Private equity and entrepreneurial management in management buy-outs

Abstract

Critics claim that short-term profit orientation and high deal price strategies of private equity (PE) firms can negatively affect the ability of management buyouts to initiate and sustain entrepreneurial management. This study investigates this claim by comparing effects of majority PE backed and other buy-outs at different levels of financial leverage on post buy-out increases in entrepreneurial management. We propose that PE can be used as an organizational refocusing device that simultaneously increases entrepreneurial and administrative management. We find that majority PE-backed buy-outs significantly increase entrepreneurial management practices. Furthermore, the increased financial leverage positively affects administrative management in management buy-outs. However, the effect of high financial leverage is larger for majority PE-backed buy-outs. These results support the notion that PE firms help buyout companies develop ambidextrous organizational change: i.e. simultaneously develop entrepreneurial and administrative management practices. The findings have important implications for practitioners and policy makers.

‘What is patient capital and who supplies it?’

“…[ Figure 2 about here] Private Equity (PE) PE has long been a subject of debate, initially between those who see it as overcoming of agency costs for long-term advantage (Jensen 1989) and those who view it as 'transitory' (Rappaport 1990), and more recently around its impact on NFC performance, investment and labour (e.g., Wright et al 2007;Davis et al 2011;Applebaum and Batt 2012;Bruining, Verwaal and Wright 2013). This debate highlights the significant heterogeneity of private equity and of the kinds of investments they make (Bacon et al 2013;Hoskisson et al 2013;Gospel, Pendleton and Vitols 2014).…”

Ex‐Post Innovation Profile of LBO Targets: Evidence from CIS Data for the Netherlands

“…Further, new product development, stronger engagement in entrepreneurial ventures, technological alliances, and R&D appear as major sources of improving fi nancial performance post-LBO (Bruining and Wright, 2002;Bull, 1989;Green, 1992;Zahra, 1995). Private equity fi rms help buyout companies develop ambidextrous organizational change: that is, simultaneously developing entrepreneurial and administrative management practices (Bruining et al, 2013). Private equity fi rms help buyout companies develop ambidextrous organizational change: that is, simultaneously developing entrepreneurial and administrative management practices (Bruining et al, 2013).…”

“…Lerner et al (2011) confi rm that private equity fi rms create both productive and innovative growth. Private equity fi rms help buyout companies develop ambidextrous organizational change: that is, simultaneously developing entrepreneurial and administrative management practices (Bruining et al, 2013). Hence, during a buyout, the management teams increase their emphasis on entrepreneurial growth, while balancing the opportunities of entrepreneurial growth with the constraints from limited fi nancing and resources (Scholes et al, 2010;Wright et al, 2001;Zahra, 1995).…”

“…2 Critics claim that high levels of debt and the short-term profi t orientation of private equity fi rms can negatively aff ect the ability of leveraged buyouts to initiate and sustain entrepreneurial management and thus innovation behavior (Bruining et al, 2013). 2 Critics claim that high levels of debt and the short-term profi t orientation of private equity fi rms can negatively aff ect the ability of leveraged buyouts to initiate and sustain entrepreneurial management and thus innovation behavior (Bruining et al, 2013).…”

“…In recent years, there has been renewed interest among academics and the public at large in the economic consequences of leveraged buyout (LBO) transactions. 2 Critics claim that high levels of debt and the short-term profi t orientation of private equity fi rms can negatively aff ect the ability of leveraged buyouts to initiate and sustain entrepreneurial management and thus innovation behavior (Bruining et al, 2013). Yet, companies need to adapt and evolve if they wish to survive and future success lies in the ability to develop innovative solutions for customers' problems and needs.…”