Are Private Equity Investors Good or Evil?

41 Pages Posted: 2 Sep 2009

See all articles by Oleg Badunenko

Oleg Badunenko

German Institute for Economic Research

Nataliya Barasinska

German Institute for Economic Research (DIW Berlin)

Dorothea Schaefer

German Institute for Economic Research (DIW Berlin); JIBS

Date Written: June 1, 2009

Abstract

The paper investigates the motives of activity (entry and exit) of Private Equity (PE) investors in European companies. Investment of a PE firm is not viewed unambiguously. First, it is claimed that PE investment is made for the sake of seeking short-term gains by taking control and utilizing the company's resources. Second, a PE firm invests because of prior identification of chances to add value to the company. We attempt to resolve these two conflicting conjectures. We use the Bureau van Dijk's Amadeus database of very large, large and medium-sized European companies. Our major results can be summarized as follows. First, PE firms are less willing to enter the firm if there is already a blocking majority, and they are more likely to leave the firm if control cannot be overtaken. Second, less mature firms are less able to lure a PE firm to invest, thus indicating a safe strategy of PE investors. Third, we do not find empirical evidence that a PE investor comes in to strip a firm of its equity. On the other hand, PE investors are likely to leave the company if it deteriorates in terms of returns and cash. Finally, when comparing the activity of PE and other financial investors, we find essential differences in choosing the field and environment of activity.

Keywords: private equity financing, leverage, corporate finance

JEL Classification: M14, G24, G34

Suggested Citation

Badunenko, Oleg and Barasinska, Nataliya and Schaefer, Dorothea, Are Private Equity Investors Good or Evil? (June 1, 2009). DIW Berlin Discussion Paper No. 901, Available at SSRN: https://ssrn.com/abstract=1465481 or http://dx.doi.org/10.2139/ssrn.1465481

Oleg Badunenko (Contact Author)

German Institute for Economic Research ( email )

Mohrensrt. 58
Belrin, 10117
Germany

HOME PAGE: http://obadunenko.googlepages.com

Nataliya Barasinska

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Dorothea Schaefer

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany
+49 30 8978 9162 (Phone)
+49 30 8978 9104 (Fax)

JIBS ( email )

Jönköping, 55111
Sweden

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