What do We Know About Entrepreneurial Finance and its Relationship with Growth?

This article explores what we do (and do not) know about entrepreneurial finance and its relationship with growth. Broadly, there is a need for research to go beyond traditional supply side/market failure issues to better understand the role of entrepreneurial cognition, objectives, ownership types and firm life-cycle stages in financing/investment decisions. We show that little is known about the pivotal relationship between access to external finance and growth due to limitations in current approaches to testing financial constraints. Instead, we propose that the relationship between funding gaps and business performance as a direct and nuanced approach to identifying financial constraints in different entrepreneurial finance markets requires scrutiny. There is also a necessity for research to disentangle cognitive from financial constraints and to better understand the role of financiers in enabling growth. In particular, there is a need to explore the relationship between non-bank sources of finance and growth, shorn of inherent survival and selection bias. We outline an agenda for future research to address gaps in our understanding

Sustaining the buyout governance model: inside secondary management buyout boards

We examine the impact of private equity (PE) directors and their human capital on operating performance in a unique hand collected sample of 200 secondary management buyouts (SMBOs) during 2000-2015. We show that PE directors’ human capital tends to play statistically and economically important role in performance. Financial (rather than operational) experience of PE directors in acquiring PE firms tends to have a substantial impact on post-SMBO profitability while high level business education is especially important in post-SMBO growth performance enhancement. Complementary expertise, provided by directors in buying and selling PE firms, plays an important role only in post-SMBO growth improvements. Overall, our results provide evidence that governance benefits of the buyout model tend not to be exhausted in the primary buyout stage but the effects in the secondary buyout phase depend on the nature of PE directors’ human capital resource, notably in respect of the balance between board monitoring and advisory roles. Our study therefore adds to growing evidence on how ownership and life-cycle nature of firms affect sustainability of boards fulfilling their roles. The results are robust to sample selection bias, different types of PE firms and different measures of human capital

Crisis, Experimentation and Change: The Case of Private Equity and PTPs

The dominant role played by financial services within liberal market economies, and the 2008 economic crisis, has variously been depicted as the product of regulatory failure, 'irrational exuberance', the over-prioritization of shareholder value or as part and parcel of an epochal change in social and economic life. Current regulationist thinking suggests that recent developments represent a long period of systemic experimentation, evolution and change, which dates back to the end of the long boom in the 1970s. In this article, we introduce and discuss current regulationist thinking regarding systemic crisis, evolution and change, and follow on with a more detailed look at the diversity and varied outcomes associated with a key area of the financial services sector, private equity (PE) and public to private buy-outs of listed corporations (PTPs). We have chosen this area because of the critical importance of capital for innovation at the same time as investment horizons have generally become more short term, and the challenges that exist in reconciling these competing needs and agendas. We conclude that, as with any innovation and experiment, the outcomes of private equity are mixed. This would suggest that the emerging financial architecture that will inevitably comprise any return to growth will, in part, incorporate aspects of private equity. Indeed, to the extent that private equity buy-outs involve the acquisition of firms in distress, they may have a positive contribution to make in resolving the problems of recession and financial crisis. The failure of unsustainable experiments does not mean, however, that renewed growth will simply result through natural selection: it depends on continued innovation and experimentation across the entire economy, coupled with relevant formal and informal socio-economic regulation.No Full Tex

Agency, Strategic Entrepreneurship and the Performance of Private Equity-Backed Buyouts.

Closed accessAgency theory has focused on buyouts as a governance and control device to increase profitability, organizational efficiency, and limited attention to growth. A strategic entrepreneurship view of buyouts incorporates upside incentives for value creation associated with growth as well as efficiency gains. In this paper, we develop the complementarity between agency theory and strategic entrepreneurship perspectives to examine the performance implications for different types of buyouts. Further, we study how the involvement of private equity (PE) firms is related to the performance of the post-buyout firm. These issues are examined for a sample of 238 PE-backed buyouts in the UK between 1993 and 2003. Implications for theory and practice are suggested

Strategic changes in family firms post management buyout: Ownership and governance issues

Closed accessWhen no suitable family successor can be identified, private family firm owners may select a management buyout (MBO) or a management buyin (MBI) exit route. After a private equity backed MBO/I, new owners may select strategies that encourage superior firm performance. We explore the strategic orientation of former private family firms pre- and post-MBO/Is. Ownership and governance issues are considered. Following insights from agency and stewardship theory, several hypotheses are derived and tested with reference to a representative sample of 104 MBO/ Is located across Europe. Univariate analysis suggests greater scope for efficiency gains and growth in cases where the founder was present at time of buyout, where no managers with equity stakes or non-executive directors were employed pre-buyout, and where the private equity investor and management were involved in succession planning. Multinomial logistic regression suggests efficiency gains in firms with no equity holding non-family managers pre-buyout. Conclusions and implications are discussed