THE ROLE OF FIRMS IN THE BOARD OF DIRECTORS OF THEIR PORTFOLIO COMPANIES

Word count: 23960

Stan Jeanty Student number: 01204505

Supervisor: Prof. dr. Regine Slagmulder

Master’s Dissertation submitted to obtain the degree of:

Master of Science in Business Economics

Academic year: 2016 - 2017

CONFIDENTIALITY AGREEMENT

PERMISSION I declare that the content of this Master’s Dissertation may be consulted and/or reproduced, provided that the source is referenced.

Stan Jeanty

Signature

II

Foreword and Acknowledgements This dissertation is written as finalization of the Master of Science degree in Business Economics, at Ghent University during the academic year 2016-2017. Since October of last year I have researched the topic "The role of private equity firms in the board of directors of their portfolio companies". The research and analysis were difficult, but I managed to achieve a satisfactory goal. Thanks to this investigation, I gained an absorbing insight into this extremely fascinating, ubiquitous industry that became the private equity industry for me. This gained insight and result would not be possible without the support and instructions of my supervisor professor Regine Slagmulder. She advised me about the content, the direction I had to take and the design of my thesis. After every intervention of her, I was excited to take a next step. I would also like to express my gratitude to my dearest family, who, with their wise counsel and kind words, assisted me as they always do. Above all, I want to express my appreciation and love for my girlfriend Jolien who kept an eye on me. When my focus threatened to weaken, she was there to motivate and encourage me. I also want to thank all respondents without whose assistance I could not perform this analysis. With this thesis, I thankfully end a chapter of my life and look forward to a next one. I am confident that the next few years will be as exciting as I have experienced so far.

I hope you enjoy reading on.

III

TABLE OF CONTENTS CONFIDENTIALITY AGREEMENT ...... I

FOREWORD AND ACKNOWLEDGEMENTS ...... III

TABLE OF CONTENTS ...... IV

LIST OF USED ABBREVIATIONS ...... VII

LIST OF FIGURES ...... VIII

INTRODUCTION AND MOTIVATION ...... 1

LITERATURE REVIEW ...... 3

1. PRIVATE EQUITY ...... 3

1.1 WHAT IS PRIVATE EQUITY? ...... 3

1.2 TYPES OF PRIVATE EQUITY ...... 3

1.3 ACTORS IN THE PRIVATE EQUITY DEAL ...... 4 1.3.1 Limited partner (LP) ...... 4 1.3.2 General partner (GP) ...... 4 1.3.3 Portfolio company ...... 5

1.4 THE PRIVATE EQUITY MARKET ...... 5 1.4.1 Current landscape ...... 5 1.4.2 Future evolutions ...... 6 1.4.3 What critics say ...... 6

1.5 ...... 7 1.5.1 What is venture capital? ...... 8 1.5.2 Why venture capital? ...... 8 1.5.3 What is the role of venture capitalists and how do they work? ...... 8

1.6 BUYOUTS ...... 10 1.6.1 What are buyouts? ...... 10 1.6.2 Types of buyouts ...... 11 1.6.3 When do buyout firms intervene? ...... 12 1.6.4 How are buyouts structured? ...... 12 1.6.5 Buyout Process ...... 13 1.6.6 Value creation ...... 15 1.6.7 Exit ...... 16

2. BOARD OF DIRECTORS ...... 17

IV

2.1 CORPORATE GOVERNANCE (CG) ...... 17

2.2 THEORIES AND ROLES OF GOVERNING BOARDS ...... 17 2.2.1 Linking role and Resource Dependency Theory ...... 18 2.2.2 Coordinating role and Stakeholder Theory ...... 19 2.2.3 Control role and Agency Theory ...... 19 2.2.4 Strategic role and Stewardship Theory ...... 20 2.2.5 Maintenance role and Institutional Theory ...... 20 2.2.6 Support role and Managerial Hegemony ...... 21 2.2.7 Conclusion ...... 21

3. ROLE OF PRIVATE EQUITY IN THE BOARD OF DIRECTORS ...... 22

4. RESEARCH QUESTION ...... 24

4.1 STAGE IN COMPANY’S BUSINESS LIFE CYCLE (BLC) ...... 25

4.2 FUND SIZE ...... 27

4.3 THE SECTOR THE FUND INVESTS IN ...... 27

4.4 GEOGRAPHICAL LOCATION ...... 27

4.5 PHASE IN BUYOUT PROCESS ...... 28

4.6 BACKGROUND OF PE PLAYER ...... 28

EMPIRICAL RESEARCH ...... 31

5. METHODOLOGY ...... 31

5.1 SAMPLE AND DATA COLLECTION ...... 31

5.2 QUESTIONNAIRE ...... 33

5.3 HYPOTHESES AND VARIABLES ...... 34

5.4 RESULTS ...... 35 5.4.1 Research question 1 ...... 36 5.4.2 Research question 2 ...... 38

5.5 REGRESSION ANALYSIS ...... 49

5.6 CONCLUSION ...... 51

5.7 LIMITATIONS, IMPLICATIONS AND FURTHER RESEARCH ...... 56

REFERENCE LIST ...... I

ATTACHMENTS ...... VIII

ATTACHMENT 1: CONTACTED BUYOUT FIRM ...... VIII

ATTACHMENT 2: SURVEY ...... IX

ATTACHMENT 3: DISTRIBUTION BUSINESS LIFE CYCLE: PORTFOLIO COMPANY (PC) AND BUYOUT FIRM (BO) ..... XIV

V

ATTACHMENT 4: DISTRIBUTION FUND SIZE ...... XV

ATTACHMENT 5: DISTRIBUTION INDUSTRY: PORTFOLIO COMPANY (PC) AND BUYOUT FIRM (BO) ...... XVI

ATTACHMENT 6: DISTRIBUTION GEOGRAPHICAL AREA: PORTFOLIO COMPANY (PC), BUYOUT FIRM (BO) AND

RESPONDENT ...... XVII

ATTACHMENT 7: DISTRIBUTION BUYOUT PROCESS: PORTFOLIO COMPANY (PC) AND BUYOUT FIRM (BO) ...... XVIII

ATTACHMENT 8: EXPERIENCE DISTRIBUTION ...... XX

ATTACHMENT 9: LOGISTIC REGRESSION ...... XXI 9.1 Controlling & Monitoring ...... XXI 9.2 Networking ...... XXII 9.3 Management Incentives & Recruitment ...... XXIII 9.4 Mentoring & Expertise Advisor ...... XXIV 9.5 Strategic & Governing ...... XXV 9.6 Maintenance & Coordinating ...... XXVI

