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 than their control counterparts, and this is more so for minority deals. We also show that PE targets experience a significantly higher board turnover than controls, and that changes are more pronounced in majority investments where both the CEO and the chairman are replaced. 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, namely the entrepreneurs/owners serving as CEO or chairman before the PE steps in.