Growth through active and professional ownership – Final remarks of the 2014 impact study / Maija Järvenpää
The previous FVCA impact study from 2012 showed that in Finland, private equity has a positive effect on portfolio company performance, and especially on growth. These results evoked wide interest and also further questions regarding the role of private equity – How PE investors create value? Potential ability of private equity to boost growth is particularly topical now, considering the current, rather chilly economic climate. Hence, a natural topic for the next private equity impact study, which I was fortunate to conduct as my master’s thesis, was a deeper analysis of the role of the private equity investor. More specifically, my thesis examines how Finnish private equity investors contribute to the performance of their portfolio companies. What differentiates this study from previous private equity studies in Finland is qualitative nature of the research that enabled me to utilise rich interview data and thus dig deeper into the topic.
Naturally, the primary role of the private equity investor is to act as an owner for the portfolio company. Previous studies in the field of private equity as well as my interviews with investment professionals and company managers show that ways of involvement in private equity are diverse, ranging from involvement in strategic planning and decision-making to mentoring and acting as a sounding board to the management. Although all interviewed investors used the same tools of involvement, every case was unique and different. I have to admit that in the beginning of the research process I was more or less stunned by the vast diversity of cases and complexity of the phenomenon. After the first interviews, it was clear that there is no single recipe for a successful private equity investment.
However, one theme that unifies successful private equity investors of the study is a certain type of adaptability, or in other words, ability to adjust investor involvement according to the needs of the portfolio company. Several interviewees mentioned that frequency and type of investor involvement changed during the investment as the portfolio company developed from an early-stage start-up into a young growth company or from a local business into a market leader. For example, investors of young, fast-growing companies typically focused on professionalization of the portfolio company while investors of more mature or stable companies generally focused on promoting growth appetite of the portfolio company. At best, the private equity investor does not only provide capital but also such non-financial resources that in each situation are beneficial for the portfolio company. As a consequence, a successful private equity investor is able to help the portfolio company grow sustainably and enter the next stage of development.
This week, I attended LSE Alternative Investments Conference, which is the world’s largest student conference on private equity and hedge funds. One of keynote speakers, Guy Hands, the CEO of PE company Terra Firma, stated that private equity is not about Excel spread sheets or delegating tasks, it is very hands-on work and not glamorous at all. This statement caused some amusement in the audience, but based on my thesis experience, it has a lot of truth in it. In my interviews, several PE investors described their role as an investor in a very similar way: value added is not some neat and abstract formula, rather it was seen to come from regular, formal as well as informal interaction with the management that was typically related to practical or topical issues. For me, this finding was probably the single most valuable takeaway from the thesis project.