VI

LIST OF USED ABBREVIATIONS

• 2BO Secondary Buyout • BIMBO Buy-In Management Buyout • BLC Business Life Cycle • BO Buyout • BOD Board of Directors • CEO Chief Executive Officer • CG Corporate Governance • EBITDA Earnings Before Interest, Taxation, Depreciation and Amortization • ESG Environmental, Social and Governance • EVCA European Private Equity and Venture Capital Association • GF General Function • GP General Partner • HQ Headquarter • IM Investment Manager • IPO Initial Public Offering • KKR Kohlberg Kravis Roberts & Co. • LBO • LP Limited Partner • MBI Management Buy-In • MBO Management Buyout • NVT New Venture Team • OECD Organization for Economic Co-operation and Development • PC Portfolio Company • PE Private Equity • RQ Research Question • RRS% Relative Role Selection Percentage • SPV Special Purpose Vehicle • Triple F Friends, Family & Fools • VC Venture Capital • VC’s Venture Capitalists

VII

LIST OF FIGURES

• Figure 1 Buyout Structure (Fraser-Sampson, 2011) • Figure 2 Stage Model of The Buy Out Process (Kaumann, 2009) • Figure 3 Sources of Value Creation (Vanacker, N.D.) • Figure 4 Typology of The Theories of The Roles of Governing Boards (Hung, 1998) • Figure 5 Roles of Venture Capitalists (Uchigaco, N.D.) • Figure 6 The Business Life Cycle (Davis, 2013) • Figure 7 Theoretical Framework • Figure 8 The 6 Different Roles • Figure 9 Role Distribution (Portfolio Companies) • Figure 10 Role Distribution (Buyout Firms) • Figure 11 Maturity Stage • Figure 12 Growth Stage • Figure 13 Fund Size • Figure 14 Experience • Figure 15 Buyout Process • Figure 16 Experience • Figure 17 Logist Regression Model • Figure 18 Conceptual Model

VIII

INTRODUCTION AND MOTIVATION Private equity is a peculiar and interesting way of financing a business. It is not a conventional source of capital and therefore has some remarkable characteristics. Moreover, since these private equity firms provide capital, they wish to have a say in what happens with it and how the firm will be run. This has implications regarding the governance of private equity-backed companies. One main implication is the role the board plays in its portfolio companies, which is divergent from the traditional role. It is these roles that are the main focus of my master dissertation. The capital provided by private equity firms has been of great importance and this will continue to be so for companies who are not able or willing to seek financing in the more typical ways. As will be explained, venture capital and buyouts are the two most frequently used forms of private equity. Despite the importance of these capital providers, there is still room for literature that studies the methods private equity firms use to add value to their portfolio companies. This is the first study to build a framework on the roles private equity firms play in the board of directors and the determinants that affect these roles. The importance of this thesis is backed by a significant number of suggestions on future research in this domain. Despite the growth in private equity, it is striking that up till now only a few studies have done research about the actions private equity investors actually take (Gompers, Kaplan, & Mukharlymov, 2015). Furthermore, studies of venture capital activity tend to be descriptive and somewhat a-theoretical. Less is known about how value is added and how it is best measured (Sapienza, Manigart, & Vermeir, 1996). There isn’t a complete gap when asking this question. For instance, Fried, Vance, Bruton and Hisrich (1998) also examined these board roles, but even they conclude in their paper that beside the roles they discovered, also other board roles should be further examined (Fried et al., 1998). This is supported by Knockart and Ucbasaran (2011), who say that it would be interesting to explore how and also through which types of activities boards contribute most to which type of ventures (Knockart & Ucbasaran, 2011). Specifically, when talking about venture capital, Rosenstein (1993) puts forward that academic studies of the relationships between the venture capital organizations and the start-up firms have concentrated more on investment decisions rather than on what Tyebjee and Bruno (1984) characterize as post-investment activities (Rosenstein, 1993). The simple fact that venture capital is the main focus of this paper shows the relevance of studying these post-investment activities for buyout firms even more. These findings are of great significance for a broad audience. Sapienza (1992) stated that this information is of great

1

importance to suppliers of capital (limited partners), venture capitalists themselves, users of capital (entrepreneurs), and public policy makers (Sapienza, 1992). I learn from these suggestions that research about the role private equity firms play in their portfolio companies is very much needed. This study is different from earlier efforts because it focuses on the role private equity firms have, rather than the characteristics or demographics of these boards. To answer this question, I start with a brief overview of private equity and more specifically venture capital and buyouts in part 1. Part 2 discusses the role of the board of directors and the theories supporting these roles. The last part will summarize and discuss the role private equity firms are playing, or should play in their portfolio companies. Based on this theory, I will answer my research question: what is the role of private equity firms in the board of directors of their portfolio companies? Building on this, I will further examine the determinants that influence these roles. I will discuss 6 determinants: (1) the stage in the business life cycle of the portfolio company, (2) the size of the fund of the private equity firm, (3) the geographical location of both the private equity firm and the portfolio company, (4) the sector where the portfolio company is in, (5) the background of the private equity player and finally (6) the phase in the buyout process the portfolio company is in. For this literature review, the subjects discussed are carefully selected keeping in mind an audience that has no or only a limited knowledge of private equity.

2

Literature Review 1. PRIVATE EQUITY 1.1 What Is Private Equity? There are numerous ways for a firm to obtain financing. The most common ones are debt financing, the use of public capital markets and the triple F’s (or now even quadruple, with the fourth one standing for “fan’s”, referring to .). Next to the traditional ways of financing, private equity firms are an innovation in the capital market. They are concerned with investments in unquoted companies and create distinctive governance features (Meuleman, Amess, Wright, & Scholes, 2009). Alternatively, Buchner, Kaserer, and Wagner (2010) define private equity as an illiquid asset that provides an opportunity to further diversify portfolios beyond the more traditional stock and bond instruments (Buchner et al., 2010, p. 41). A brief summary of what private equity is and how it works, is best described by Investopedia (2017): “Private equity is a source of investment capital from high net worth individuals and institutions for the purpose of investing and acquiring equity ownership in companies. Partners at private equity firms raise funds and manage these monies to yield favorable returns for their shareholder clients, typically with an investment horizon between four and seven years.” Or in other words, private equity provides companies the oxygen to grow.

1.2 Types of Private Equity Before going more in depth, I shall explain the most important types of private equity. There are two main areas of activity: (1) the provision of early stage venture capital and (2) the provision of equity capital for buyouts. The last sort is the principal focus of private equity investments (Wright et al., 2009). Private equity in general refers to unregistered equity and equity-linked securities sold by private and – sometimes – public companies or partnerships to financial buyers. Venture capital is a subset of private equity and refers to equity or equity-linked investments made for the launch, early growth or expansion of a business (EVCA, 2004; Vanacker et al., n.d.). Venture capital is distinctive from buyouts, which refers to investments in more mature companies and which have an established business plan to acquire equity stakes from existing shareholders, such as families or corporations (EVCA, 2004; Vanacker et al., n.d.).

