosenstein,
1993). The simple fact that venture capital is the main focus of this paper shows the relevance of
studying these post-investment activities for buyout firms even more. These findings are of great
significance for a broad audience. Sapienza (1992) stated that this information is of great
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importance to suppliers of capital (limited partners), venture capitalists themselves, users of capital
(entrepreneurs), and public policy makers (Sapienza, 1992).
I learn from these suggestions that research about the role private equity firms play in their
portfolio companies is very much needed. This study is different from earlier efforts because it
focuses on the role private equity firms have, rather than the characteristics or demographics of
these boards. To answer this question, I start with a brief overview of private equity and more
specifically venture capital and buyouts in part 1. Part 2 discusses the role of the board of directors
and the theories supporting these roles. The last part will summarize and discuss the role private
equity firms are playing, or should play in their portfolio companies. Based on this theory, I will
answer my research question: what is the role of private equity firms in the board of directors of
their portfolio companies? Building on this, I will further examine the determinants that influence
these roles. I will discuss 6 determinants: (1) the stage in the business life cycle of the portfolio
company, (2) the size of the fund of the private equity firm, (3) the geographical location of both
the private equity firm and the portfolio company, (4) the sector where the portfolio company is
in, (5) the background of the private equity player and finally (6) the phase in the buyout process
the portfolio company is in.
For this literature review, the subjects discussed are carefully selected keeping in mind an
audience that has no or only a limited knowledge of private equity.
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LiteratureReview
1.PRIVATEEQUITY1.1WhatIsPrivateEquity?
There are numerous ways for a firm to obtain financing. The most common ones are debt
financing, the use of public capital markets and the triple F’s (or now even quadruple, with the
fourth one standing for “fan’s”, referring to crowdfunding.). Next to the traditional ways of
financing, private equity firms are an innovation in the capital market. They are concerned with
investments in unquoted companies and create distinctive governance features (Meuleman,
Amess, Wright, & Scholes, 2009). Alternatively, Buchner, Kaserer, and Wagner (2010) define
private equity as an illiquid asset that provides an opportunity to further diversify portfolios beyond
the more traditional stock and bond instruments (Buchner et al., 2010, p. 41). A brief summary of
what private equity is and how it works, is best described by Investopedia (2017): “Private equity
is a source of investment capital from high net worth individuals and institutions for the purpose
of investing and acquiring equity ownership in companies. Partners at private equity firms raise
funds and manage these monies to yield favorable returns for their shareholder clients, typically
with an investment horizon between four and seven years.” Or in other words, private equity
provides companies the oxygen to grow.
1.2TypesofPrivateEquityBefore going more in depth, I shall explain the most important types of private equity. There
are two main areas of activity: (1) the provision of early stage venture capital and (2) the provision
of equity capital for buyouts. The last sort is the principal focus of private equity investments
(Wright et al., 2009).
Private equity in general refers to unregistered equity and equity-linked securities sold by
private and – sometimes – public companies or partnerships to financial buyers. Venture capital is
a subset of private equity and refers to equity or equity-linked investments made for the launch,
early growth or expansion of a business (EVCA, 2004; Vanacker et al., n.d.).
Venture capital is distinctive from buyouts, which refers to investments in more mature
companies and which have an established business plan to acquire equity stakes from existing
shareholders, such as families or corporations (EVCA, 2004; Vanacker et al., n.d.).
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Other, less significant, forms of private equity are development and growth capital and
rescue or vulture capital. To complete the list, there are also secondary transactions. These last
members of the private equity family are not significantly present and thus will not be discussed.
1.3ActorsinThePrivateEquityDealTo understand where the private equity firm comes in and where it can have an influence, it
is important to have a brief idea of the people involved in such a deal, in particular a buyout deal.
Legally, private equity funds are organized as limited partnerships in which the general partners
manage the fund and the limited partners provide most of the capital. Translating this into practice,
the private equity firm serves as the funds general partner (Kaplan and Strömberg, 2009).
The third actor is the portfolio company, or the company in which the private equity firm is
investing. Part 1.7.4 will elaborate on how these actors are structured and how they work for a
buyout.
1.3.1Limitedpartner(LP)
The LP’s, or limited partners, play the financing and principal role of the private equity deal.
LP’s commit a certain amount of capital to a private equity fund and the managers of the private
equity fund invest that money over a period agreed with the LP. At the time of committing capital
to the fund, there is an agreement between the LP and the private equity firm about the timeslot
the capital will be returned to the LP (Wright et al., 2009).
There are several possible actors who can act as a limited partner. They typically include
institutional investors, such as banks, insurance companies, and pension funds, but also
governments, sovereign wealth funds, corporations, family offices and private individuals (EVCA,
2007, 2004). The economic life of most funds is ten years, although provisions are often included
to extend the life of the funds by two years (Sahlman, 1990).
1.3.2Generalpartner(GP)
The GP’s, or general partners, play the leading and agent role in the private equity structure.
They are responsible for managing the investments within the private equity fund (Investopedia,
2017). Their incentive is a yearly management fee of approximately 1,5 to 2,5 % of the total
amount invested. These fees serve to pay salaries and cover due diligence and other costs incurred
to manage the fund. On top of this, and in an effort to align both the interests of the LP’s and the
GP’s, GP’s typically have a so called carried interest of 20 %. This permits GP’s to obtain 20 %
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of the capital gains realized by the fund (Vanacker et al., n.d.). It is also important that in contrast
with the limited partner, the general partners can be legally liable for the actions of the fund
(Investopedia, 2017).
1.3.3Portfoliocompany
The third, and last, actor in the private equity deal is the portfolio company. This is the
company in which the private equity firm is investing. However, the ideal portfolio company in
which all private equity firms want to invest, does not exist. This is because each private equity
firm, or fund, has its own strategy, characteristics, niche market, formula and preferences. That
means that there is a variety of private equity firms all over the world, with different investment
time horizons and different objectives (Wright et al., 2009). To end this section and in order to
have a better understanding of how most portfolio companies look like, we can consult the
European Private Equity and Venture Capital Association (EVCA) report. Here we observe that
the top 3 of the amount invested are in:
(1) Business and Industrial Products (2) Consumer Goods and Retail (3) Life Sciences
When looking at the number of companies invested in, instead of the amount invested, the
top 3 changes:
(1) Computer and Consumer Electronics (2) Communications (3) Life Sciences
1.4ThePrivateEquityMarketTo show the relevance and topicality of this thesis, I will briefly sketch a short portrait of
where private equity has come from and where it is heading to in the future.
1.4.1Currentlandscape
Both venture capital and buyouts are omnipresent in the (inter)national landscape. Looking
at Belgium, a positive story can be told. The relatively small country managed to occupy the 18th
place, out of 125, on The Venture Capital and Private Equity Country Attractiveness Index. With
investments in Belgium being 0,34% of national GDP, it beats the European average of 0,30 %
(EVCA, 2015).
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Looking behind the numbers, venture capitalists are an important source of private equity
for business. There are numerous internationally well- known venture-capital backed companies,
such as Intel, Apple, Microsoft, Google, Federal Express and Skype (Fried, Bruton, and Hisrisch,
1998; Metrick, and Yasuda, 2010; Fried et al., 1998). Also, nationally, formal venture capital is an
important source of financial support for new and growing companies in Belgium (Van den
Berghe, and Levrau, 2002). There are also several nationally known companies established
through venture capital. These include, among others, Lunch Garden, Studio 100 and Neuhaus.
1.4.2Futureevolutions
Having an idea of the national and international landscape of the private equity market is
one thing. Now I will discuss the future evolutions of this market. The overall opinion is that
private equity deals will continue to increase. In 2012, in Europe, the amount of private equity
deals completed increased to €83 billion, which is the highest value since 2008. This trend has
continued through 2014 since mergers and acquisitions activity has picked up and secondary
buyouts have continued to rise (EY, 2013). Since the interest and amount invested in private equity
deals are increasing, the industry is adapting and has taken great strides to improve its reporting to
LP’s and to engage more effectively with wider stakeholders.
Ernst and Young (2013) conclude that this is a significant, long-term development and it will
help to improve the industry’s image and standing. The continuing rise of the private equity
market, its positive evolutions and the observation that private equity deals outperform traditional
methods, will ensure that it will become an even bigger part of the capital market landscape.
1.4.3Whatcriticssay
When studying the role private equity plays, it is important to be aware of the conventional
arguments used to counter these roles. The first, and probably the most emotional argument against
private equity, concerns lay-offs and remuneration. This is the main criticism highlighted by
Wright et al. (2009). They are concerned that employees suffer via lay-offs and lower wages and
are convinced that this can have a disruptive effect to a VC-NVT (venture capital-new venture
team) relationship (Fried et al., 1997). However, this is countered by stating that in the creation of
viable businesses, jobs are created (EVCA, 2001; Constantin Associés and AFIC, 2007; ASCRI,
2008; BVCA, 2008). This is also confirmed by Smith (1990), who shows an initial reduction in
employment the first 3 years, followed by subsequent increases in employment and higher wages,
mostly after year 4 or 5.
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Another point of critic is asset stripping. This means that private equity firms are profiting
from the reselling of assets within short periods of time (asset flipping). When this includes selling
of subdivisions, this implies lay-offs as well (PSE Group of the European Parliament, 2007; Wright
et al., 2009).
Next to negative effects regarding lay-offs, remuneration and asset stripping, another point
of criticism is the short-term mindset they claim private equity firms to have. It is criticized that
private equity firms choose this short horizon in investee firms because they seek to make a return
for the investors in their funds (Wright et al., 2009). They often call them “fast-buck artists”. To
refute this argument, the study of Strömberg (2009) comes in. He found out that 70% of buyouts
remain in the possession of the private equity investors for five years or longer.
Some go even further and state that venture capitalists in particular, but also buyout firms,
can hinder venture growth if they offer the wrong strategic input or impose ill-advised constraints
(Steier and Greenwood, 1995; Gomez-Mejia, Luis, Balkin, and Welbourne, 1990). Other research
even suggests that venture capitalists do not add value at all (Manigart et al., 2002; Steier and
Greenwood, 1995; Gomez-Mejia et al., 1990). Several researchers counter this accusation. They
say that financial performance generally improves after the buyout (Cressy, Munari, and
Malipiero, 2007; Guo, Hotchkiss, and Song, 2011).
A last common argument against private equity is that these firms use leverage and offshore
holding companies to reduce tax charges and it is mainly these that account for, or significantly
contribute to, investment performance (PSE Group of the European Parliament, 2007; Wright et
al., 2009). They accuse private equity companies of evading taxes, for instance by using debt
financing to take advantage of interest deduction. These criticism and debates have led to more
demand for regulations and transparency (Treasury Select Committee, 2007; Unquote, 2008; Mike
Wright et al., 2009).
1.5VentureCapitalWhen putting buyouts to the side, venture capital is the second most important member of
the private equity family. However, this thesis emphasizes on buyouts, it is crucial to first have a
good understanding of how venture capital works and how it is structured. This is because after
venture-capital firms are backed and exited (i.e. when the venture capital divests its investment)
the company is often left to buyout firms. There are also many similarities between the
characteristics and the process of venture capital and buyouts. That is why this section will give a
short but thorough overview of venture capital.
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1.5.1Whatisventurecapital?
The word “venture” is derived from the word adventure. This already gives a good
understanding of what venture capital is all about. Defined, venture capital is a subset of the private
equity asset class that mainly focuses on investments in new or growing privately-held companies
with high growth potential (Vanacker et al., n.d.). The venture capitalist takes a huge risk in
financing these firms, but hopes to get a return when there is one lucky winner in its portfolio.
The venture capitalist invests and manages capital in his role as a general partner of a limited
partnership. Most of the capital invested comes from institutional investors. The fund has a finite
life by the end of which all of the investments must either be liquidated or distributed to the
partners. First the venture capitalist must choose companies to invest in and negotiate the purchase
of stock in private transactions. These stocks are typically illiquid. In order that no venture
capitalist is overexposed to the risks of a single venture, it is common for more than one venture
capital partnership to invest in a firm (Fried et al., 1998).
1.5.2Whyventurecapital?
Venture capitalists exist because of the demand of capital from new ventures which are
unable to obtain loans from traditional means. Since they are lacking collateral or sufficient cash
flow, these companies cannot raise capital from conventional sources, such as commercial banks
or the public market and are therefore attracted to venture capital as an alternative financing
method (Gomez-Mejia et al., 1990).
In order to overcome the huge business and financial risks and the potential agency problems
associated with investing in young, growth-oriented ventures (often without valuable assets but
with a lot of intangible investments), venture capital firms specialize in selecting the most
promising ventures. After the investment, their top priority is being involved in the ventures once
they have made the investment (Manigart, and Wright, 2013). This means that the venture
capitalist will play an important role besides the financing of the venture.
1.5.3Whatistheroleofventurecapitalistsandhowdotheywork?
