The Effects of Private Equity on Targets: Majority versus Minority Investments

This paper investigates the differential effects on performance of majority and minority Private Equity (PE) investments. By using a difference in difference approach, we compare a sample of 191 firms in the years following the PE investment with a control group constituted by firms that are the most similar to targets in the years preceding the deal. We find that, in the three years following PE investments, targets achieve higher profitability, higher sales and employ more people than their control counterparts. We also find that this effect is markedly larger for minority deals. We also show that PE targets experience a significantly higher board turnover than controls. As expected, changes are more pronounced in majority than in minority investments, with the former replacing both CEO and chairman. After the deal majority boards are smaller, younger and less local. In contrast, in minority deals board characteristics are not significantly altered. Moving to targets ownership types, we find that PEs are especially effective when they acquire a minority interest in family firms or, to some extent, when they take a majority stake in non-family firms. These results suggest that when dealing with family firms PEs are particularly beneficial when they tend to complement rather than substitute the incumbent human capital, and namely the entrepreneurs/owners serving as CEO or chairman before the PE steps in.