3

Other, less significant, forms of private equity are development and and rescue or vulture capital. To complete the list, there are also secondary transactions. These last members of the private equity family are not significantly present and thus will not be discussed.

1.3 Actors in The Private Equity Deal To understand where the private equity firm comes in and where it can have an influence, it is important to have a brief idea of the people involved in such a deal, in particular a buyout deal. Legally, private equity funds are organized as limited partnerships in which the general partners manage the fund and the limited partners provide most of the capital. Translating this into practice, the private equity firm serves as the funds general partner (Kaplan and Strömberg, 2009). The third actor is the portfolio company, or the company in which the private equity firm is investing. Part 1.7.4 will elaborate on how these actors are structured and how they work for a buyout.

1.3.1 Limited partner (LP) The LP’s, or limited partners, play the financing and principal role of the private equity deal. LP’s commit a certain amount of capital to a private equity fund and the managers of the private equity fund invest that money over a period agreed with the LP. At the time of committing capital to the fund, there is an agreement between the LP and the private equity firm about the timeslot the capital will be returned to the LP (Wright et al., 2009). There are several possible actors who can act as a limited partner. They typically include institutional investors, such as banks, companies, and pension funds, but also governments, sovereign wealth funds, corporations, family offices and private individuals (EVCA, 2007, 2004). The economic life of most funds is ten years, although provisions are often included to extend the life of the funds by two years (Sahlman, 1990).

1.3.2 General partner (GP) The GP’s, or general partners, play the leading and agent role in the private equity structure. They are responsible for managing the investments within the private equity fund (Investopedia, 2017). Their incentive is a yearly management fee of approximately 1,5 to 2,5 % of the total amount invested. These fees serve to pay salaries and cover due diligence and other costs incurred to manage the fund. On top of this, and in an effort to align both the interests of the LP’s and the GP’s, GP’s typically have a so called carried interest of 20 %. This permits GP’s to obtain 20 %

4

of the capital gains realized by the fund (Vanacker et al., n.d.). It is also important that in contrast with the limited partner, the general partners can be legally liable for the actions of the fund (Investopedia, 2017).

1.3.3 Portfolio company The third, and last, actor in the private equity deal is the portfolio company. This is the company in which the private equity firm is investing. However, the ideal portfolio company in which all private equity firms want to invest, does not exist. This is because each private equity firm, or fund, has its own strategy, characteristics, niche market, formula and preferences. That means that there is a variety of private equity firms all over the world, with different investment time horizons and different objectives (Wright et al., 2009). To end this section and in order to have a better understanding of how most portfolio companies look like, we can consult the European Private Equity and Venture Capital Association (EVCA) report. Here we observe that the top 3 of the amount invested are in: (1) Business and Industrial Products (2) Consumer Goods and Retail (3) Life Sciences

When looking at the number of companies invested in, instead of the amount invested, the top 3 changes: (1) Computer and Consumer Electronics (2) Communications (3) Life Sciences

1.4 The Private Equity Market To show the relevance and topicality of this thesis, I will briefly sketch a short portrait of where private equity has come from and where it is heading to in the future.

1.4.1 Current landscape Both venture capital and buyouts are omnipresent in the (inter)national landscape. Looking at Belgium, a positive story can be told. The relatively small country managed to occupy the 18th place, out of 125, on The Venture Capital and Private Equity Country Attractiveness Index. With investments in Belgium being 0,34% of national GDP, it beats the European average of 0,30 % (EVCA, 2015).

5

Looking behind the numbers, venture capitalists are an important source of private equity for business. There are numerous internationally well- known venture-capital backed companies, such as Intel, Apple, Microsoft, Google, Federal Express and Skype (Fried, Bruton, and Hisrisch, 1998; Metrick, and Yasuda, 2010; Fried et al., 1998). Also, nationally, formal venture capital is an important source of financial support for new and growing companies in Belgium (Van den Berghe, and Levrau, 2002). There are also several nationally known companies established through venture capital. These include, among others, Lunch Garden, Studio 100 and Neuhaus.

1.4.2 Future evolutions Having an idea of the national and international landscape of the private equity market is one thing. Now I will discuss the future evolutions of this market. The overall opinion is that private equity deals will continue to increase. In 2012, in Europe, the amount of private equity deals completed increased to €83 billion, which is the highest value since 2008. This trend has continued through 2014 since mergers and acquisitions activity has picked up and secondary buyouts have continued to rise (EY, 2013). Since the interest and amount invested in private equity deals are increasing, the industry is adapting and has taken great strides to improve its reporting to LP’s and to engage more effectively with wider stakeholders. Ernst and Young (2013) conclude that this is a significant, long-term development and it will help to improve the industry’s image and standing. The continuing rise of the private equity market, its positive evolutions and the observation that private equity deals outperform traditional methods, will ensure that it will become an even bigger part of the capital market landscape.

1.4.3 What critics say When studying the role private equity plays, it is important to be aware of the conventional arguments used to counter these roles. The first, and probably the most emotional argument against private equity, concerns lay-offs and remuneration. This is the main criticism highlighted by Wright et al. (2009). They are concerned that employees suffer via lay-offs and lower wages and are convinced that this can have a disruptive effect to a VC-NVT (venture capital-new venture team) relationship (Fried et al., 1997). However, this is countered by stating that in the creation of viable businesses, jobs are created (EVCA, 2001; Constantin Associés and AFIC, 2007; ASCRI, 2008; BVCA, 2008). This is also confirmed by Smith (1990), who shows an initial reduction in employment the first 3 years, followed by subsequent increases in employment and higher wages, mostly after year 4 or 5.

6

Another point of critic is asset stripping. This means that private equity firms are profiting from the reselling of assets within short periods of time (asset flipping). When this includes selling of subdivisions, this implies lay-offs as well (PSE Group of the European Parliament, 2007; Wright et al., 2009). Next to negative effects regarding lay-offs, remuneration and asset stripping, another point of criticism is the short-term mindset they claim private equity firms to have. It is criticized that private equity firms choose this short horizon in investee firms because they seek to make a return for the investors in their funds (Wright et al., 2009). They often call them “fast-buck artists”. To refute this argument, the study of Strömberg (2009) comes in. He found out that 70% of buyouts remain in the possession of the private equity investors for five years or longer. Some go even further and state that venture capitalists in particular, but also buyout firms, can hinder venture growth if they offer the wrong strategic input or impose ill-advised constraints (Steier and Greenwood, 1995; Gomez-Mejia, Luis, Balkin, and Welbourne, 1990). Other research even suggests that venture capitalists do not add value at all (Manigart et al., 2002; Steier and Greenwood, 1995; Gomez-Mejia et al., 1990). Several researchers counter this accusation. They say that financial performance generally improves after the buyout (Cressy, Munari, and Malipiero, 2007; Guo, Hotchkiss, and Song, 2011). A last common argument against private equity is that these firms use leverage and offshore holding companies to reduce tax charges and it is mainly these that account for, or significantly contribute to, investment performance (PSE Group of the European Parliament, 2007; Wright et al., 2009). They accuse private equity companies of evading taxes, for instance by using debt financing to take advantage of interest deduction. These criticism and debates have led to more demand for regulations and transparency (Treasury Select Committee, 2007; Unquote, 2008; Mike Wright et al., 2009).

