Private Equity and Bank Capital Requirements: Evidence from European Firms

Abstract

Using firm-level data from 16 euro-area countries over 2008-2014, we investigate how the performance of bank-affiliated private equity-backed companies evolves after the European Banking Authority increased capital requirements for their parent banks. We find that portfolio companies connected to exposed banks reduce their level of investment and experience weaker asset growth, employment growth and profitability following the capital exercise. We further show that the effect is stronger for companies likely to face financial constraints. Finally, the findings indicate that the negative effect of the capital exercise is muted when the private equity sponsor is more experienced.PE arm and the portfolio companies in which it invests. This paper provides, for the first time, a systematic empirical analysis of the mechanism through which an exogenous increase in capital requirements affects the portfolio companies of the PE arms of exposed banks.The theoretical and empirical literature to date points to differences in the motives of independent PE investors and bank-affiliated PE investors, as well as the selection of target companies, and the value-added to their portfolio companies (Andrieu and Groh, 2012;Hellmann, 2002). Given the reliance on securing fundraising from external institutional investors to raise a new fund successfully every 5 to 10 years, financial returns and sufficient returns for investors drive independent PE investors. Captive investors, on the other hand, such as those affiliated with a bank, are strategic investors focused on increasing synergies and the strategic value-added to the parent organization, rather than pure financial gain. Hellmann, Lindsey and Puri (2007) provide empirical evidence that bank-affiliated investors use the PE market to create relationships, as companies receiving investment from bank-affiliated investors are significantly more likely to receive future loans