This section will give a brief overview of the structure of a venture capital deal and the stages
both parties have to go through.
The first stage is to perform due diligence and, if all goes well, the selection of new portfolio
companies. Since venture capital firms receive a huge number of business plans from capital-
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seeking firms, only a small fraction is appointed with financing. A quick screening ascertains
whether an investment proposal fits with the general investment criteria of the venture capital fund
(Fried, and Hisrich, 1994). The few ventures that are selected, will have to undergo a pre-
investment due diligence process. This is to decrease the risk of adverse selection and potential
information asymmetry problems (Vanacker et al., n.d.).
This is followed by the actual venture capital deal. Now the venture capitalist will have to
decide the price he will ask in return for its investment. In order to do so, he has to determine the
value of entrepreneurial companies, or alternatively, the percentage of equity capital they want in
return for their investment (Heughebaert, and Manigart, 2012). If after the due diligence, the
venture capital firm still wants to invest in the venture, a term sheet is set up. This contains the
conditions and terms the deal entails.
After the investment is made, the most important and interesting aspect for this thesis begins:
the role of the venture capitalist in the backed company. In addition to their role as a financial
intermediary, venture capitalists may have a very important influence on the way the firm is
managed (R. Gomez-Mejia et al., 1990). As they occupy a number of seats in the board of directors
in order to make sure their invested money is well spent and used, they can assist the existing
executive team in many ways. There has been some literature written about these roles. For
example, Vanacker et al. (n.d.) state that the three broad post-investment activities are: monitoring,
assisting and certifying their portfolio companies. Fried and Hisrish (1995) also acknowledge these
post investment roles, next to financing, such as: operating services, access to business contacts,
generally business knowledge, and financial and strategic discipline (Fried, and Hisrich 1995). A
last illustration of these roles comes from Frank Maene (2017), partner at Volta Ventures, during
a reading on financing, who said that venture capitalists not only provide cash but also advice,
work as a sounding board, help with headhunting and hiring, consult with the IPO and provide aid
with fund raising.
These venture capital roles already give a great introduction in the possible roles a buyout
firm can play in the board of its portfolio company. However, it is important to bear in mind that
these roles will not be completely the same for buyouts. This is because the portfolio companies
of a buyout firm will be substantially bigger and are more experienced than those of a venture
capital firm.
A second point of attention is that these roles may also differ when looking at the
characteristics of the portfolio company. For instance, the stage in the business life cycle may
affect the private equity player’s roles. For each stage (start-up, growth, maturity and decline) the
company is faced with other challenges. Therefore, each stage will call for other tools offered by
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the private equity firms. For instance, in the start-up phase, one of the most important challenges
will be to establish a customer base. To handle this issue, the network of a private equity player
may come in handy. This role will be less important when the company is in the decline phase,
where looking for a proper exit strategy will be more important. Other determinants may be the
sector the portfolio company is operating in, as well as the size of the fund of the venture capitalist
and the geographical location of the two parties. These determinants will be discussed more
profoundly in part 4.
This last paragraph on venture capital is also the last phase where a venture capitalist comes
into the picture. From the beginning, the venture capitalist is working towards the exit. This is
when their task is done and they can no longer add value to the company. In the end, the main
objective of the venture capitalist is always to generate a return on its investment. The exit is
typically some 3 to 7 years after the initial investment, thereby turning their illiquid stakes in
private companies into realized returns (Gompers, and Lerner, 2001).
There are several exit routes for a venture capital fund in an effort to monetize their return.
First of all, trade sales. This is where a company’s shares are sold to an industrial investor. These
are the leading exit routes in Europe. Another exit route are secondary sales, or sales to another
private equity house. This is the second most chosen exit strategy. And finally, public market exits,
or initial public offerings (IPO’s). This last exit route has seen a significant increase the last couple
of years (EVCA, 2017). Exit strategies are discussed more in depth in section 1.7.7.
1.6BuyoutsAfter an introduction in the private equity market through venture capital, we have arrived
at the buyout stop. Whereas venture capital represents the early stage, buyouts represent the later
stage investment category of private equity. In size, buyouts are more significant and the capital
injections when dealing with buyouts are substantially bigger than venture capital. After
explaining what buyouts are and in which forms they exist, the structure and the process of a
buyout deal will be explained.
1.6.1Whatarebuyouts?
In brief, buyouts, in all its different forms, are the purchase of a company’s shares in which
the acquiring party gains controlling interest of the targeted firm (Investopedia, 2017). Since each
type of buyouts is funded and structured differently, each one of them will be explained separately.
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1.6.2Typesofbuyouts
Management Buyout (MBO) is a transaction where the management team of a company
purchases the assets and operations of the business they manage (Investopedia, 2017). This classic
type of buyouts involves the executive team who is managing a particular business activity,
deciding to buy it out from the parent company or shareholders. In order to finance the deal, the
management team puts their own money into the deal and are usually required to get a loan as
well. In return, they are rewarded with sweet equity issued at preferential rates and ratcheted up to
pre-agreed performance targets (Fraser-Sampson, 2010).
Management Buy-In (MBI) is a form of buyout evolved from the MBO. MBI is a corporate
action in which an outside management team purchases an ownership stake in the first company
and replaces the existing management team (Investopedia, 2017). It is similar in just about every
way as a MBO apart from the nature of the team or, otherwise, apart from the way in which the
deal initially comes together. Instead of the established management team of a business getting
together to buy it, an outside team comes together to buy another company operating in the same
sector (Fraser-Sampson, 2010).
The Buy-In Management Buyout (BIMBO) is a form of a buyout that incorporates
characteristics of both a management buyout and a management buy-in. A BIMBO occurs when
the existing management – along with outside managers – decides to buyout a company. The
existing management represents the buyout part while the outside managers represent the buy-in
part (Investopedia, 2017).
When private equity investors, and often a management team, pool their own money
(together with debt finance) to buy shares in a company from its current owners, we talk about
Leveraged Buyouts (LBOs). The debt is usually provided by institutions, such as commercial
banks, investment banks, and hedge funds. In larger transactions, the private equity firm is likely
to be the majority equity holder (Wright et al., 2009). Leveraged buyouts are often accomplished
by using a relatively small portion of equity and a relatively large portion of outside debt financing
(Kaplan, and Strömberg, 2009). This can be compared to homeowners who take out a mortgage to
buy a house, using only a small portion of their own money while borrowing the rest.
The Secondary Buyout, as mentioned, is a popular exit method. Instead of being sold to a
trade buyer, or exited by way of an IPO (initial public offering), it is sold to another buyout firm
(Fraser-Sampson, 2010), thereby ending its involvement with the company in question
(Investopedia, 2017). The secondary buyout provides a means to continue the buyout
organizational form, but now with a different set of investors (Wright et al., 2009). Simply put, it
is selling them to another private equity firm. This exit strategy has risen and since 2013 reached
12
the proportion of 55% of all the exits (EY, 2013). When a secondary buyout is sold to another firm
once more, we speak of a tertiary buyout, and so on.
1.6.3Whendobuyoutfirmsintervene?
Generally, buyout practitioners are concerned with established companies that are usually in
the mature or decline stage of their relevant product life cycle (Fraser-Sampson, 2010). So, young
or growing companies, looking for capital to still their cash-hunger, have too much uncertainty
and risk for buyout firms. Fraser-Sampson (2012) explains this by the fact that no buyout firm can
afford the risk of outright failure. This is important to keep in mind for the remaining part of this
thesis.
1.6.4Howarebuyoutsstructured?
With the structure of a venture capital deal in mind, buyouts can be explained similarly. The
buyout deal is usually financed by a private equity fund, set up as a limited partnership. Typically,
members who contribute to the fund are pension funds, investment banks, insurance companies,
wealthy individuals and the fund’s managers. By contributing a portion of the fund’s investment
in a specific buyout, fund members diversify their risk. The fund will have an exit strategy with
the aim of maximizing returns in terms of fees and dividends received, but the main source of
return will be the generated exit value (Wright et al., 2009).
First, the buyout identifies a target company which they would like to buy as one of the
portfolio companies of their current fund, and agrees a purchase price with the company’s current
owner (Fraser-Sampson, 2010). The biggest difference between buyouts and venture capital is that
buyout firms, in order to close the deal, set up a special purpose vehicle (SPV) – in literature called
“Newco”. This then acts as a holding company. Once this new company is set up, it will purchase
the target company. This structure is illustrated in figure 1.
13
Figure 1: Buyout Structure
Often, the capital in the buyout fund does not cover the purchase price. Therefore, debt and
mezzanine finance is issued so that the SPV can cover the purchase price. The SPV now has
enough money to be able to pay the purchase price to the owner of the target company, receiving
in return all the shares in the target, and becoming its 100% owner (Fraser-Sampson, 2010).
The Buyout Structure as illustrated in Figure 1, has three advantages according to Hanney
(1986). First of all, due to the SPV, the buyout team avoids any personal liability apart from
financial involvement. Secondly, the Target Company can effectively finance its own acquisition
and at the same time obtain tax relief for the interest costs. And finally, Newco provides a vehicle
in which financiers can have an equity stake (Hanney, 1986).
1.6.5BuyoutProcess
After handling the structure of a buyout deal, the process is next. The Buyout process can be
divided in three phases: the acquisition phase, the holding period and the divestment phase (Berg
and Gottschalg, 2004). Figure 2 gives a schematic overview of the different stages and the
corresponding tasks that have to be performed by the equity investor (Kaumann, 2009).
Newco
Management BuyoutFund
TargetCompany
Debt
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Figure 2: Stage Model of the Buy Out Process
The first phase, the acquisition phase, is where the buyout process starts. Target selection,
valuation, capitalization and negotiation are the main tasks. The acquisition phase is a critical step
for the success of the buyout investment as a whole. During this phase, the investors familiarize
themselves with the company and they also develop a business plan for the buyout (Berg and
Gottschalg, 2004). The most important result from this phase is the valuation of the target company
and the corresponding acquisition price. These negotiations make or break the deal. When coming
to the end of the acquisition phase, the acquirer must make important decisions regarding the
degree of financial leverage, the distribution of management equity stakes, the design of incentive
systems, etc. (Berg and Gottschalg, 2004). Baker and Montgomery (1994) argue that a significant
part of the value generation of a buyout is determined through the decisions taken in this first
phase.
In the holding period, the business plan is executed. This means that the strategic,
organizational and operational change prescribed in the business plan are implemented and
intended operational improvements are being realized (Berg and Gottschalg, 2004). This phase
typically lasts between 3 to 5 years (in Europe), and it is the most crucial phase for the value
creation in the buyout process (Oliveira, 2014).
Last but not least comes the divestment phase. This means the end of the buyout, and
determines the divestment strategy (such as trade sale, IPO, secondary buyout etc.). This final
phase is a crucial part in the buyout process for investors since this is the moment that the
Acquisitionphase
•TargetSelection•Valuation•Capitalisation•Negotiation
HoldingPeriod
•DebtPaydown•OperationalEfficiencies•Growth
DivestmentPhase
•Valuation•EquityStory•Negotiation
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difference between the acquisition and exit price is calculated and the return on investment is
rewarded (Berg and Gottschalg, 2004).
1.6.6Valuecreation
In the previous section, I discussed that the acquisition phase is responsible for most of the
realized returns at the end of the buyout process. In this paragraph, we take a look at how this value
is created and through which methods.
Figure 3 is based on a slide from a class of Tom Vanacker in Advanced Corporate Finance
on buyouts, and neatly sums up and illustrates the way a buyout firm can generate return on its
purchase. Each designated method will be elaborated below.
The most important one is “creating a higher EBITDA” (Earnings Before Interest, Tax,
Depreciation and Amortization) by the time the exit is due. Raising EBITDA can be done by:
(1) realizing higher sales volumes at the same selling prices and margins
(2) realizing higher gross margins, either by using higher selling prices or by negotiating
lower purchase prices
(3) reducing costs by working more efficiently
Enterprise value = Multiple X EBITDA
Ente
rpris
e V
alue
E ETime
• Higher multiple • Increased EBITDA • Time • Repayment of debts
Figure 3: Sources of value creation
EQU
ITY
EQU
ITY
DEB
TS DEB
TS
16
(4) cleaning the balance sheet via reducing the working capital and selling off irrelevant
assets.
The second most important path in creating value is “time”: increasing the growth
expectations and reducing the risk the firm is exposed to. The third option is the repayment of debt.
By simply repaying the firms’ debt, the EBITDA will increase. Finally, the buyout firms hope that
the multiple of the target company will increase by the time the firm is exited. Needless to say,
this is not a sustainable investment policy.
1.6.7Exit
In section 1.5.3 I swiftly introduced the most popular exit strategies for venture capital. For
buyouts, these same exit strategies are used and I will discuss each of them shortly.