1.5 Venture Capital When putting buyouts to the side, venture capital is the second most important member of the private equity family. However, this thesis emphasizes on buyouts, it is crucial to first have a good understanding of how venture capital works and how it is structured. This is because after venture-capital firms are backed and exited (i.e. when the venture capital divests its investment) the company is often left to buyout firms. There are also many similarities between the characteristics and the process of venture capital and buyouts. That is why this section will give a short but thorough overview of venture capital.

7

1.5.1 What is venture capital? The word “venture” is derived from the word adventure. This already gives a good understanding of what venture capital is all about. Defined, venture capital is a subset of the private equity asset class that mainly focuses on investments in new or growing privately-held companies with high growth potential (Vanacker et al., n.d.). The venture capitalist takes a huge risk in financing these firms, but hopes to get a return when there is one lucky winner in its portfolio. The venture capitalist invests and manages capital in his role as a general partner of a limited partnership. Most of the capital invested comes from institutional investors. The fund has a finite life by the end of which all of the investments must either be liquidated or distributed to the partners. First the venture capitalist must choose companies to invest in and negotiate the purchase of stock in private transactions. These stocks are typically illiquid. In order that no venture capitalist is overexposed to the risks of a single venture, it is common for more than one venture capital partnership to invest in a firm (Fried et al., 1998).

1.5.2 Why venture capital? Venture capitalists exist because of the demand of capital from new ventures which are unable to obtain loans from traditional means. Since they are lacking collateral or sufficient cash flow, these companies cannot raise capital from conventional sources, such as commercial banks or the public market and are therefore attracted to venture capital as an alternative financing method (Gomez-Mejia et al., 1990). In order to overcome the huge business and financial risks and the potential agency problems associated with investing in young, growth-oriented ventures (often without valuable assets but with a lot of intangible investments), venture capital firms specialize in selecting the most promising ventures. After the investment, their top priority is being involved in the ventures once they have made the investment (Manigart, and Wright, 2013). This means that the venture capitalist will play an important role besides the financing of the venture.

1.5.3 What is the role of venture capitalists and how do they work? This section will give a brief overview of the structure of a venture capital deal and the stages both parties have to go through. The first stage is to perform due diligence and, if all goes well, the selection of new portfolio companies. Since venture capital firms receive a huge number of business plans from capital-

8

seeking firms, only a small fraction is appointed with financing. A quick screening ascertains whether an investment proposal fits with the general investment criteria of the venture capital fund (Fried, and Hisrich, 1994). The few ventures that are selected, will have to undergo a pre- investment due diligence process. This is to decrease the risk of adverse selection and potential information asymmetry problems (Vanacker et al., n.d.). This is followed by the actual venture capital deal. Now the venture capitalist will have to decide the price he will ask in return for its investment. In order to do so, he has to determine the value of entrepreneurial companies, or alternatively, the percentage of equity capital they want in return for their investment (Heughebaert, and Manigart, 2012). If after the due diligence, the venture capital firm still wants to invest in the venture, a term sheet is set up. This contains the conditions and terms the deal entails. After the investment is made, the most important and interesting aspect for this thesis begins: the role of the venture capitalist in the backed company. In addition to their role as a financial intermediary, venture capitalists may have a very important influence on the way the firm is managed (R. Gomez-Mejia et al., 1990). As they occupy a number of seats in the board of directors in order to make sure their invested money is well spent and used, they can assist the existing executive team in many ways. There has been some literature written about these roles. For example, Vanacker et al. (n.d.) state that the three broad post-investment activities are: monitoring, assisting and certifying their portfolio companies. Fried and Hisrish (1995) also acknowledge these post investment roles, next to financing, such as: operating services, access to business contacts, generally business knowledge, and financial and strategic discipline (Fried, and Hisrich 1995). A last illustration of these roles comes from Frank Maene (2017), partner at Volta Ventures, during a reading on financing, who said that venture capitalists not only provide cash but also advice, work as a sounding board, help with headhunting and hiring, consult with the IPO and provide aid with fund raising. These venture capital roles already give a great introduction in the possible roles a buyout firm can play in the board of its portfolio company. However, it is important to bear in mind that these roles will not be completely the same for buyouts. This is because the portfolio companies of a buyout firm will be substantially bigger and are more experienced than those of a venture capital firm. A second point of attention is that these roles may also differ when looking at the characteristics of the portfolio company. For instance, the stage in the business life cycle may affect the private equity player’s roles. For each stage (start-up, growth, maturity and decline) the company is faced with other challenges. Therefore, each stage will call for other tools offered by

9

the private equity firms. For instance, in the start-up phase, one of the most important challenges will be to establish a customer base. To handle this issue, the network of a private equity player may come in handy. This role will be less important when the company is in the decline phase, where looking for a proper exit strategy will be more important. Other determinants may be the sector the portfolio company is operating in, as well as the size of the fund of the venture capitalist and the geographical location of the two parties. These determinants will be discussed more profoundly in part 4. This last paragraph on venture capital is also the last phase where a venture capitalist comes into the picture. From the beginning, the venture capitalist is working towards the exit. This is when their task is done and they can no longer add value to the company. In the end, the main objective of the venture capitalist is always to generate a return on its investment. The exit is typically some 3 to 7 years after the initial investment, thereby turning their illiquid stakes in private companies into realized returns (Gompers, and Lerner, 2001). There are several exit routes for a venture capital fund in an effort to monetize their return. First of all, trade sales. This is where a company’s shares are sold to an industrial investor. These are the leading exit routes in Europe. Another exit route are secondary sales, or sales to another private equity house. This is the second most chosen exit strategy. And finally, public market exits, or initial public offerings (IPO’s). This last exit route has seen a significant increase the last couple of years (EVCA, 2017). Exit strategies are discussed more in depth in section 1.7.7.

1.6 Buyouts After an introduction in the private equity market through venture capital, we have arrived at the buyout stop. Whereas venture capital represents the early stage, buyouts represent the later stage investment category of private equity. In size, buyouts are more significant and the capital injections when dealing with buyouts are substantially bigger than venture capital. After explaining what buyouts are and in which forms they exist, the structure and the process of a buyout deal will be explained.

1.6.1 What are buyouts? In brief, buyouts, in all its different forms, are the purchase of a company’s shares in which the acquiring party gains controlling interest of the targeted firm (Investopedia, 2017). Since each type of buyouts is funded and structured differently, each one of them will be explained separately.

