Who gets private equity? The role of debt capacity, growth and intangible assets

While informed private equity (PE) investors screen for the most promising ventures, firms may avoid raising of PE for issues of cost and control. A critical question therefore is: which firms get PE? We consider both supply and demande side arguments to study the characteristics of a sample of 231 firms that did receive PE and compare them to those of a matched sample. Supporting the pecking order theory, we show that firms rely on PE funding when there are no alternatives, i.e.when their debt capacity is limited, due to financial and bankruptcy risk and due to important investments in intangibles. PE investors, from their side, select firms with substantial growth options. Further, firms that receive PE have grown more before the funding event than companies that did not receive PE. Keywords: financing choice, private equity JEL classification: G3

Follow-on financing of venture capital backed companies: the choice between debt, equity, existing and new investors

We study the financing strategies of 191 start-ups after they have received venture capital (VC) and thereby contribute to the staging literature. The VC backed start-ups have raised financing on 345 occasions over a five-year period after the initial VC investment. Surprisingly, bank debt is the most important source of funding for these young and growth-oriented companies, supporting the view that VC investors have a certifying role in their portfolio companies. Bank debt is available to firms with a lower demand for money, lower levels of risk and of information asymmetries, implying that staging of equity funding is less important for these firms. A firm only raises equity when it's debt capacity is exhausted, hinting that equity investors are investors of last resort. New equity is provided by the existing shareholders in 70% of the equity issues, supporting earlier findings that staged financing is important in venture capital financing. New shareholders invest when large amounts of funding are required and when risk and information asymmetries are high. We interpret these findings as support for the extended pecking order theory. In line with syndication arguments, new investors thus provide risk sharing opportunities and skills to screen and monitor and thereby reduce information asymmetries. New equity investors face adverse selection problems, however, in that only the most risky investments are syndicated. Keywords: financing strategy, venture capital, bank debt, external shareholders JEL classification: G3

Who gets private equity? The role of debt capacity, growth and intangible assets

While informed private equity (PE) investors screen for the most promising ventures, firms may avoid raising of PE for issues of cost and control. A critical question therefore is: which firms get PE? We consider both supply and demande side arguments to study the characteristics of a sample of 231 firms that did receive PE and compare them to those of a matched sample. Supporting the pecking order theory, we show that firms rely on PE funding when there are no alternatives, i.e.when their debt capacity is limited, due to financial and bankruptcy risk and due to important investments in intangibles. PE investors, from their side, select firms with substantial growth options. Further, firms that receive PE have grown more before the funding event than companies that did not receive PE. Keywords: financing choice, private equity JEL classification: G3

The impact of trust on private equity contracts

This paper adresses the impact of trust on private equity contracts. Trust between investor and entrepreneur is essential to help overcome control problems, especially in an environment with severe agency risks and incomplete contracts. In this study, information about the effects of trust is collected using a simulation with 144 entrepreneurs and investors. We find that trust has an impact on the desired contracts of entrepreneurs, but not on that of investors. Our findings suggest that for parties, faced with potentially large agency problems (investors), trust and control seem to play complementary roles. On the other hand, for parties faced with smaller agency problems (entrepreneurs), trust seems to be a substitute for control

Credit Rationing with Symmetric Information

Without denying the importance of asymmetric information, this article purports the view that credit rationing may also originate from a lender's inability to classify loan applicants in proper risk categories. This effect is particularly strong when novel technologies are involved. Furthermore, its relevance may increase with the importance assigned to internal rating systems by the Basel accord. This article presents a measure of the inadequacy of a lender's classification criteria to the qualitative features of prospective borrowers. Even without information asymmetries, credit rationing may occur if this quantity reaches too high a value. Furthermore, some general principles are outlined, that may be used by lenders in order to change their classification criteria