IPO’s (Initial Public Offering), also called flotation or listing, is the exit strategy whereby
the shares of the company get listed on the stock market for the first time. As a result, the investor
will be able to sell its shares to the public. One disadvantage is that the stock market can be very
unpredictable and volatile. Also, the listing of the shares of a company is typical subject to strict
regulatory requirements and restrictions, which can make IPO’s an expensive exit route
(Investopedia, 2017).
Trade sale is another commonly used exit route. Instead of going public, the private equity
investor sells all of its shares held in a company to a trade buyer. This is a third party often
operating in the same industry as the company itself. This is sometimes preferred because it can
be done quickly and efficiently where the regulatory restrictions of the IPO are not present (HVCA,
2017).
Secondary sale is the last of the three exit strategies. As mentioned before and as the name
indices, secondary sales are sales to another private equity firm. The structure remains, but now
another private equity firm can take over and add value.
All of these business opportunities may not have presented itself without the private equity
involvement (Cumming, Douglas, Siegel, and Wright, 2009). And in general, exits tend to take
place 3-5 years after the buyout (Wright et al., 2007).
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2.BOARDOFDIRECTORSThis thesis examines the role of private equity firms in the board of directors of their portfolio
companies. Having a good understanding of private equity, and in particular buyouts, now the
other part of the research question will be treated: the board of directors. The focus of this section
will be the role these boards have in their company. After explaining the board, part 4 will combine
and examine the role of private equity firms in the board of their portfolio companies.
2.1CorporateGovernance(CG)I will use the definition of the OECD (Organization for Economic Co-operation and
Development) to explain corporate governance (CG). Corporate governance is a set of procedures
and processes according to which an organization is directed and controlled. These structures the
distribution of rights and responsibilities among the different participants in the organization –
such as the board, managers, shareholders and other stakeholders – and lays down the rules and
procedures for decision-making (OECD, 2017). These rights, responsibilities, rules and
procedures for decision-making are very important because we are looking at the role a private
equity firm has in this structure.
The primary reason for corporate governance is the separation of ownership and control, and
the agency problems it engenders (John, and Senet, 1998). Corporate governance is concerned
with creating incentives and control mechanisms to ensure that managers use firms’ resources in
the interests of their shareholders and that they pursue value maximization. The dispersed
ownership structure of the public corporation, while allowing risk to be efficiently allocated, is not
beneficial to the effective monitoring of managers, because free-riding can occur (Jensen, and
Meckling, 1976; Fama, and Jensen, 1983; Hart 1995; Thompson, and Wright, 1995). The incentive
realignment hypothesis suggests that the reconsolidation of ownership and control in the post-
buyout firm will improve managerial incentives (Wright et al., 2009).
2.2TheoriesandRolesofGoverningBoardsSince board involvement is such a complex phenomenon, it is commonly suspected that no
single theoretical perspective could adequately capture the entire process (Hung, 1998). Because
there is no such exhaustive theory, I will use the typology written by Hung (1998) to discuss the
theories on roles of boards of directors, as given in figure 4, in an effort to be as thorough as
possible. It is important to take into account that private equity firms have a special structure and
therefore could have implications in the corporate governance of the organization.
18
Figure 4: Typology of the theories of the roles of governing boards
2.2.1LinkingroleandResourceDependencyTheory
The first theory, the resource dependency theory, views the firm as an open system,
dependent on external organizations for the supply of key resources (Pfeffer, and Salancik, 1978).
The survival and success of a firm is thus contingent on the top management team’s ability to
manage the dependency of the firm on external resource providers, in order to gain independence
from its environment (Pfeffer and Salancik, 1978; Blau, 1964; Knockaert and Ucbasaran, 2011).
They therefore seek to establish links in an attempt to regulate their interdependence (Hung, 1998).
Roughly, the board functions as a link between the organization and the stakeholders around it.
The resource dependency theory argues that a board exists as a provider of resources to
executives in order to help them achieve organizational goals (Hillman, Cannella, and Paetzold,
2000; Hillman and Daziel, 2003). However, buyout firms do not possess all the tools and resources
that their portfolio companies may demand. Then the private equity firms can call upon the
network they have built throughout their career. They can use their network to offer their portfolio
companies the tools and resources they lack, but indirectly have through their network (Lee, Lee,
and Pennings, 2001). This way, private equity firms can have a linking role between their network
and their portfolio companies.
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2.2.2CoordinatingroleandStakeholderTheory
The stakeholder theory takes into account other stakeholders than shareholders. A
stakeholder, as defined by Freeman (1984), is “Any group or individual who can affect, or is
affected by, the achievement of a corporation’s purpose.” Groups that meet this criterion are for
instance employees, customers, suppliers, stockholders, governments, etc. Consequently,
managers have special obligations to guarantee that all stakeholders (not just the shareholders)
receive a fair return from their stake in the company (Donaldson and Preston, 1995). Hence, a
company acts as a guardian of the interests of all its stakeholders. The board has to play a
coordinating role, ensuring that its corporate actions take into account the principles of
sustainability for surrounding communities (Academlib, 2017). This means that the board has to
negotiate and compromise with stakeholders in the interest of the corporation (Hung, 1998).
It is also the private equity firms’ role to align its portfolio company’s interests with those
of its stakeholders. Stakeholder engagement has become an indispensable aspect of a modern
company. It is hard to find academic literature on the way private equity firms deal with their
stakeholders, however it can be found in practice. For instance, KKR (Kohlberg Kravis Roberts
and Co.), a global private equity firm, places emphasis on its management of environmental, social
and governance (ESG) issues. They see it as an essential part of long-term success in a fast-
changing world (KKR.com, 2017).
2.2.3ControlroleandAgencyTheory
The most common and popular governance theory is the agency theory. Agency
relationships occur when a partner in a transaction (the principal) delegates authority to another
(the agent) and the welfare of the principal is affected by the choices of the agent (Arrow, 1985).
Applying to the corporate world, the shareholders act as principals and the executives as agents.
The problem occurs when the shareholders cannot ascertain that the executives will act in their
interest due to unaligned goals or different aversion levels to risk or information asymmetry
(Wikipedia, 2017; Investopedia, 2017). The principal cannot perfectly and without a cost monitor
the actions of the agent. Here the board is present in order to make sure their actions are in line
with the objectives of the shareholders. This can be done through monitoring, installing incentives
and other mechanisms. Conclusion, the board has a controlling role.
When throwing private equity firms in the mix, we get a special kind of principal-agent
relationship. First of all, since private equity investors are not the traditional shareholders, there
are now two principals. This gives us a principal-principal-agent relationship. Further, the agency
theory assumes that both the agent and principal are self-interested and boundedly rational
20
(Eisenhardt, 1989). Consequently, individual utility-maximizing behavior is likely to emerge if
proper incentives and controls to align the goals of the entrepreneur with the VC are not enacted
(Arthurs and Busenitz, 2003). Secondly, according to Arthurs and Busenitz (2003), the agency
theory also differs throughout the life of a venture (before or after investment decision). A third
implication for the agency theory combined with private equity is that private equity firms, acting
as large shareholders, can put more pressure over managers than small different policyholders.
This means that a “horizontal” agency problem can exist between the two principals (Mayers and
Smith, 1981; Rasmussen, 1988; Krishnaswami and Pottier, 2002).
This paragraph makes it clear that there are significant implications when combining the
agency theory with private equity.
2.2.4StrategicroleandStewardshipTheory
The second most important theory, the stewardship theory, is different from the agency
theory because here it does not emphasize the two different parts of the company, being the
shareholders and executives. This theory defines situations in which managers are not motivated
by individual goals, but rather are stewards whose motives are aligned with objectives of their
principals (Ghansoli, 2013). Whereas the agency theory portrays managers as opportunists, the
stewardship theory believes they want to do a good job. There is no non-alignment between the
agents and the principals. Here the governing board has a performance function or a strategic role
(Hung, 1998). The board has to guide the company using the decided strategy to reach the
objectives.
Bender (2011) argues that the goal of both a venture capitalist and entrepreneur is to see the
venture succeed. Needless to say, that the entrepreneur, who puts in the initiative, capital and
energy, will do anything to see his company grow and flourish. The VC who puts in a huge amount
of capital, aiming to gain a return on its investment, will also need the company to succeed. In this
context, the stewardship theory can be applied to the private equity market (Bender, 2011).
2.2.5MaintenanceroleandInstitutionalTheory
The institutional theory is concerned with the pressure an organization undergoes due to
institutionalization. Scott and Meyer (1983) consider that it includes all social rules and
requirements to which individual organizations must conform if they will receive support and
legitimacy (Hung, 1998). Here, the board has a maintenance role. This is necessary in response to
21
institutional pressure and focuses on training the organization by understanding and analyzing the
environment and knowing how to cope with external pressure (Hung, 1998).
The same pressure is also found for venture capitalists. According to Bruton, Fried and
Manigart (2005), VCs are subject to different institutional forces which can influence their
behavior.
2.2.6SupportroleandManagerialHegemony
Managerial hegemony is the idea that governing boards are tools used by professional
managers to lend support and validate their actions (Mace, 1971). It is the managers who both run
the company and make the strategic decisions, instead of the board taking on the latter task. A
word often used to explain this is “rubber stamping”. This means that the board only exists to
accept the decisions of the executives and act as a legitimizing figurehead (Baker, 2010; Hung,
1998; Mahadeo et al., 2012; Thomson, and Bebbington, 2005). Hence, the role of the board is
solely supporting the managers’ decisions and actions.
By now it is clear that private equity firms provide the majority of the capital of a company.
In return, they claim a huge say in the actions and goals of the company. It would be
counterintuitive when the investors would blindly go along with the actions and decisions of the
executive team.
2.2.7Conclusion
The theories and roles just described are not exhaustive. There are numerous papers and
studies looking at the role of the board of directors. For instance, another role that is typically
ascribed to directors is: control of the process by which top executives are hired, promoted,
assessed, and, if necessary, dismissed (Adams et al., 2008). Most roles, however, can be
accommodated under one of the roles discussed.
Though most theories are applicable to venture capital, this most likely is also true for other
private equity firms such as buyout firms.
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3. ROLE OF PRIVATE EQUITY IN THE BOARD OFDIRECTORS
Having dealt with both private equity and the board of directors allows us to combine both
parts and have a look at the role a private equity firm can play in the board of directors of their
portfolio company. Research by Sapienza et al. (1995) on the role of venture capitalists, focuses
on three roles: strategic, interpersonal and networking. Each of these groups can be further divided
as shown in figure 5. Almost every role found in literature can be placed in one of these groups.
Figure 5: Roles of venture capitalists
Though this gives a good first notion of what kind of roles we are talking about, the attentive
reader has noticed that this research focused on venture capital firms, whereas this thesis primarily
focusses on buyout firms. It could be argued that these roles are about the same for both private
equity groups but Kaplan and Strömberg (2009) classify three types of value increasing actions
regarding specifically buyout firms: financial engineering, governance engineering and
operational engineering. It is important to read that these value-increasing actions are not
necessarily mutually exclusive, but it is most likely that certain firms put more emphasis on some
of the actions than others (Kaplan et al., 2015). This categorization will be used to take a look at
the roles private equity firms appear to play in their portfolio company.
In the first group of three, financial engineering, the private equity investors provide strong
equity incentives to the management teams of their portfolio companies. At the same time,
leverage puts pressure on managers not to waste money. This observation confirms previous work
by Kaplan (1989), Kaplan and Strömberg (2009) and Acharya et al. (2013) in which they found
Strategic
Soundingboard
Financier
Businessadvisor
Interpersonal
Mentor/coach
Friend/confidant
Networking
Sourceofprofessionalcontacts
Sourceofindustrycontacts
Managementrecruiter
23
out that private equity firms put emphasis on strong incentives and remunerations. On average,
private equity investors allocate 17% of company equity to management and employees (Gompers
et al., 2015).
In the second type of value increasing actions, governance engineering, private equity
investors control the boards of their portfolio companies and are more actively involved in
governance than public company directors and public shareholders.
The last group, operational engineering, is perhaps the most relevant group regarding the
research question of this thesis, since it explores the ways in which the private equity investors
attempt to create value for their investments and add value to their portfolio companies. It is based
on the idea that private equity firms develop industry and operating expertise, which they bring in
to add value to their portfolio companies (Gompers et al., 2015).
They also make a distinction between pre- and post-investment sources of value creation.
These post-investment sources are important as well, as showed by a study by Baker and Gompers
(2003), which suggests that the presence of private equity firms can affect firms long after they
have left the board.
According to Gompers et al. (2015), the pre-investment sources of value mainly include:
increasing revenues, reducing costs, follow-on acquisitions and changing the company’s strategy
and executives (these all fall under operational engineering). Other important sources of value are
improving incentives and corporate governance. These belong under financial and governance
engineering. Private equity firms appear to engage in differentiated investment strategies with
different sources of expected value creation (Gompers et al., 2015). The same sources identified
as important pre-investment remain important post-investment, except that many of them increase
in importance (Gompers et al., 2015).