10

1.6.2 Types of buyouts Management Buyout (MBO) is a transaction where the management team of a company purchases the assets and operations of the business they manage (Investopedia, 2017). This classic type of buyouts involves the executive team who is managing a particular business activity, deciding to buy it out from the parent company or shareholders. In order to finance the deal, the management team puts their own money into the deal and are usually required to get a loan as well. In return, they are rewarded with sweet equity issued at preferential rates and ratcheted up to pre-agreed performance targets (Fraser-Sampson, 2010). Management Buy-In (MBI) is a form of buyout evolved from the MBO. MBI is a corporate action in which an outside management team purchases an ownership stake in the first company and replaces the existing management team (Investopedia, 2017). It is similar in just about every way as a MBO apart from the nature of the team or, otherwise, apart from the way in which the deal initially comes together. Instead of the established management team of a business getting together to buy it, an outside team comes together to buy another company operating in the same sector (Fraser-Sampson, 2010). The Buy-In Management Buyout (BIMBO) is a form of a buyout that incorporates characteristics of both a management buyout and a management buy-in. A BIMBO occurs when the existing management – along with outside managers – decides to buyout a company. The existing management represents the buyout part while the outside managers represent the buy-in part (Investopedia, 2017). When private equity investors, and often a management team, pool their own money (together with debt finance) to buy shares in a company from its current owners, we talk about Leveraged Buyouts (LBOs). The debt is usually provided by institutions, such as commercial banks, investment banks, and hedge funds. In larger transactions, the private equity firm is likely to be the majority equity holder (Wright et al., 2009). Leveraged buyouts are often accomplished by using a relatively small portion of equity and a relatively large portion of outside debt financing (Kaplan, and Strömberg, 2009). This can be compared to homeowners who take out a mortgage to buy a house, using only a small portion of their own money while borrowing the rest. The Secondary Buyout, as mentioned, is a popular exit method. Instead of being sold to a trade buyer, or exited by way of an IPO (initial public offering), it is sold to another buyout firm (Fraser-Sampson, 2010), thereby ending its involvement with the company in question (Investopedia, 2017). The secondary buyout provides a means to continue the buyout organizational form, but now with a different set of investors (Wright et al., 2009). Simply put, it is selling them to another private equity firm. This exit strategy has risen and since 2013 reached

11

the proportion of 55% of all the exits (EY, 2013). When a secondary buyout is sold to another firm once more, we speak of a tertiary buyout, and so on.

1.6.3 When do buyout firms intervene? Generally, buyout practitioners are concerned with established companies that are usually in the mature or decline stage of their relevant product life cycle (Fraser-Sampson, 2010). So, young or growing companies, looking for capital to still their cash-hunger, have too much uncertainty and risk for buyout firms. Fraser-Sampson (2012) explains this by the fact that no buyout firm can afford the risk of outright failure. This is important to keep in mind for the remaining part of this thesis.

1.6.4 How are buyouts structured? With the structure of a venture capital deal in mind, buyouts can be explained similarly. The buyout deal is usually financed by a private equity fund, set up as a limited partnership. Typically, members who contribute to the fund are pension funds, investment banks, insurance companies, wealthy individuals and the fund’s managers. By contributing a portion of the fund’s investment in a specific buyout, fund members diversify their risk. The fund will have an exit strategy with the aim of maximizing returns in terms of fees and dividends received, but the main source of return will be the generated exit value (Wright et al., 2009). First, the buyout identifies a target company which they would like to buy as one of the portfolio companies of their current fund, and agrees a purchase price with the company’s current owner (Fraser-Sampson, 2010). The biggest difference between buyouts and venture capital is that buyout firms, in order to close the deal, set up a special purpose vehicle (SPV) – in literature called “Newco”. This then acts as a holding company. Once this new company is set up, it will purchase the target company. This structure is illustrated in figure 1.

12

Management Buyout Fund

Debt Newco

Target Company

Figure 1: Buyout Structure

Often, the capital in the buyout fund does not cover the purchase price. Therefore, debt and mezzanine finance is issued so that the SPV can cover the purchase price. The SPV now has enough money to be able to pay the purchase price to the owner of the target company, receiving in return all the shares in the target, and becoming its 100% owner (Fraser-Sampson, 2010). The Buyout Structure as illustrated in Figure 1, has three advantages according to Hanney (1986). First of all, due to the SPV, the buyout team avoids any personal liability apart from financial involvement. Secondly, the Target Company can effectively finance its own acquisition and at the same time obtain tax relief for the interest costs. And finally, Newco provides a vehicle in which financiers can have an equity stake (Hanney, 1986).

1.6.5 Buyout Process After handling the structure of a buyout deal, the process is next. The Buyout process can be divided in three phases: the acquisition phase, the holding period and the divestment phase (Berg and Gottschalg, 2004). Figure 2 gives a schematic overview of the different stages and the corresponding tasks that have to be performed by the equity investor (Kaumann, 2009).

13

•Target Selection •Valuation Acquisition •Capitalisation phase •Negotiation

•Debt Paydown •Operational Efficiencies Holding •Growth Period

•Valuation •Equity Story Divestment •Negotiation Phase

Figure 2: Stage Model of the Buy Out Process

The first phase, the acquisition phase, is where the buyout process starts. Target selection, valuation, capitalization and negotiation are the main tasks. The acquisition phase is a critical step for the success of the buyout investment as a whole. During this phase, the investors familiarize themselves with the company and they also develop a business plan for the buyout (Berg and Gottschalg, 2004). The most important result from this phase is the valuation of the target company and the corresponding acquisition price. These negotiations make or break the deal. When coming to the end of the acquisition phase, the acquirer must make important decisions regarding the degree of financial leverage, the distribution of management equity stakes, the design of incentive systems, etc. (Berg and Gottschalg, 2004). Baker and Montgomery (1994) argue that a significant part of the value generation of a buyout is determined through the decisions taken in this first phase. In the holding period, the business plan is executed. This means that the strategic, organizational and operational change prescribed in the business plan are implemented and intended operational improvements are being realized (Berg and Gottschalg, 2004). This phase typically lasts between 3 to 5 years (in Europe), and it is the most crucial phase for the value creation in the buyout process (Oliveira, 2014). Last but not least comes the divestment phase. This means the end of the buyout, and determines the divestment strategy (such as trade sale, IPO, secondary buyout etc.). This final phase is a crucial part in the buyout process for investors since this is the moment that the

14

difference between the acquisition and exit price is calculated and the return on investment is rewarded (Berg and Gottschalg, 2004).

