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: G32
Financial theory, resource-based theory and access to deal flow are used to explain syndication practices among European venture capital (VC) firms. The desire to share risk and increase portfolio diversification is a more important motive for syndication than the desire to access additional intangible resources or deal flow. Access to resources is, however, more important for non-lead than for lead investors. When resource-based motives are more important, the propensity to syndicate increases. Syndication intensity is higher for young VC firms and for VC firms, specialised in a specific investment stage. Finally, syndication strategies are similar across European countries, but differ from North American strategies.
Manigart, Sophie; Korsgaard, Audrey M.; Folger, R.; Sapienza, Harry J.; Baeyens, Katleen (Vlerick Business School, 2002)
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.
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