Using the first table and the study of Gompers et al. (2015), we notice that both venture
capital and buyout firms add value through similar means. Venture capital firms will, however,
have a different impact since their portfolio companies do not exist as long as the portfolio
companies of buyout investors. The premature nature of the companies, the higher entrepreneurial
risks involved, the higher volatility of the business, the low degree of transparency and public
accountability, are all factors that make the venture capitalist more inclined to actively monitor the
venture-backed firms (Van den Berghe et al., 2002). Monitoring was greatest in early stage
ventures, indicating that venture capitalists respond to high uncertainty by increased information
exchange with CEO's (Sapienza et al., 1996).
Within a strategic entrepreneurship perspective, private equity firms may provide
complementary resources and capabilities that may be missing from the management team. Also,
24
some private equity firms may be much more skilled in how they implement monitoring and
advisory devices as they are more effective at learning from experience to create distinctive
organizational capabilities (Barney, Wright, and Ketchen, 2001; De Clercq and Dimov, 2008).
4.RESEARCHQUESTIONIt should be clear by now what this master dissertation will probe to unveil: the role of buyout
firms in their portfolio company. I will only take buyout firms into account, and leave venture
capital for future research for two reasons. As explained, buyouts are the most significant part of
the entire private equity market. It is therefore a good place to start. Secondly, part of my research
question studies the board of directors of an organization. Since venture capital-backed companies
do not have “big boards”, if any at all, it is hard to study them.
The roles of buyout firms are central in this study and lay the foundation for my first research
question. Since buyout firms have to use their power through the board of directors, my RQ1
(Research Question 1) is:
What is the role of buyout firms in the board of directors of their portfolio companies?
This means that I will try to build a framework about which roles private equity firms can
have, besides the primary role of financier.
However, more than ever, fewer and fewer funds are purely generalist. Being a generalist
means they have no sector or business type specialization. The majority of private equity funds
have however decided to specialize in certain industrial sectors or services or in companies at a
certain stage of development, of a particular size or with a specific geographical coverage
(regional, national or international) (EVCA, 2007). With this, I want to show that no private equity
firm is identical. Further, since each buyout firm operates in a different context and environment,
other forces may be active. It is therefore important to take these differences between buyout firms
into account when exploring the roles these firms play in their portfolio companies. Also, Berg
and Gottschalg (2005) show that total value generation in buyouts is the result of a variety of value
generating levers. These levers have an effect during different phases of the buyout, they also
differ in the way they cause value generation and they can come from the target company or evolve
out of the interaction between both the target company and the equity investor. Concluding, the
second objective of this thesis is to develop a conceptual framework to discover the determinants
that may influence the role buyout firms have. Here from RQ2 is deducted:
25
What are the determinants that influence the role of buyout firms in the board of directors
of their portfolio companies?
Thorough research resulted in 6 possible determinants that can influence the roles of buyout
firms in the board of directors of their portfolio companies.
4.1StageinCompany’sBusinessLifeCycle(BLC)
Figure 6: The business life cycle
First of all, the stage of the lifecycle that the portfolio company is in could decide the role of
the buyout firm. These stages are illustrated in Figure 6. The first stage, start-up or seed stage, is
when the uncertainty is the highest and where especially business angels come into the picture
(EVCA, 2007). In this stage, a board’s traditional roles are advising management, looking for
partners and communicating with other stakeholders (Huse and Zattoni, 2008). In the next stage,
the growth stage, the primary tasks of the board are taking strategic decisions, collecting
information and data and giving specialized advice (Huse and Zattoni, 2008). However, the first
and second stage are not relevant when looking at buyout firms. In the book “Private Equity as an
asset class” by Fraser-Sampson (2010), it says that buyout practitioners are concerned with
established companies that are usually in the mature or decline stage of their relevant product life
cycle. Or as Peter Claes, Director Integration and Separation at KPMG, said at Capitant’s M&A
26
Track: Buyout firms stay away from risk as much as possible. Hence, buyout firms will not be
active in the start-up and growth stage. Their field of expertise lays in the companies that are more
established and find themselves in the mature or decline phase.
When arriving in the last two stages of a business’ life cycle, the emphasis is now less on
growth but more on planning, controlling and efficiency (Miller and Friesen, 1984). Here the board
takes a monitoring role upon itself because there are already proven systems in place (Lynall,
Golden, and Hillman, 2003).
Now we have an idea which roles the traditional board of a company has in each stage. It is
a good base to use as a first idea of which role a buyout firm will play in these stages. This results
in 2 hypotheses, one for each stage where buyout firms are active in.
Hypothesis H1A is backed by the fact that companies in the maturity stage are well defined
and established. The main focus in this stage is making the organization sustainable for the long
term (Pacific Continental, 2011). Further, Mathiasen (1999) found that the focus of the board in
the maturity stage is to focus on recruiting a large board that has the capacity to give or have access
to funders and donors, and influential people. This corresponds with the earlier described
monitoring role. Therefrom it is deducted that, in the maturity stage, this role will be fulfilled by
buyout firms.
H1A: The role of a buyout firm in the board of directors of their portfolio companies in the
maturity stage is a monitoring role.
In the second and last stage, the decline stage, a lot of companies’ management puts its head
in the sand and choose a denial attitude. There is also a lack of connection with the community,
inability to recruit new funding sources, and/or low morale among the staff is trending (Pacific
Continental, 2011). It is hard to get out of this status quo, and this change will most certainly not
be obtained through a monitoring role. Agard (2010) sees that at this stage, a common need is to
bring in an outside perspective to assist in the process and make appropriate decisions about the
next steps of reinvention or dissolution. In effort to get to that reinvention or dissolution, the roles
that are most appropriate are the strategic and linking role.
H1B: The role of a buyout firm in the board of directors of their portfolio companies in the
decline stage is a strategic and networking role.
27
4.2FundSizeHochberg, Ljungqvist and Lu (2007) found that there was a positive and significant
correlation between the funds’ size and their network. Building on these findings, a buyout firm
with a relative big fund will more easily use its network than a smaller or newer fund. Although
this affects only one role, there may be more roles affected by the size of the fund.
H2: Fund size has an impact on the role a buyout firm plays in the board of directors of
their portfolio companies.
4.3TheSectortheFundInvestsinAs a buyout firm, it makes sense to choose one or more sector(s) you want to specialize in.
Sector specialization allows investors to make better evaluations of a business. In addition, the
entrepreneur is able to deal with a specialist in his sector with whom he can share his strategic
thoughts (EVCA, 2007). As mentioned in section 1.3.3, a wide variety of private equity firms with
different characteristics, objectives and markets can be found. This makes it important to have a
look at the different sectors buyout firms are active in, and if there is a difference between the
sector and the role held by the investors.
When looking at the point of view of the portfolio company a similar conclusion can be
made. Each company is operating in a different context and each context demands different actions
to survive. So, each industry will require a different role for the buyout firm.
H3: The industry where the firm is investing/specialized in has an impact on the role of a
buyout firm in the board of directors of their portfolio companies.
4.4GeographicalLocationAnother factor that can motivate which role a buyout firm can play, is the geographical
location of both the portfolio company and the buyout firm itself, also called the spatial proximity.
Clearly, being close to the business allows for a better relationship between both investor and
investee. This said, the geographical location is of most importance in the first stages of the
portfolio company. When in the last stages, the geographical proximity is less important (EVCA,
2007).
It is obvious that when both parties are located in different geographical regions, certain
roles will be less convenient than others and some transaction costs could be higher. Monitoring
28
and supervision of an investment require face-to-face contact. The transaction costs related to these
actions can be expected to rise as the geographical distance between the venture capital investor
and the portfolio firm increases (Gompers, 1995; Lerner, 1995; Mason and Harrison, 2002;
Sorensen and Stuart, 2001) because of longer travel times required for personal meetings and
inspections on site (Fritsch and Schilder,2008). Investors would likely visit top management less
when there is a time-consuming distance between the two. It is however important to realize that
this spatial proximity has less of an impact on the last stages and these findings above are true for
venture capital firms which typically invest in first stage companies. So, the impact may be smaller
but still significant. This results in hypothesis 4:
H4: The spatial proximity between the buyout firm and the portfolio companies has an
impact on the role of buyout firms in the board of directors of their portfolio companies.
4.5PhaseinBuyoutProcessSection 1.7.5 dealt with the buyout process which has 3 phases: the acquisition phase, the
holding period and the divestment phase. It is most likely that depending on which phase the
buyout process is currently in, the role of the buyout firm will change. This is the idea behind
hypothesis 5:
H5: The phase in the buyout process has an impact on the role of buyout firms in the
board of directors of their portfolio companies.
4.6BackgroundofPEPlayerA last possible determinant is the background of the private equity player. A study by Carter
and Van Auken (1992) already discovered that the background of venture capitalists (business or
non-business background) determines how the process proceeds. They say that a venture capitalist
with, for instance, a technical background, may be more interested and will give higher priority to
tasks and operations dealing with the technical side than a venture capitalist with a non-technical
background. The latter may have a greater interest in the product, its market and competitors and
will therefore put the focus of its strategy on these aspects. This also applies to banking,
engineering, sciences, etc. This shows that, for venture capital, different private equity players
with different backgrounds have a different perspective and will see different roles necessary to
improve the companies’ performance. These conclusions for venture capital raise the question
29
whether this also applies when looking at buyout firms. The background of the buyout player is
the last determinant I take into account.
H6: The background of the private equity player has an impact on the role of buyout firms
in the board of directors of their portfolio companies.
Figure 7 gives a theoretical framework of the 2 research questions and the underlying
hypotheses. All the possible roles a buyout firm can have, as discussed above, through the board
of directors of their portfolio companies are summarized and divided in 6 groups based on the
literature discussed above.
30
Figure 7: Theoretical Framework
Buyout Firm
PortfolioCompany
1.StageinBLC
2.FundSize
3.Industry
4.
Geographical
Location
5.Phasein
BuyoutProcess
RQ2
6.Background
PEPlayer
Controllingandmonitoring
ManagementIncentives&Recruitment
Strategic&Governing
Maintenance&Coordinating
Networking
RQ1
ROLES
Mentoring&ExpertiseAdvisor
Determinants
31
EmpiricalResearchNow that I have gone through the literature needed to build up and fully comprehend my
research questions and hypothesis, I’ll continue with my empirical research. In the first part, I will
lay out the methodology I used to retrieve my sample and I will explain how I collected my data.
Next, I will discuss my hypotheses and variables and how these were measured through my
questionnaire. This is followed by the results of my empirical research. These results are then
turned into conclusions. I will end my thesis with limitations, paths for further research and
implications.
5.Methodology5.1SampleandDataCollection
Because this thesis is specifically directed at the role of buyout firms in the board of directors
of their portfolio companies and since there is no or little data available regarding this topic, it was
necessary for me to find a way to get in touch with these buyout firms.
I defined my population as “all buyout firms”, with no exceptions. I decided to look at this
population globally for two reasons. On the one hand, I picked buyout firms across continents in
an effort to increase the validity and generalizability of my research. It is clear that when only
conducting research in one country or region, the results will not be generalizable because there
may be other factors and forces in place which are not accounted for. On the other hand, because
I could contact all buyout firms throughout the world, my population and hence the ease of finding
respondents increased significantly. It is no secret that it is not always easy to get in touch with the
private equity world and its players and there is not a lot of data available on private equity. Buyout
firms are not omnipresent, and certainly not in Belgium.
So, now that I decided to look at all buyout firms across the world, I had to make a list of
the buyout firms I was going to get in touch with. Again, there was nog exhaustive list or database
where I could consult all the existing buyout firms, so I had to compile one myself. I first made a
list with all the private equity firms I could possibly find. I used channels like Wikipedia, Google,
and LinkedIn. Next, I checked all of the private equity firms and made sure they were active in the
buyout market. If not, they were excluded. The 40 buyout firms I contacted are listed in Attachment
1.
In order to get in touch with all of the buyout firms across the world, the most efficient and
effective way for me was using the social media platform LinkedIn. This was even more
appropriate when I was able to use the Premium LinkedIn profile of an employee who was at the
time working at the HR firm Hudson. His premium profile, with over 500 connections, gave me
32
the possibility to see all the employees working within a buyout firm. This also gave me the option
to filter the results in a way that I could only see the employees with a function in “venture capital
and private equity”.
Having found 40 buyout firms, I looked for all the relevant employees working within each
firm. I made a list with all the names of the potential respondents. This resulted in a list of almost
500 people. Next, I used my personal LinkedIn profile to send out a message explaining my
research question and asking for a connection. Three weeks of inviting respondents on LinkedIn,
making phone calls, sending mails, etc. resulted in over 100 connections on LinkedIn. I then sent
them a message asking to fill out my survey and to send the link to their colleagues and friends. I
also asked several influential people to share the link to my survey on LinkedIn. This resulted in
almost 3000 views.