1.6.6 Value creation In the previous section, I discussed that the acquisition phase is responsible for most of the realized returns at the end of the buyout process. In this paragraph, we take a look at how this value is created and through which methods. Figure 3 is based on a slide from a class of Tom Vanacker in Advanced Corporate Finance on buyouts, and neatly sums up and illustrates the way a buyout firm can generate return on its purchase. Each designated method will be elaborated below.

Enterprise value = Multiple X EBITDA

DEBTS

DEBTS

EQUITY

EQUITY

Enterprise Value

E E

Time • Higher multiple • Increased EBITDA • Time • Repayment of debts

Figure 3: Sources of value creation

The most important one is “creating a higher EBITDA” (Earnings Before Interest, Tax, Depreciation and Amortization) by the time the exit is due. Raising EBITDA can be done by: (1) realizing higher sales volumes at the same selling prices and margins (2) realizing higher gross margins, either by using higher selling prices or by negotiating lower purchase prices (3) reducing costs by working more efficiently

15

(4) cleaning the balance sheet via reducing the working capital and selling off irrelevant assets. The second most important path in creating value is “time”: increasing the growth expectations and reducing the risk the firm is exposed to. The third option is the repayment of debt. By simply repaying the firms’ debt, the EBITDA will increase. Finally, the buyout firms hope that the multiple of the target company will increase by the time the firm is exited. Needless to say, this is not a sustainable investment policy.

1.6.7 Exit In section 1.5.3 I swiftly introduced the most popular exit strategies for venture capital. For buyouts, these same exit strategies are used and I will discuss each of them shortly. IPO’s (Initial Public Offering), also called flotation or listing, is the exit strategy whereby the shares of the company get listed on the stock market for the first time. As a result, the investor will be able to sell its shares to the public. One disadvantage is that the stock market can be very unpredictable and volatile. Also, the listing of the shares of a company is typical subject to strict regulatory requirements and restrictions, which can make IPO’s an expensive exit route (Investopedia, 2017). Trade sale is another commonly used exit route. Instead of going public, the private equity investor sells all of its shares held in a company to a trade buyer. This is a third party often operating in the same industry as the company itself. This is sometimes preferred because it can be done quickly and efficiently where the regulatory restrictions of the IPO are not present (HVCA, 2017). Secondary sale is the last of the three exit strategies. As mentioned before and as the name indices, secondary sales are sales to another private equity firm. The structure remains, but now another private equity firm can take over and add value. All of these business opportunities may not have presented itself without the private equity involvement (Cumming, Douglas, Siegel, and Wright, 2009). And in general, exits tend to take place 3-5 years after the buyout (Wright et al., 2007).

16

2. BOARD OF DIRECTORS This thesis examines the role of private equity firms in the board of directors of their portfolio companies. Having a good understanding of private equity, and in particular buyouts, now the other part of the research question will be treated: the board of directors. The focus of this section will be the role these boards have in their company. After explaining the board, part 4 will combine and examine the role of private equity firms in the board of their portfolio companies.

2.1 Corporate Governance (CG) I will use the definition of the OECD (Organization for Economic Co-operation and Development) to explain corporate governance (CG). Corporate governance is a set of procedures and processes according to which an organization is directed and controlled. These structures the distribution of rights and responsibilities among the different participants in the organization – such as the board, managers, shareholders and other stakeholders – and lays down the rules and procedures for decision-making (OECD, 2017). These rights, responsibilities, rules and procedures for decision-making are very important because we are looking at the role a private equity firm has in this structure. The primary reason for corporate governance is the separation of ownership and control, and the agency problems it engenders (John, and Senet, 1998). Corporate governance is concerned with creating incentives and control mechanisms to ensure that managers use firms’ resources in the interests of their shareholders and that they pursue value maximization. The dispersed ownership structure of the public corporation, while allowing risk to be efficiently allocated, is not beneficial to the effective monitoring of managers, because free-riding can occur (Jensen, and Meckling, 1976; Fama, and Jensen, 1983; Hart 1995; Thompson, and Wright, 1995). The incentive realignment hypothesis suggests that the reconsolidation of ownership and control in the post- buyout firm will improve managerial incentives (Wright et al., 2009).

2.2 Theories and Roles of Governing Boards Since board involvement is such a complex phenomenon, it is commonly suspected that no single theoretical perspective could adequately capture the entire process (Hung, 1998). Because there is no such exhaustive theory, I will use the typology written by Hung (1998) to discuss the theories on roles of boards of directors, as given in figure 4, in an effort to be as thorough as possible. It is important to take into account that private equity firms have a special structure and therefore could have implications in the corporate governance of the organization.

17

Figure 4: Typology of the theories of the roles of governing boards

2.2.1 Linking role and Resource Dependency Theory The first theory, the resource dependency theory, views the firm as an open system, dependent on external organizations for the supply of key resources (Pfeffer, and Salancik, 1978). The survival and success of a firm is thus contingent on the top management team’s ability to manage the dependency of the firm on external resource providers, in order to gain independence from its environment (Pfeffer and Salancik, 1978; Blau, 1964; Knockaert and Ucbasaran, 2011). They therefore seek to establish links in an attempt to regulate their interdependence (Hung, 1998). Roughly, the board functions as a link between the organization and the stakeholders around it. The resource dependency theory argues that a board exists as a provider of resources to executives in order to help them achieve organizational goals (Hillman, Cannella, and Paetzold, 2000; Hillman and Daziel, 2003). However, buyout firms do not possess all the tools and resources that their portfolio companies may demand. Then the private equity firms can call upon the network they have built throughout their career. They can use their network to offer their portfolio companies the tools and resources they lack, but indirectly have through their network (Lee, Lee, and Pennings, 2001). This way, private equity firms can have a linking role between their network and their portfolio companies.

18

2.2.2 Coordinating role and Stakeholder Theory The stakeholder theory takes into account other stakeholders than shareholders. A stakeholder, as defined by Freeman (1984), is “Any group or individual who can affect, or is affected by, the achievement of a corporation’s purpose.” Groups that meet this criterion are for instance employees, customers, suppliers, stockholders, governments, etc. Consequently, managers have special obligations to guarantee that all stakeholders (not just the shareholders) receive a fair return from their stake in the company (Donaldson and Preston, 1995). Hence, a company acts as a guardian of the interests of all its stakeholders. The board has to play a coordinating role, ensuring that its corporate actions take into account the principles of sustainability for surrounding communities (Academlib, 2017). This means that the board has to negotiate and compromise with stakeholders in the interest of the corporation (Hung, 1998). It is also the private equity firms’ role to align its portfolio company’s interests with those of its stakeholders. Stakeholder engagement has become an indispensable aspect of a modern company. It is hard to find academic literature on the way private equity firms deal with their stakeholders, however it can be found in practice. For instance, KKR (Kohlberg Kravis Roberts and Co.), a global private equity firm, places emphasis on its management of environmental, social and governance (ESG) issues. They see it as an essential part of long-term success in a fast- changing world (KKR.com, 2017).

