Sustaining the Buyout Governance Model: Inside Secondary Management Buyout Boards
47 Pages Posted: 25 Feb 2018
Date Written: February 14, 2018
We examine the impact of private equity (PE) directors and their human capital on operating performance in a unique hand collected sample of 200 secondary management buyouts (SMBOs) during 2000-2015. We show that PE directors’ human capital tends to play statistically and economically important role in performance. Financial (rather than operational) experience of PE directors in acquiring PE firms tends to have a substantial impact on post-SMBO profitability while high level business education is especially important in post-SMBO growth performance enhancement. Complementary expertise, provided by directors in buying and selling PE firms, plays an important role only in post-SMBO growth improvements. Overall, our results provide evidence that governance benefits of the buyout model tend not to be exhausted in the primary buyout stage but the effects in the secondary buyout phase depend on the nature of PE directors’ human capital resource, notably in respect of the balance between board monitoring and advisory roles. Our study therefore adds to growing evidence on how ownership and life-cycle nature of firms affect sustainability of boards fulfilling their roles. The results are robust to sample selection bias, different types of PE firms and different measures of human capital.
Keywords: Buyouts, Boards, Private Equity, Human Capital
JEL Classification: G24, G32, G34
Suggested Citation: Suggested Citation