These efforts resulted in 44 respondents. This may seem like a relative low response rate,
but this was partially expected because off the hard-to-reach characteristic of the buyout sector as
well as the private equity sector in general. Some respondents even explicitly wished me good luck
because they acknowledged the fact that it is not evident to communicate with private equity firms.
However, the unit of analysis of my research is not the respondent himself but rather the
portfolio company. I chose this unit because I want to analyze the role of buyout firms in these
companies. And since each investment manager has a role in more than one portfolio company, it
was more logical and effective to ask each respondent to the different roles they have in different
portfolio companies.
But because there were also respondents with a more general function, I had to make a
distinction between two kinds of respondents. The first one being “Investment Manager” and the
second one having a “General Function”. The respondents in this last group do not have a role in
the portfolio company but rather have a role in the buyout firm itself. For example, CEO’s and
CFO’s filled out the survey as a “General Function”.
The method described above increased the data points to more than the 44 respondents.
Thirty-four respondents answered as an investment manager and half of them filled out the survey
for 2 or even 3 portfolio companies. This resulted in 56 data points. The “General Function”
answers lead to 10 data points. As will be proven later on, it is not accurate to accumulate both
groups. However, when analyzing the results, it was interesting to have both perspectives in order
to confirm or contest my observations.
33
5.2QuestionnaireThis section will lay out the structure and questions of my survey. The questionnaire was
divided into three sections. The first section asked general questions about the buyout fund, more
specifically the size and location of the fund, and the professional background of the private equity
player. These were respondent-dependent, and not portfolio company dependent and thus only had
to be asked once per respondent.
The next question determined the set of questions each respondent was given. As briefly
mentioned, there were 2 options: Investment manager and General function. The first one was
described as “If you have a role in the portfolio companies of the buyout firm in any way”. The
second option was recommended “If you have a role in the buyout firm itself rather than in the
portfolio companies of the buyout firm”. This distinction was necessary due to the method by
which I collected my respondents. Since I sent my survey to hundreds of people across the world
with dozens of different jobs title’s, it was most likely that some of the respondents, who were
CEO’s CFO’s, … were not active in the portfolio company itself but still have valuable
information for my research. By giving them a different set of questions, I made sure to get as
much information as possible from all my respondent.
After this, depending whether the respondent selected Investment Manager or General
Function, they were asked to answer a different set of questions.
All the questions for the investment managers were portfolio company dependent. They were
asked to keep in mind 1, 2, 3 or 4 portfolio companies in which they had or have a role. They were
asked to choose the most diverse companies they can think of. They were then given a set of
questions about the individual portfolio company such as: the location, industry, phase in the
buyout process and phase in the business life cycle. Then the role the respondent had in the
particular portfolio company was questioned. This can be found in the second part of Attachment
2.
Depending on the number of portfolio companies the respondent had in mind, these portfolio
company dependent questions were asked again 1, 2 or even 3 times.
On the other hand, when the respondent had ticked off the General Function option, I could
not question independent portfolio companies. In this case, I asked the same questions as discussed
above but in the point of view of the buyout firm itself. For example, I now asked the industries
the buyout firm invests in instead of asking in which industry the portfolio company is in.
34
I used Qualtrics for making and sending out my survey. Now that you have a clear
understanding of what I asked my respondents, the next section will combine these questions with
my research questions and hypotheses.
5.3HypothesesandVariablesFirst of all, to be able to answer my first research question I questioned the respondents about
which roles they play in their portfolio companies. I used the roles as illustrated in the theoretical
framework given in figure 7. I gave all the 6 roles, with definition to avoid confusion and overlap,
and asked whether they have this role for the portfolio company they have in mind. These roles,
including definition, can be found in Figure 8 in the next chapter.
To deal with research question 2, I have to answer all 7 hypotheses. These are listed below
in order to give a clear overview.
• H1A: The role of a buyout firm in the board of directors of their portfolio companies in the maturity stage is a monitoring role.
• H1B: The role of a buyout firm in the board of directors of their portfolio companies in the decline stage is a strategic and networking role.
• H2: Fund size has an impact on the role a buyout firm plays in the board of directors of their portfolio companies.
• H3: The industry where the firm is investing/specialized in has an impact on the role of a buyout firm in the board of directors of their portfolio companies.
• H4: The spatial proximity between the buyout firm and the portfolio company has an impact on the role of buyout firms in the board of directors of their portfolio companies.
• H5: The phase in buyout process has an impact on the role of buyout firms in the board of directors of their portfolio companies.
• H6: The background of the private equity player has an impact on the role of buyout firms in the board of directors of their portfolio companies.
The first two hypotheses are concerned about the stage of the business life cycle the portfolio
company is in. For the investment managers, I simply asked in which stage the portfolio company
is in. The general functions are asked in which stages the buyout firm invests in.
35
For hypothesis 2, I made a distinction between 4 fund sizes. The 4 sizes are Small (<500mln),
Mid-Market (501mln-1,5bn), Large (1,6-4,5bn) and Mega (>4,5bn). The respondent is simply
asked in which category the buyout firm is placed in.
Hypothesis 3 is handled similarly. I asked in which industry the portfolio company is in. For
the general functions, I asked in which industries the buyout firm is active in.
For hypothesis 4, I needed to determine whether the spatial proximity has an influence on
the role of buyout firms in the board of directors of their portfolio companies. First I asked the
location of the headquarter (HQ) of the buyout firm. I then asked for each portfolio company in
which region it is located. When this region is different than the one operating in, spatial proximity
may have an impact.
The phase of the buyout process, which comes up in hypothesis 5, is the next variable asked
for. There are three possible phases: acquisition phase, holding period and divestment phase. I
simply asked in which phase each portfolio company is in, or in which phase the buyout firm
invests.
The last hypothesis looks at the background of the buyout firm. To determine the
background, I asked in which sectors the respondent has experience in.
This section gave a clear overview of why each question was asked and how data for each
hypothesis was gathered. Now that the reader is up to speed regarding the methodology I will start
to discuss the results of my survey.
5.4ResultsIn this part, I will discuss the results of my 44 respondents. To revise, I received 44
responses. 10 of which filled out the survey as General Function and 34 as Investment Manager.
This translated into 56 portfolio companies and 10 buyout firms.
An important remark is that each sample size, between the different determinants, will be
different. Therefore, throughout the course of this section, I will discuss the data in a relative
manner. For RQ1 this means that I divide the number of times that each role has been selected by
the entire sample. For the determinants in RQ2 I will divide the number each role has been selected
by the number of portfolio companies in the corresponding group. For instance, the Networking
role has been selected 7 times in the portfolio companies that are in the maturity stage. In the
maturity stage are 17 portfolio companies. Here from I get 41% or 7 divided by 17. I will refer to
this methodology using the abbreviation RRS% (Relative Role Selection %).
36
5.4.1Researchquestion1
Before going more in depth about the roles and its determinants in RQ2, RQ1 focuses on
which roles buyout firms have in the board of directors of their portfolio companies. In order to
get the data from my respondents to answer this question, I asked each one of them which roles
they have in each portfolio company. Each respondent could answer for more than one portfolio
company, they had to choose between 6 roles and multiple answers were possible. The roles and
the corresponding definition, as showed to the respondents, can be found in Figure 8. It is important
to have a good grasp of the 6 roles and what they mean in order to understand the following results
and conclusions. In order to increase the comprehensibility, I will use the same colors as used in
Figure 8 throughout the rest of this thesis for each role.
The 6 roles are the same as in my theoretical framework from section 4. All the roles I found
in existing literature have been summarized and grouped into these 6 roles.
Figure 8: The 6 Different Roles
Now I will discuss the answers to this question in my survey. I will do so by drawing up
some clear and revealing figures of the responses I received. The conclusions drawn from these,
and following results, will be presented in section 5.6. The distribution between the 6 different
roles for the 56 portfolio companies can be found in Figure 9. The percentage between brackets is
the RRS%.
Controlling&MonitoringVerifyingwhethereverythingoccursinconformatieswiththeplansadopted,instructionsissuedandprinciples
established.
NetworkingProvidingownnetworktoportfolio
company.
Managementincentives&recruitment
Recruitingexecutivesandbuildingexecutiveteamsforportfolio
companiesandprovidingstrongequityincentivestothemanagementteams
oftheportfoliocompanies.
Mentoring&expertiseadvisor
Usingbuiltexpertisetoadviseandguidingtheportfoliocompaniesand
providingsupport.
Strategic&GoverningCreatingandhelpingwithstrategicobjectivesandchallengesand/ordevelopingagovernancesystem.
Maintenance&coordinating
Dealingwithinstitutionalpressureand/ornegotiatingandcompromisingwithstakeholdersand/oranalyzing
theexternalenvironment.
37
Figure 9: Role Distribution (Portfolio Companies)
Going from most selected on the left, to least selected on the right, we clearly see a
difference. We can see that Controlling & Monitoring was selected 49 times, and took the first
place. This means that out of the 56 portfolio companies, 88% stated to have this role in their
portfolio companies. This is also the role that in previous literature often came forward as the most
prominent role of private equity firms. It is only normal that when private firms are investing huge
amounts of capital into portfolio companies, the least they want is to oversee where their money
is going and what they are doing with it. The private equity firm wants to verify whether everything
occurs in accordance with the plans adopted, instructions issued and principles established.
With two portfolio companies less, Strategic & Governing places itself on the second most
selected role. This was a role in 47, or 84%, of the portfolio companies. All these portfolio
companies had a buyout firm which created and helped with strategic objectives and challenges
and/or developed a governance system.
In the middle, we find Networking (with 38 picks or 68%), Mentoring & Expertise Advisor
(with 35 picks or 63%) and Management Incentives & Recruitment (with 33 picks or 59%). These
roles are still present in more than half of the portfolio companies. Buyout firms seem to provide
their own network to their portfolio company. They also use their accumulated expertise to advise
and guide their portfolio companies and provide support. Thirdly, they recruit executives and build
executive teams for their portfolio companies and provide strong equity incentives to the
management teams of their portfolio companies.
The last role is the role where buyout firms deal with institutional pressure and/or negotiate
and compromise with stakeholders and/or analyze the external environment. This was defined as
49 (88%) 47 (84%)
38 (68%) 35 (63%) 33 (59%)
17 (30%)
0
10
20
30
40
50
60
Controllingand
Monitoring
Strategic&Governing
Networking Mentoring&expertiseadvisor
Managementincentives&recruitment
Maintenance&
coordinating
SampleSize=56
38
Maintenance & Coordinating. Allegedly, only 17 portfolio companies got help, regarding this
aspect, from the buyout firm. This is only 30 % or less than 1 out of 3 portfolio companies.
I will now apply the same method but for the 10 respondents who answered as GF. This
cannot be added to the previous results because here the unit of analysis changes: not the portfolio
company but rather the buyout firm itself becomes the unit. With only 10 buyout firms, these
results are less reliable. Nevertheless, it can be an indication that the previous results are accurate
if the same trend is visible between the roles.
Figure 10: Role Distribution (Buyout Firms)
Though we clearly see a different sequence of colors compared to the 56 portfolio
companies, the difference between the first 5 roles is caused by only one respondent’s answer.
These 5 roles are present in 80 or 90% of the buyout firms. This can be explained by the perspective
of this question. A buyout firm has a lot of different portfolio companies and a wide toolset which
they can use in order to add value to their portfolio companies. There are few roles they cannot
have and thus they might select, on average, more roles than when asking the roles for one specific
portfolio company. However, we do see that, again, the role of Maintenance & Coordinating is
last. Only half of the buyout firms state that they take this role upon themselves. This was also
clear at the previous figure and seems to be a recurring result.
5.4.2Researchquestion2
My second research question deals with the determinants of the roles discussed in the first
research question.
9 9
8 8 8
5
0
1
2
3
4
5
6
7
8
9
10
Strategic&Governing
Managementincentives&recruitment
Controllingand
Monitoring
Networking Mentoring&expertiseadvisor
Maintenance&
coordinating
SampleSize=10
39
The business life cycle is the first likely determinant. While looking at the distribution
between the different stages of the business life cycle, a surprising result was found. It was, based
on previous literature, expected that most portfolio companies would be in the maturity and decline
stage. However, zero portfolio companies and only one buyout firm were in the decline stage. The
majority of the portfolio companies were in the growth or maturity stage. This distribution can be
found in Attachment 3. Consequently, I will not be able to draw results for hypothesis H1B. I will,
however, look at hypothesis H1A and also, since I have the data available, I will have a look at the
portfolio companies in the growth stage.
I took all 56 portfolio companies and filtered out the ones that are in the maturity stage. This
left 17 portfolio companies in the sample. I then looked at the roles for these companies. The
results are shown in Figure 11 below.