2.2.3 Control role and Agency Theory The most common and popular governance theory is the agency theory. Agency relationships occur when a partner in a transaction (the principal) delegates authority to another (the agent) and the welfare of the principal is affected by the choices of the agent (Arrow, 1985). Applying to the corporate world, the shareholders act as principals and the executives as agents. The problem occurs when the shareholders cannot ascertain that the executives will act in their interest due to unaligned goals or different aversion levels to risk or information asymmetry (Wikipedia, 2017; Investopedia, 2017). The principal cannot perfectly and without a cost monitor the actions of the agent. Here the board is present in order to make sure their actions are in line with the objectives of the shareholders. This can be done through monitoring, installing incentives and other mechanisms. Conclusion, the board has a controlling role. When throwing private equity firms in the mix, we get a special kind of principal-agent relationship. First of all, since private equity investors are not the traditional shareholders, there are now two principals. This gives us a principal-principal-agent relationship. Further, the agency theory assumes that both the agent and principal are self-interested and boundedly rational

19

(Eisenhardt, 1989). Consequently, individual utility-maximizing behavior is likely to emerge if proper incentives and controls to align the goals of the entrepreneur with the VC are not enacted (Arthurs and Busenitz, 2003). Secondly, according to Arthurs and Busenitz (2003), the agency theory also differs throughout the life of a venture (before or after investment decision). A third implication for the agency theory combined with private equity is that private equity firms, acting as large shareholders, can put more pressure over managers than small different policyholders. This means that a “horizontal” agency problem can exist between the two principals (Mayers and Smith, 1981; Rasmussen, 1988; Krishnaswami and Pottier, 2002). This paragraph makes it clear that there are significant implications when combining the agency theory with private equity.

2.2.4 Strategic role and Stewardship Theory The second most important theory, the stewardship theory, is different from the agency theory because here it does not emphasize the two different parts of the company, being the shareholders and executives. This theory defines situations in which managers are not motivated by individual goals, but rather are stewards whose motives are aligned with objectives of their principals (Ghansoli, 2013). Whereas the agency theory portrays managers as opportunists, the stewardship theory believes they want to do a good job. There is no non-alignment between the agents and the principals. Here the governing board has a performance function or a strategic role (Hung, 1998). The board has to guide the company using the decided strategy to reach the objectives. Bender (2011) argues that the goal of both a venture capitalist and entrepreneur is to see the venture succeed. Needless to say, that the entrepreneur, who puts in the initiative, capital and energy, will do anything to see his company grow and flourish. The VC who puts in a huge amount of capital, aiming to gain a return on its investment, will also need the company to succeed. In this context, the stewardship theory can be applied to the private equity market (Bender, 2011).

2.2.5 Maintenance role and Institutional Theory The institutional theory is concerned with the pressure an organization undergoes due to institutionalization. Scott and Meyer (1983) consider that it includes all social rules and requirements to which individual organizations must conform if they will receive support and legitimacy (Hung, 1998). Here, the board has a maintenance role. This is necessary in response to

20

institutional pressure and focuses on training the organization by understanding and analyzing the environment and knowing how to cope with external pressure (Hung, 1998). The same pressure is also found for venture capitalists. According to Bruton, Fried and Manigart (2005), VCs are subject to different institutional forces which can influence their behavior.

2.2.6 Support role and Managerial Hegemony Managerial hegemony is the idea that governing boards are tools used by professional managers to lend support and validate their actions (Mace, 1971). It is the managers who both run the company and make the strategic decisions, instead of the board taking on the latter task. A word often used to explain this is “rubber stamping”. This means that the board only exists to accept the decisions of the executives and act as a legitimizing figurehead (Baker, 2010; Hung, 1998; Mahadeo et al., 2012; Thomson, and Bebbington, 2005). Hence, the role of the board is solely supporting the managers’ decisions and actions. By now it is clear that private equity firms provide the majority of the capital of a company. In return, they claim a huge say in the actions and goals of the company. It would be counterintuitive when the investors would blindly go along with the actions and decisions of the executive team.

2.2.7 Conclusion The theories and roles just described are not exhaustive. There are numerous papers and studies looking at the role of the board of directors. For instance, another role that is typically ascribed to directors is: control of the process by which top executives are hired, promoted, assessed, and, if necessary, dismissed (Adams et al., 2008). Most roles, however, can be accommodated under one of the roles discussed. Though most theories are applicable to venture capital, this most likely is also true for other private equity firms such as buyout firms.

21

3. ROLE OF PRIVATE EQUITY IN THE BOARD OF DIRECTORS Having dealt with both private equity and the board of directors allows us to combine both parts and have a look at the role a private equity firm can play in the board of directors of their portfolio company. Research by Sapienza et al. (1995) on the role of venture capitalists, focuses on three roles: strategic, interpersonal and networking. Each of these groups can be further divided as shown in figure 5. Almost every role found in literature can be placed in one of these groups.

Strategic Interpersonal Networking

Source of Sounding Mentor/ professional board coach contacts

Source of Friend/ Financier industry confidant contacts

Business Management advisor recruiter

Figure 5: Roles of venture capitalists

Though this gives a good first notion of what kind of roles we are talking about, the attentive reader has noticed that this research focused on venture capital firms, whereas this thesis primarily focusses on buyout firms. It could be argued that these roles are about the same for both private equity groups but Kaplan and Strömberg (2009) classify three types of value increasing actions regarding specifically buyout firms: financial engineering, governance engineering and operational engineering. It is important to read that these value-increasing actions are not necessarily mutually exclusive, but it is most likely that certain firms put more emphasis on some of the actions than others (Kaplan et al., 2015). This categorization will be used to take a look at the roles private equity firms appear to play in their portfolio company. In the first group of three, financial engineering, the private equity investors provide strong equity incentives to the management teams of their portfolio companies. At the same time, leverage puts pressure on managers not to waste money. This observation confirms previous work by Kaplan (1989), Kaplan and Strömberg (2009) and Acharya et al. (2013) in which they found

