Industry specialization of private equity firms: a source of buy-out performance heterogeneity

Abstract

This study sheds new light on the industry specialization of private equity (PE) firms as a source of buy-outs' performance and on the conditions under which these firms can add value to the buy-outs in which they invest. Advantages to specialization are based on specific resources and capabilities that confer the PE funds advantages both in the pre-and post-transaction phases. We argue that the magnitude of the advantages to industry specialization will depend on the criticality of these specific resources for buy-outs' performance improvements. Industry specialization will confer advantages when the target company is weakly or strongly performing before the buy-out because, in that context, performance improvements are more difficult to reach. The analysis is based on a sample of 217 PE-backed buy-outs completed in France between 2001 and 2007. The results show that relative specialization in the industry of the buy-out company results in profit increases of 7.5% greater than buy-outs backed by non-industry-specialized PE firms. Industry specialization also contributes to target company growth, especially when performance improvements are difficult to reach. Besides, the magnitude of the positive industry specialization effect varies between PE firms. This result emphasizes industry specialization as a strategic variable by illustrating heterogeneity in the ability to construct a competitive advantage.

Which investors’ characteristics are beneficial for initial coin offerings? Evidence from blockchain technology-based firms

“…However, this aspect raises the question whether industry-specialized VC investors are able to outperform generalists and whether existing findings hold in the blockchain context. Existing research shows ambiguous results whether industry-specialized investors outperform generalists (Le Nadant et al 2018). While Hagendorff et al (2009) find no statistically significant relationship between industry specialization and portfolio company success as measured by the number of IPOs, Matusik and Fitza (2012) provide evidence that the relationship between portfolio company success and VC firm industry-specialization follow a U-shape with VCs having a moderate level of diversification showing the lowest performance.…”

“…the specialization of a VC firm relies majorly on past experience in the industry of the respective portfolio firm. Subsequently, Le Nadant et al (2018) provide empirical evidence that investors with experience in the industry of their portfolio companies are more beneficial to their portfolio companies.…”

The Real Effects of Private Equity Buyouts: A Meta-Analysis

“…Examples include PE experience (Alperovych et al, 2013), syndication (Huyghebaert & Priem, 2016), specialization (Le Nadant, Perdreau, & Bruining, 2018) and institutional affiliation (Fang, Ivashina, & Lerner, 2013). We also lack more detailed information on the portfolio companies and their control groups (non-PE or pre-PE in the case of event studies).…”