Figure 11: Maturity Stage
Comparing the color-order with the previous results (on the right side of each pair), it looks
almost the same. Controlling & Monitoring and Strategic & Governing are, again, unmistakably
selected most. These are also followed by the next 2 roles which are, percentage wise, almost
similar to figure 9. And also in line with previous results, Maintenance & Coordinating is selected
least. The only difference is that Management Incentives & Recruitment and Mentoring &
Expertise Advisor have switched places. Mentoring & Expertise Advisory appears to be less
88% 88%
65% 59%
41%
24%
88% 84%
68%
59% 63%
30%
0
0,1
0,2
0,3
0,4
0,5
0,6
0,7
0,8
0,9
1
ControllingandMonitoring
Strategic&Governing
Networking Managementincentives&recruitment
Mentoring&expertiseadvisor
Maintenance&coordinating
SampleSize=17
40
common relative to Management Incentives & Recruitment. This role is only selected by 41% of
the portfolio companies whereas before, 63% of the portfolio companies selected this role. The
other roles have almost exactly the same percentages.
This result can be backed by previous discussed literature. Lynall, Golden and Hillman
(2003) already argued that in the last two stages of the business’ life cycle (maturity and decline)
the board takes a monitoring role because there are already proven systems in place. Mentoring
and Expertise Advisory is less called upon in this stage because these portfolio companies are
already well defined and established.
As stated before, I have no single portfolio company that is indicated to be in the decline
stage. Since the majority of the portfolio companies are in the growth stage, it might be interesting
to have a look at these companies.
Figure 12: Growth Stage
Compared to the first research question, figure 12 shows that the first 2 and the last 2 are
standing at the exact same place. Compared to the number of portfolio companies, they have been
selected the same number of times. And, however Networking has gone down from the third to
the fourth place, it has been selected by 70% of the portfolio companies that are in the growth
stage compared to 68% by all of the portfolio companies. This is not a significant difference. The
shift of place can be ascribed to the Mentoring & Expertise Advisor role. Before, this role was
selected by 63% of the portfolio companies. Now, when only looking at the portfolio companies
in the growth stage, 10% more companies selected this role (or 73%).
86% 84%
73% 70%
59%
35%
88% 84%
63% 68%
59%
30%
0
0,1
0,2
0,3
0,4
0,5
0,6
0,7
0,8
0,9
1
ControllingandMonitoring
Strategic&Governing
Mentoring&expertiseadvisor
Networking Managementincentives&recruitment
Maintenance&coordinating
SampleSize=37
41
This can also be explained by existing literature. Huse and Zattoni (2008) state that the
primary tasks of the board in the growth stage are taking strategic decisions, collecting information
and data and giving specialized advice. The strategic decisions are reflected in Strategic &
Governing role. Collecting information and data can be translated in the role of Networking &
Expertise Advisor. Giving specialized advice is almost the same as the Mentoring & Expertise
Advisor. It is this role that shifted upwards when in the growth stage and thus lays in line with
previous research.
Above I analyzed the first hypothesis of RQ2 and tried to find an underlying reason for the
movement each role made when looking at different stages in the business life cycle. We saw that
the implementation of these roles shift up and down and that the roles are selected differently
across different stages. This insight is needed to come up with sound conclusions on this
determinant and will be given in the next chapter.
The second hypothesis looks at fund size as determinant. The sizes where the respondents
could choose from are Small (<500mln), Mid-Market (501mln – 1,5bn), Large (1,6 – 4,5bn) and
Mega (>4,5bn). The distribution between the sizes is given in Attachment 4. Precisely half of the
responses (22) came from a Small fund. Mid-Market came second with 14 responses. The
remaining responses is evenly shared between Large and Mega funds with each 4 funds.
Figure 13 first needs some clarification. The role is on the x-axis and I made a differentiation
between the different fund sizes. The most left bar in each color is a Small fund, followed by Mid-
Market and so on. The last bar, highlighted with a black line, is how the role was selected in RQ1
and thus when looking at all the portfolio companies together. By comparing, for each role, the 4
bars with the last bar, it is able to see whether or not fund size determines the role and if it deviates
from the entire sample or not.
I want to highlight that there are only 2 Mega funds and that as a result the fourth bar is very
unstable and not as representative as the other 3 fund sizes.
42
Figure 13: Fund Size
There seems to be a difference when looking at different fund sizes and the roles the buyout
firms have. For instance, when looking at Controlling & Monitoring the difference between the
highest and lowest RRS% is 16%. For Strategic & Governing, Networking, Mentoring & Expertise
Advisor, Management Incentives & Recruitment and Maintenance & Coordinating the RRS%
difference is respectively 23%, 38%, 17%, 22% and 33%. This difference is caused by the different
fund sizes. If fund size would not affect the roles of buyout firms, the bars would all have the same
percentages for each role.
After fund size, the next determinant is the industry where the portfolio company is in. The
respondents could choose between 12 industries. These, together with the distribution of the
portfolio companies, are given in Attachment 5. The portfolio companies were most found in the
Industrials, Business Services, Information Technology and Healthcare industry.
I could analyze the 12 different industries and try to see which roles are more present in
which industries. However, this is not the objective of this thesis. I am trying to figure out which
determinants have an influence on the role of a buyout firm. This is the reason why I chose the
design of figure 14. The important story behind this graph is the movement. If the industry is not
a determinant, the lines would not be going up and down when switching from industry to industry
from left to right. Hypothesis 3 asks whether the role of a buyout firm is dependent on the industry
84%
77%
71%
58%
45%
32%
93%
87%
73%
67%
67%
33%
100%
100%
88%
63%
63%
25%
100%
100%
50%
50%
50%
0%
88%
84%
68%
63%
59%
30%
CONTRO L L ING AND
MON I TOR ING
STRATEG I C & GOV ERN ING
NETWORK ING MENTOR ING & E XP ER T I S E ADV I SOR
MANAGEMENT INC ENT IV E S & R EC RU I TMENT
MA INTENANC E & COORD INAT ING
S AMP L E S I Z E = 3 1 / 1 5 / 8 / 2
43
the firm is investing/specialized in. This graph makes it able to draw conclusions regarding this
question.
Although there seems to be a lot of movement, it is dangerous to jump too quickly to these
conclusions. First, you have to look at each role individually and figure out how big the movement
is. Also, having a relative sample size, movement is more easily created. I will take these
considerations into account in the conclusions chapter.
44
Figure 14: Experience
0%
10%
20%
30%
40%
50%
60%
SAMPLE S I ZE = 22/17/13/6/24/20/46/27/14/6/20/2
ControllingandMonitoring Strategic&Governing Mentoring&expertiseadvisor
Managementincentives&recruitment Networking Maintenance&coordinating
45
For the next hypothesis, I needed to determine the spatial proximity between buyout firm
(respondent) and the portfolio company.
When we look at the location of the buyout firms’ HQ, as shown in Attachment 6, we notice
that the majority (75%) of the respondents was sending from the Benelux. The reasoning behind
this result could be that respondents living in the same geographical region as I do, and people
affiliated with the university I am writing for, are more easily inclined to answer the survey. For
respondents on the other side of the globe, a random survey from an unknown university may be
more easily ignored.
When looking at the other actor needed to determine spatial proximity we see a similar result.
The majority of the portfolio companies is also located in the Benelux. The other part is found in
the rest of Europe. Only one portfolio company is located in Asia. This trend is the same for the
10 buyout firms.
Based on my sample, it seems that most buyout firms invest in portfolio companies nearby.
This can be explained by several reasons, which were also discussed in section 4.4. It is harder to
play a role in a company that is located overseas than one close by. Even more, Gompers et al.
(1995) stated that transaction costs can be expected to rise as the geographical distance between
the investor and the portfolio firm increases because of longer travel times required for personal
meetings and inspections on site (Fritsch and Schilder, 2008). Also, industries that are located
further away are less known by the investor and they might want to stick with their specialty and
in the field of expertise they know best.
Now that we have both the location of the buyout firm and the portfolio company, the
difference between both variables can be used as the spatial proximity determinant. I put both sides
against each other and looked whether there is a geographical distance between the buyout firm
and the portfolio company. After comparing the 56 portfolio companies with the 44 respondents’
HQ’s, the result is that only one of the portfolio companies was located far enough to suspect
spatial proximity. When both sides were located in the Benelux or the same country, as was the
case for this data, the distance should not be a concern. The HQ of this one fund was found in New
York whereas the portfolio company is located in Mumbai, India. Unfortunately, this lack of data
means I do not have sufficient data to analyze hypothesis 4.
46
The second last hypothesis looks at the buyout process as discussed in the literature review
part. Attachment 7 shows the different stages in the buyout process and the number of portfolio
companies that are in each stage. More than 60% of the portfolio companies are in the holding
period. Second is the exit, and last, we find the acquisition phase. The order for the buyout firms
is not the same. First is the holding period, second the acquisition phase and the exit comes last.
Now that we have an idea of the descriptive statistics on the buyout process, I will examine whether
the phase determines the role a buyout firm has in the board of directors of their portfolio
companies. Figure 15 below shows this comparison.
Figure 15: Buyout Process
When comparing the biggest group, the Holding Period, with the results from RQ1, we see
that the color sequence is exactly the same. When looking at the percentage of each role being
selected, this is almost exactly the same as the entire sample as well. This result could either mean
that the holding period does not demand other roles to be executed or that this phase is
overrepresented in the entire sample and thus behaves in line with the entire sample.
The Exit is the second biggest group. Mentoring & Expertise Advisor has gone to the last
place. In this phase, Management Incentives & Recruitment and Maintenance & Coordinating has
been selected more than Mentoring & Expertise Advisor. The difference seems small, being 8%,
but it is a huge difference that here Maintenance & Coordinating has been selected in 62% of the
portfolio companies in the exit phase, whereas in the holding period this role has only been selected
100%
83% 92%
100%
83% 77%
63% 66% 77% 75%
63% 54%
75%
54% 62%
25% 20%
62%
0%
20%
40%
60%
80%
100%
120%
Acquisitionphase Holdingperiod Exit
ControllingandMonitoring Strategic&Governing
Networking Mentoring&expertiseadvisor
Managementincentives&recruitment Maintenance&coordinating
47
in 20% of the portfolio companies and 25% in the acquisition phase. In the entire sample, the grey
role had been selected in 30% of the portfolio companies. The rise from 30% to 62% should be
examined further and will be discussed in the conclusion section.
The Acquisition Phase is the smallest and thus also the less stable of the three. Taking into
account this small sample, the roles distribute almost the same when comparing to the entire
sample. Only Management Incentives & Recruitment appears to increase in times selected relative
to the number of portfolio companies in this group. This will also be discussed more in depth in
the conclusion section.
In order to get data to deal with the last hypothesis, I asked the respondents to select the
fields they have experience in. The resulting bar chart is given in Attachment 8. I gave the
respondents the option between 26 industries, based on the NACE code. One respondent could
select multiple experiences, so the total exceeds the number of respondents. In order to be able to
work with the data, I had to split up each respondent’s answer. If someone had experience in A, B
and C, I had to duplicate this into three portfolio companies where each portfolio company has
either A, B or C as experience. This methodology resulted in 147 data points instead of 56.
First I counted the number of respondents that had experience in each category. I set the limit
at 4 or higher, groups with less than 4 would be considered unreliable. As a result, 9 experiences
were removed from the dataset.
Next, I divided the number of times each experience selected each role by the total number
of respondents within each role. For example, from the 20 respondents who had experience in
Accountancy and Finance, 18 selected the Strategic & Governing role. 18 divided by 20 gives me
90%. Doing this for all the experiences, I had a more reliable and comparable dataset. With this
matrix, I could see whether the experience is a variable that influences the role of the respondent.
I am not searching for the experiences that select certain roles more, but simply whether experience
influences the role at all. Trying to answer this question I generated the graph, given in figure 16,
in a same way as for hypothesis 3. This allows us to see whether there is movement for each role
when going from one experience to another. If the experience was not a determinant, the lines of
the roles in the graph would not be allowed to move up and down when switching from experience
on the x-axis. This will be discussed more in depth in the next chapter.
In this section, I looked at all the responses of my questionnaire and represented the data in
such a way that I am able to come up with conclusions in the next chapter. I also looked at the
movements and the reasons behind these changes in order to make sure that these were accounted
for. The next chapter will go a step further and analyzes the data using regression analysis.
48
Figure 16: Experience
0%
20%
40%
60%
80%
100%
120%
AantalvanStrategic&Governing AantalvanControllingandMonitoring
AantalvanNetworking AantalvanMentoring&expertiseadvisor
AantalvanManagementincentives&recruitment AantalvanMaintenance&coordinating
49
5.5RegressionAnalysisNow I will apply regression analysis on my data instead of using a frequency method.
Although my sample does not have the ideal size, it might confirm certain results or give an idea
which determinants are significant and which are not. The regression analysis is conducted using
the statistical program SPSS.
The 6 roles are my dependent variables. These are dichotomous since the respondent could
either select the role or not. This means that I will use logistic regression and I will do this 6 times,
once for each role. Linear regression is not applicable since some of the assumptions are not met.
Multinomial logistic regression was not an option because the dependent variables were not
exclusive.
The independent variables are: business life cycle, fund size, industry and buyout process.
As mentioned before, spatial proximity has too little data and experience would be too complex to
analyze in a regression analysis. I transformed each variable so that it was usable for statistical
analysis. This means that I gave every group within a variable number. For instance, the variable
fund size got a 1 for Small, 2 for Mid-Market, etc. The 6 roles acted as dependent variables and
the 4 determinants as covariates. Because of the nominal characteristic of some of the independent
variables, I made sure the logistic regression model created dummy variables for business life
cycle, industry and buyout process. The variable fund size is ordinal and does not require a dummy.
The results of the 6 binary logistic regressions can be found in Attachments 9.1 through 9.6.
The Omnibus Test of Model Coefficients gives the appropriateness of the model and
indicates the explanatory value of the model. For Controlling & Monitoring the chi-square is
15,374 with 17 degrees of freedom and is not significant, as illustrated in attachment 9.1.
Translated into words, this means that this model does not fit the data or has a low explanatory
value. Only Networking and Mentoring & Expertise give a significant result for the Omnibus test
and thus only 2 from the 6 roles are tested using a correct model according to this test. This does
not seem very promising and to make sure of these results I also looked at the Hosmer and
Lemeshow test. This is not significant in any of the 6 roles but the interpretation is the opposite of
the Omnibus test. When it gives an insignificant result, the data does fit the model. However, a
characteristic of this test is that it gives a positive result when the sample size is too big or too
small. Unfortunately, my sample size could be defined as too small.
With this in mind I will discuss the results of the logistic regression. As can be seen in
Attachment 9, there is no consistent result. There are only 2 roles which give a significant result.
For the role Management Incentives & Recruitment only the fund size comes up as significant at
50
a 5% level. For the least popular role Maintenance & Coordinating, the buyout process seems to
be significant.
The interpretation of a logistic regression is not the same as the linear regression model. The
correct interpretation for fund size is the following. The ratio of selecting the role / not selecting
the role increases with 323% ((4,230-1)*100%) when fund size increases from small à mid-
market, mid-market à large and large à mega. For the exit phase, in the Maintenance &
Coordinating role, the interpretation is different. Here, the odds of selecting the role decreases with
almost 100% when comparing to the acquisition phase. But only one of the three stages came up
significant over the 6 different roles. This is not a very reliable result and we cannot deduct from
these results that the buyout process is a determinant.
Concluding, when looking across the 6 roles, only 1 determinant (fund size) came up
significant once. This gives the regression model as illustrated in figure 17.
Figure 17: Logistic Regression Model
The overall results from the logistic regression analysis are very extreme, unreliable and not
trustworthy, as illustrated by the the Omnibus Test of Model Coefficients, the Hosmer and
Lemeshow test and the unusual numbers. It does however indicate that fund size and buyout
process could influence the roles of buyout firms in the board of directors of their portfolio
companies. It is not appropriate to draw conclusions from this model since the significant
determinants were not consistent over the 6 roles. Fifty-six portfolio companies were not sufficient
when looking for determinants through logistic regression. As a consequence, I will not carry these
results forward to the conclusions part of my thesis.
For the completeness of my analysis I also looked at possible interaction terms. I took the
only remaining determinant, size, and added the possible interaction terms one by one. I did this
for the 6 roles giving 36 possible interaction terms. None of these came up as significant. This can
also be ascribed to the data constraint.
51
5.6ConclusionBuyout firms are omnipresent these days, and as demonstrated this trend is promising for
the future. This omnipresence also means that it is important to have a good understanding
regarding buyout firms. Existing literature briefly discusses the roles of buyout firms in the board
of directors of their portfolio companies but to date I did not find any framework mapping the
roles and determinants that influence the presence of these roles. This paper discusses and
questions the roles and determinants based on existing literature. I contacted over 500 people
globally through LinkedIn wherefrom more than 100 accepted my invitation. This resulted in 44
respondents. I questioned my respondents with buyout-, respondent- and fund-dependent
questions in order to get the data I needed to be able to answer my 2 research questions. Using this
data, I examined each determinant and whether these determinant influences the roles the
investment managers had in their portfolio companies.
The end goal of this chapter is to adjust my theoretical framework from before and turn it
into a conceptual model which grasps the roles and determinants buyout firms have in the board
of directors of their portfolio companies.
The answer to my first research question and thus the roles that are mostly executed by the
buyout firms can be found in Figure 9. This figure shows each role and what percentage of the
sample indicated to have each role for their portfolio company. Controlling & Monitoring and
Strategic & Governing is undeniably dominant. These roles, even considering my relative small
sample, distinguish themselves from the other roles and are not affected by the determinants
investigated. Networking, Mentoring & Expertise Advisor and Management Incentives &
Recruitment is to be considered as the average role because they are not as present as the first 2
roles, but they still distinguish themselves from the last role. They are present in more than half of
the portfolio companies and are definitely an important task of the buyout firm. The only role that
is not as significant as its forerunners is Maintenance & Coordinating. Only 30% of the investment
managers have this role, and under certain determinants this percentage drops even lower. Buyout
firms appear not to put a lot of time, importance and priority to dealing with institutional pressure
and/or negotiating and compromising with stakeholders and/or analyzing the external
environment.
Knowing which roles buyout firms have in the board of directors of their portfolio companies
is already half of my thesis. Digging deeper, I examine which determinants, based on existing
literature, influence the roles of the buyout firms. The 6 determinants I take into account are the
stage in the business life cycle, fund size, industry, spatial proximity, phase in the buyout process
52
and experience or background of the investment manager. I looked at each determinant one by one
and discovered that only the business life cycle, fund size, buyout process and experience determine
the role of buyout firms in the board of directors of their portfolio companies. For the other 2
determinants, I did not have significant respondents to look at the spatial proximity and the
industry proved not to be a determinant.
Business Life Cycle. When looking at the maturity stage, we see that Mentoring & Expertise
Advisor has been selected in 41% of the portfolio companies, compared to 63% of the entire
sample. This already indicates that the stage in the business life cycle affects the roles the
investment managers have. This is confirmed when looking at the growth stage. Here, the
Mentoring & Expertise Advisor role has been selected in 73% of the portfolio companies,
compared to 41% in the growth stage. So, based on these findings, depending on which stage the
portfolio company is in, the roles of the investment managers change. Or in other words, the
business life cycle determines the role of buyout firms in the board of directors of their portfolio
companies. Existing literature provides theories which confirm these results. Lynall, Golden and
Hillman (2003) state that in the maturity stage, mentoring and expertise advisory is less called
upon because these portfolio companies are already well defined and established. And in the
growth stage, Huse and Zattoni (2008) discuss that the primary tasks of the board are taking
strategic decisions, collecting information and data and giving specialized advice. This last task is
in this study the same as mentoring and expertise advisor.
Fund Size. When going back to Figure 5, the first observation is that for each role the
different fund sizes have different percentages. Networking even changes 38% depending on the
fund size. This means that depending on the fund of the buyout firm, its role in the board of director
of its portfolio company’s changes. Or in other words, fund size is a determinant. From a practical
point of view, this is realistic. As a buyout firms’ fund grows, more resources and capital becomes
available to inject in the portfolio company. A bigger fund, for instance, will have more employees,
a bigger network, more connections and thus will the Networking role become more significant
relative to the other roles. Also, as more capital becomes available, management’s incentives can
increase and the buyout firm can put more resources and time in recruiting the most competent
people for the right functions. This can be found in Figure 5 where the Management Incentives &
Recruitment role increases as fund size increases. With these observations and reasoning, we can
conclude that fund size is a determinant for the role that buyout firms have in the board of directors
of their portfolio companies.
Industry. When looking at Figure 6, at first sight there seems to be a lot of movement when
switching from industry. However, when looking at the numbers behind the graph, hypothesis 3
53
seems less accurate. If I compare the average of each role and compare this to the percentages per
industry, the biggest deviation from the average is only 18%. This does not seem a whole lot,
certainly not in this relative small sample. When looking at industrials, which has the largest
sample of 46, the biggest difference is 17%. Taking into mind the small sample of portfolio
companies, and thus the high volatility, there is not enough support to conclude that the industry
determines the role of buyout firms in the board of directors of its portfolio companies.
Buyout Process. When looking at the different phases in the buyout process, we can easily
come to a conclusion whether this is a determinant or not. The first role indicating this conclusion
is the Maintenance & Coordinating role. Going through the 3 phases, the percentage of investment
managers that selected this role goes from 25% to 20% to 62%. There is a huge increase in this
role when going towards the end of the buyout process. This seems logical since by the time the
buyout firm wants to exit the portfolio company they will have to put more effort and energy in
communicating with the external environment since they want to divest their investment. Also,
Strategic & Governing, Mentoring & Expertise Advisor and Management Incentives &
Recruitment decreases when getting closer to the exit. These roles seem to make place for the
Maintenance & Coordinating and Networking role. This makes sense since buyout firms will try
to increase the value of the firm as soon as possible. For instance, they will replace management
teams and put incentives in place as soon as they have a say in the portfolio company. Doing this
in the exit phase would be too late. This also counts for the other roles. These illustrations show
that depending on which phase of the buyout process the portfolio company is in, a buyout firm
will put their time and effort in different roles. In the beginning of the process they will mostly
pass their time by playing strategic, governing and mentoring roles. And when getting nearer the
exit of the process, they will prioritize the maintenance, coordinating and networking roles in order
to be able to divest their investment more easily. The important conclusion is that the buyout
process is a determinant for the role buyout firms have in the board of directors of their portfolio
companies.
Experience. As illustrated by the results, and illustrated by Figure 9, the experience proves
to be a determinant. We see that when following each line on the graph that, going from left to
right, each role has some serious ups and downs. And, in contrast with the industry, now the
differences between the percentages are significant. For instance, Maintenance & Coordinating
changes from 25% to 100% depending on the experience the investment manager has. This means
that each role behaves differently for different experiences. Or in other words, there is enough
support to state that experience determines the role of a buyout firm in the board of directors of its
portfolio companies. This is not far-fetched when thinking about what this means. When you have
54
a certain background, and experience, you will focus and prioritize different aspects within a
company. An investment manager with a banking background will focus more on the financial
numbers than an investment manager who worked his entire career in Marketing.
Summarizing, buyout firms have mostly a Controlling & Monitoring and Strategic &
Governing role. Also, Networking, Mentoring & Expertise Advisory and Management Incentives
& Recruitment are present and are common. Maintenance & Coordinating does not belong to the
roles of most buyout firms and is less significantly present. These roles are determined by the stage
in the business life cycle and buyout process the portfolio company is in, the fund size of the buyout
firm and the experience of the investment manager. This means that there is data to support
hypotheses H1A, H2, H5 and H6. There was either not enough data or the data did not back the
other hypothesis to support these as well. In an effort to refute or boost my results I also conducted
a binary logistic regression. Due to the relative small data sample this regression model did not
come up with significant and usable results. The regression analysis could come up with more
reliable results if the sample would have been bigger.
Figure 18 gives the conclusions from above in an adjusted conceptual model. The 6 roles are
given in a pie chart according their RRS% in the entire sample. Also, the remaining determinants
are given that influence these roles. This model visualizes the connection between buyout firm and
portfolio company and gives an idea of which roles the buyout firm will or can have in the board
of directors of their portfolio companies and which determinants there are that can influence or
affect these roles.
55
ControllingandMonitoring
Strategic&Governing
Networking
Mentoring&ExpertiseAdvisor
Managementincentives&recruitment
Maintenance&Coordinating
Buyout Firm
ROLES Determinants
StageinBLC
FundSize
PhaseinBuyoutProcess
BackgroundPEPlayer
PortfolioCompany
Figure 18: Conceptual Model
56
5.7Limitations,ImplicationsandFurtherResearchAlthough my research was carefully prepared and it reached its aim for most of the
determinants, I am aware of its limitations and shortcomings. In this section I will lay these out as
well as paths for future research in order to cope with these limitation and shortcomings in the
future. Secondly, I will give the implications of my research.
The first, and most important limitation is the sample size. Due to the time constraint of this
thesis, and the low response rate, I could only do so much. Contacting people across the world
through LinkedIn takes some time, and some respondents only accepted my connection or filled
out the survey by the time I was finishing this thesis. Having more time would also have given me
the possibility to send out the survey to a test-group to see whether I should adjust certain aspect
of my survey or not before sending it out. Having more time available could bypass these problems
and increase the sample. This limitation endangers the generalizability, validity and reliability of
this research. The study should have more respondents and the sample should be significantly
larger to be able to generalize these results to a broader subject. For instance, some experiences or
industries only had a few respondents and the sample size was thus too small to generalize. This
could, as highlighted, be resolved by contacting more investment managers and giving them more
time to answer the survey. Another positive result of a bigger sample size would be the results of
the regression analysis. The results were not usable due to the unreliable numbers and models. A
bigger sample size could solve this problem and would give the ability to use trustworthy
conclusions.
Another limitation is the subjectiveness of my research. Since this thesis was written by
myself and I did not have a lot of input aside from my promotor, there may be some subjectiveness
present. This could be avoided by sharing my research with other researchers and organize groups
to discuss and question certain results and conclusions.
Further research is required to have a better understanding regarding the roles of buyout
firms and the determinants of these roles. Building upon my conceptual model, it could be
interesting to involve more and different determinants in the mix. There are most definitely a lot
of determinants out there that are not included in my analysis. Also, applying this research on
venture capital could reveal more roles and determinants. There may also be other ways to contact
different investment managers in order to get a wider, more diverse population.
Other guidelines for further research are the definitions of my variables. I was not able to
investigate spatial proximity as a determinant due to the lack of data for this variable. This could
be avoided if the respondent was motivated to choose 2 portfolio companies that were as far away
57
from the headquarter as possible. Another way in which this could have been avoided is by setting
up a different population with more geographically distributed headquarters. Using this
methodology, spatial proximity could be analyzed as determinant.
Other variables I would define differently are the roles, industries and backgrounds of the
respondents. I experienced that due to the fact that I gave the respondent more than 10 experiences
to select from, this made the analysis part of my research significantly harder. Fewer groups would
result in bigger groups and this could lead to more robust and reliable results. In line with this
remark is the fact that it could also be more convenient and reliable if I gave the respondent less
than 6 roles to choose from. I already downsized the existing roles from 12 to 6, but even fewer
roles could enhance the analysis of my research and the results. This also counts for the industries.
Last but not least, I will discuss the implications of my research and the conceptual model
that came to be thanks to this research. The research questions “What is the role of buyout firms
in the board of directors of their portfolio companies?” and “What are the determinants that
influence the role of buyout firms in the board of directors of their portfolio companies?” can now
be answered. And the framework that resulted from my research can be used in several ways by
different parties. First of all, having an idea which roles a buyout firm has in its portfolio companies
gives an insight for both the portfolio company and the buyout firm. Using this model, the portfolio
company can see which roles he can expect when dealing with a buyout firm. For instance, he
should not expect the buyout firm to deal with external pressure and institutions but rather expect
the buyout firm to intervene through Controlling & Monitoring and Strategic & Governing. He
can then make sure that the roles that buyout firms do not have are covered by the portfolio
company itself. On the other side, buyout firms have a better insight in the roles buyout firms have
in general.
The determinants also have several implications for both sides of the buyout deal. The
portfolio companies have a better understanding of which roles the buyout firms will have within
their board. For instance, a portfolio company in the exit stage should be expecting more
Maintenance & Coordinating roles rather than Management Incentives & Recruitment roles. On
the other hand, buyout firms have a better understanding in which roles they should be focusing
on for each different portfolio company. It is clear that not all the portfolio companies should be
treated the same, and using my model they have a better overview on where to focus on. Also,
since experience is a determinant, buyout firms now should be aware that they look at the
background of their investment managers when recruiting and hiring. Different investment
managers with different backgrounds will focus on different aspects within a portfolio company
and thus it is important to look at past experience. They now also know that different BLC stages
58
and buyout process phases demand different roles. Thus, buyout firm firms should only have those
roles that belong to the phases and stages they invest in.
Concluding, having a better insight in the roles buyout firms have and the determinants that
influence these roles can help both buyout firm and portfolio company. The portfolio company has
a better idea of what to expect from its buyout partners and can use this knowledge in its strategy.
The buyout firm on the other hand has a better idea about which roles are most appropriate for
each of its portfolio companies and which determinants he has to take into account when dealing
with different portfolio companies with different characteristics.
I
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ATTACHMENTS
Attachment1:ContactedBuyoutFirm
• 3D Investments • 3i Group Plc • Ackermans & van Haaren • Apollo Global Management • Argos Soditic • Avista Capital Partners • Bain Capital • Bank van Breda • Belfius • Beluge Invest • Blackstone – Private eQuity • BNP Paribas Fortis • Buysse & Partners • CVC Capital Partners (Benelux) • Egeria • Ergon Capital Partners • Fin.co • Fortress Investment Group • Gilde Buy Out Partners • Gilde Equity Management • Hellman & Friedman • ING • KBC • Kohlberg Kravis Roberts (KKR) • Mandarin Capital Partners • Merrill Lynch • Metric Capital Partners • Mezzanine Partners 1 • MidOcean Partners • PAI Partners • Pamlico Capital • Parcom • PMV • Profinpar • Quest for Growth (QFG) • The Carlyle Group • Think2Act • TPG Capital • Waterland Private Equity • TPG Capital • Waterland Private Equity
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Attachment2:SurveyQ1 Dear Respondent
My name is Stan Jeanty, I am a master student conducting research towards the completion
of my master’s degree at the Ghent University. I am looking for respondents with experience in
the buyout market. With my thesis, I am investigating the role of buyout firms in the board of
directors of their portfolio companies. The determinants of these roles are the second focus of my
thesis. If you are currently working, or have experience, in the buyout market, I would much
appreciate it if you would use 5-10 minutes of your time to answer my survey. Your assistance, by
completing the online questionnaire, would be greatly appreciated and it would help me to obtain
my master’s degree in corporate finance. If interested, there is the possibility to leave your email
address behind to which I will send my findings and conclusions. All answers will be analyzed
discretely and no names or personal information will be used in my thesis. Thank you in advance,
Stan – Master Student Business Economics - Corporate Finance @ Ghent University (You can
also fill out this survey using your smartphone.) (For questions or problems feel free to contact me
through LinkedIn or mail [email protected])
Q2 What is the size of the buyout fund? m Small: m Mid-Market: 501mln - 1,5bn m Large: 1,6 - 4,5 bn m Mega: >4,5bn
Q3 In which country is the buyout firms headquarter located?
Q4 Which sector(s) do you personally have experience in? (Multiple answers possible) q Accountancy & Finance q Banking q Business, consulting and management q Charity and voluntary work q Creative arts and design q Energy and utilities q Engineering and manufacturing q Environment and agriculture q Healthcare q Hospitality q Event Management q Information technology q Law q Law enforcement and technology
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q Leisure, sports and tourism q Marketing, advertising and PR q Media and Internet q Property and construction q Public services and administration q Recruitment and HR q Retail q Sales q Science and pharmaceuticals q Social Care q Teaching and education q Transport and Logistics
Q5 Select the function you have within the buyout firm. m Investment manager (Select this function if you have a role in the portfolio companies of the buyout
firm in any way) m General function (Select this function if you have a role in the buyout firm itself rather than in the portfolio
companies of the buyout firm and do not have a role in the portfolio companies)
INVESTMENT MANAGER
Q6 The following questions will be about the role you have in portfolio companies of
the buyout firm. Please keep 2, or more, portfolio companies in mind and answer the
following questions about the portfolio company you have in mind. When choosing your
portfolio companies, please choose the most diverse portfolio companies you can think of.
The first questions will be about the first portfolio company you have in your mind.
Q7 Which geographical area is the portfolio company located in? m Africa m Asia m Benelux m Rest of Europe m Oceania m North America m South America
Q8 Which industry is the portfolio company in? m Industrials m Information Technology m Business Services m Consumer Discretionary m Healthcare m Food and Agriculture m Telecoms & Media m Energy & Utilities m Materials
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m Other (specify here): ____________________
Q9 Which phase of the buyout process is the portfolio company in? m Acquisition phase m Holding period m Exit
Q10 Which stage of the business life cycle is the portfolio company in? m Start-Up m Growth m Maturity m Decline
Q11 Select the role(s) you have in the board of directors of the portfolio
company. (Multiple answers possible) q Controlling and Monitoring (Verifying whether everything occurs in conformities with the plans adopted,
instructions issued and principles established) q Networking (Providing own network to portfolio company) q Management incentives & recruitment (Recruiting executives and building executive teams for portfolio
companies and providing strong equity incentives to the management teams of the portfolio companies) q Mentoring & expertise advisor (Using built expertise to advise and guiding the portfolio companies and
providing support) q Strategic & Governing (Creating and helping with strategic objectives and challenges and/or developing
a governance system) q Maintenance & coordinating (Dealing with institutional pressure and/or negotiating and compromising
with stakeholders and/or analyzing the external environment)
Q13 This is the end of your first portfolio company. Please do this again for the second
portfolio company you have in mind by clicking on the “Next” button. If you only have/had a role
in one portfolio company, click "End survey" m End Survey
GENERAL FUNCTION
Q35 Which geographical area(s) does the buyout firm invest in? (Multiple answers
possible) q Africa q Asia q Benelux q Rest of Europe q Oceania q North America q South America
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Q36 Which industry/industries does the buyout firm invest in? (Multiple answers
possible) q Industrials q Information Technology q Business Services q Consumer Discretionary q Healthcare q Food and Agriculture q Telecoms & Media q Energy & Utilities q Materials q Other (specify here): ____________________
Q37 Which phase(s) of the buyout process does the firm invest in? (Multiple answers
possible) q Acquisition phase q Holding period q Exit
Q38 Which stage(s) of the business life cycle does the buyout firm invest in? (Multiple
answers possible) q Start-Up q Growth q Maturity q Decline
Q39 Select the role(s) the buyout firm has in its portfolio companies. (Multiple answers
possible) q Controlling and Monitoring (Verifying whether everything occurs in conformities with the plans adopted,
instructions issued and principles established) q Networking (Providing own network to portfolio company) q Management incentives & recruitment (Recruiting executives and building executive teams for portfolio
companies and providing strong equity incentives to the management teams of the portfolio companies) q Mentoring & expertise advisor (Using built expertise to advise and guiding the portfolio companies and
providing support) q Strategic & Governing (Creating and helping with strategic objectives and challenges and/or developing
a governance system) q Maintenance & coordinating (Dealing with institutional pressure and/or negotiating and compromising
with stakeholders and/or analyzing the external environment)
Q41 Dear respondent
Thank you for taking the time to fill out my survey. If you want to continue helping me and
send this survey to colleagues or other possible respondents, please use the follow link to send
them this survey: https://qtrial2017q2az1.az1.qualtrics.com/jfe/form/SV_eCKQKaYW9pswIcdIf
XIII
you are interested in the results of my thesis, you can leave you email address below and I will get
back to you as soon as I have my results.
Email address:
XIV
Attachment3:DistributionBusinessLifeCycle:PortfolioCompany(PC)
andBuyoutFirm(BO)
2
37
17
00
5
10
15
20
25
30
35
40
Start-Up Growth Maturity Decline
PC
2
8
7
1
0
1
2
3
4
5
6
7
8
9
Start-Up Growth Maturity Decline
BO
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Attachment4:DistributionFundSize
50%
32%
9%
9%
FundSize
Small
Mid-Market
Large
Mega
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Attachment5:DistributionIndustry:PortfolioCompany(PC)andBuyout
Firm(BO)
012345678
BOFirmIndustry
02468101214
PC'sIndustry
XVII
Attachment6:DistributionGeographicalArea:PortfolioCompany(PC),
BuyoutFirm(BO)andRespondent
1 1
8
1 1
7
1
0123456789
Africa Asia Benelux NorthAmerica
Oceania RestofEurope
SouthAmerica
GeographicalAreaBO
0 1
41
0 0
14
005
1015202530354045
Africa Asia Benelux NorthAmerica
Oceania RestofEurope
SouthAmerica
GeographicalAreaPC
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Attachment7:DistributionBuyoutProcess:PortfolioCompany(PC)and
BuyoutFirm(BO)
20
31 2 1
11
3 3
0
5
10
15
20
25
GeographicalAreaRespondent
8
35
13
0
5
10
15
20
25
30
35
40
Acquisitionphase Holdingperiod Exit
PCPhaseBuyoutProcess
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8
9
4
0
1
2
3
4
5
6
7
8
9
10
Acquisitionphase Holdingperiod Exit
BOFirmBuyoutProcess
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Attachment8:ExperienceDistribution
2628
275
37
138
100
19
73
73
105
12
72
311
5
0 5 10 15 20 25 30
Accountancy&Finance
Business,consultingandmanagement
Creativeartsanddesign
Engineeringandmanufacturing
Healthcare
EventManagement
Law
Leisure,sportsandtourism
MediaandInternet
Publicservicesandadministration
Retail
Scienceandpharmaceuticals
Teachingandeducation
XXI
Attachment9:LogisticRegression
9.1Controlling&Monitoring
Th
XXII
9.2Networking
XXIII
9.3ManagementIncentives&Recruitment
XXIV
9.4Mentoring&ExpertiseAdvisor
XXV
9.5Strategic&Governing
XXVI
9.6Maintenance&Coordinating