22

out that private equity firms put emphasis on strong incentives and remunerations. On average, private equity investors allocate 17% of company equity to management and employees (Gompers et al., 2015). In the second type of value increasing actions, governance engineering, private equity investors control the boards of their portfolio companies and are more actively involved in governance than public company directors and public shareholders. The last group, operational engineering, is perhaps the most relevant group regarding the research question of this thesis, since it explores the ways in which the private equity investors attempt to create value for their investments and add value to their portfolio companies. It is based on the idea that private equity firms develop industry and operating expertise, which they bring in to add value to their portfolio companies (Gompers et al., 2015). They also make a distinction between pre- and post-investment sources of value creation. These post-investment sources are important as well, as showed by a study by Baker and Gompers (2003), which suggests that the presence of private equity firms can affect firms long after they have left the board. According to Gompers et al. (2015), the pre-investment sources of value mainly include: increasing revenues, reducing costs, follow-on acquisitions and changing the company’s strategy and executives (these all fall under operational engineering). Other important sources of value are improving incentives and corporate governance. These belong under financial and governance engineering. Private equity firms appear to engage in differentiated investment strategies with different sources of expected value creation (Gompers et al., 2015). The same sources identified as important pre-investment remain important post-investment, except that many of them increase in importance (Gompers et al., 2015). Using the first table and the study of Gompers et al. (2015), we notice that both venture capital and buyout firms add value through similar means. Venture capital firms will, however, have a different impact since their portfolio companies do not exist as long as the portfolio companies of buyout investors. The premature nature of the companies, the higher entrepreneurial risks involved, the higher volatility of the business, the low degree of transparency and public accountability, are all factors that make the venture capitalist more inclined to actively monitor the venture-backed firms (Van den Berghe et al., 2002). Monitoring was greatest in early stage ventures, indicating that venture capitalists respond to high uncertainty by increased information exchange with CEO's (Sapienza et al., 1996). Within a strategic entrepreneurship perspective, private equity firms may provide complementary resources and capabilities that may be missing from the management team. Also,

23

some private equity firms may be much more skilled in how they implement monitoring and advisory devices as they are more effective at learning from experience to create distinctive organizational capabilities (Barney, Wright, and Ketchen, 2001; De Clercq and Dimov, 2008).

4. RESEARCH QUESTION It should be clear by now what this master dissertation will probe to unveil: the role of buyout firms in their portfolio company. I will only take buyout firms into account, and leave venture capital for future research for two reasons. As explained, buyouts are the most significant part of the entire private equity market. It is therefore a good place to start. Secondly, part of my research question studies the board of directors of an organization. Since venture capital-backed companies do not have “big boards”, if any at all, it is hard to study them. The roles of buyout firms are central in this study and lay the foundation for my first research question. Since buyout firms have to use their power through the board of directors, my RQ1 (Research Question 1) is:

What is the role of buyout firms in the board of directors of their portfolio companies?

This means that I will try to build a framework about which roles private equity firms can have, besides the primary role of financier. However, more than ever, fewer and fewer funds are purely generalist. Being a generalist means they have no sector or business type specialization. The majority of private equity funds have however decided to specialize in certain industrial sectors or services or in companies at a certain stage of development, of a particular size or with a specific geographical coverage (regional, national or international) (EVCA, 2007). With this, I want to show that no private equity firm is identical. Further, since each buyout firm operates in a different context and environment, other forces may be active. It is therefore important to take these differences between buyout firms into account when exploring the roles these firms play in their portfolio companies. Also, Berg and Gottschalg (2005) show that total value generation in buyouts is the result of a variety of value generating levers. These levers have an effect during different phases of the buyout, they also differ in the way they cause value generation and they can come from the target company or evolve out of the interaction between both the target company and the equity investor. Concluding, the second objective of this thesis is to develop a conceptual framework to discover the determinants that may influence the role buyout firms have. Here from RQ2 is deducted:

24

What are the determinants that influence the role of buyout firms in the board of directors of their portfolio companies?

Thorough research resulted in 6 possible determinants that can influence the roles of buyout firms in the board of directors of their portfolio companies.

4.1 Stage in Company’s Business Life Cycle (BLC)

Figure 6: The business life cycle

First of all, the stage of the lifecycle that the portfolio company is in could decide the role of the buyout firm. These stages are illustrated in Figure 6. The first stage, start-up or seed stage, is when the uncertainty is the highest and where especially business angels come into the picture (EVCA, 2007). In this stage, a board’s traditional roles are advising management, looking for partners and communicating with other stakeholders (Huse and Zattoni, 2008). In the next stage, the growth stage, the primary tasks of the board are taking strategic decisions, collecting information and data and giving specialized advice (Huse and Zattoni, 2008). However, the first and second stage are not relevant when looking at buyout firms. In the book “Private Equity as an asset class” by Fraser-Sampson (2010), it says that buyout practitioners are concerned with established companies that are usually in the mature or decline stage of their relevant product life cycle. Or as Peter Claes, Director Integration and Separation at KPMG, said at Capitant’s M&A

25

Track: Buyout firms stay away from risk as much as possible. Hence, buyout firms will not be active in the start-up and growth stage. Their field of expertise lays in the companies that are more established and find themselves in the mature or decline phase. When arriving in the last two stages of a business’ life cycle, the emphasis is now less on growth but more on planning, controlling and efficiency (Miller and Friesen, 1984). Here the board takes a monitoring role upon itself because there are already proven systems in place (Lynall, Golden, and Hillman, 2003). Now we have an idea which roles the traditional board of a company has in each stage. It is a good base to use as a first idea of which role a buyout firm will play in these stages. This results in 2 hypotheses, one for each stage where buyout firms are active in. Hypothesis H1A is backed by the fact that companies in the maturity stage are well defined and established. The main focus in this stage is making the organization sustainable for the long term (Pacific Continental, 2011). Further, Mathiasen (1999) found that the focus of the board in the maturity stage is to focus on recruiting a large board that has the capacity to give or have access to funders and donors, and influential people. This corresponds with the earlier described monitoring role. Therefrom it is deducted that, in the maturity stage, this role will be fulfilled by buyout firms.

H1A: The role of a buyout firm in the board of directors of their portfolio companies in the maturity stage is a monitoring role.

In the second and last stage, the decline stage, a lot of companies’ management puts its head in the sand and choose a denial attitude. There is also a lack of connection with the community, inability to recruit new funding sources, and/or low morale among the staff is trending (Pacific Continental, 2011). It is hard to get out of this status quo, and this change will most certainly not be obtained through a monitoring role. Agard (2010) sees that at this stage, a common need is to bring in an outside perspective to assist in the process and make appropriate decisions about the next steps of reinvention or dissolution. In effort to get to that reinvention or dissolution, the roles that are most appropriate are the strategic and linking role.

H1B: The role of a buyout firm in the board of directors of their portfolio companies in the decline stage is a strategic and networking role.

26

4.2 Fund Size Hochberg, Ljungqvist and Lu (2007) found that there was a positive and significant correlation between the funds’ size and their network. Building on these findings, a buyout firm with a relative big fund will more easily use its network than a smaller or newer fund. Although this affects only one role, there may be more roles affected by the size of the fund.

H2: Fund size has an impact on the role a buyout firm plays in the board of directors of their portfolio companies.

4.3 The Sector the Fund Invests in As a buyout firm, it makes sense to choose one or more sector(s) you want to specialize in. Sector specialization allows investors to make better evaluations of a business. In addition, the entrepreneur is able to deal with a specialist in his sector with whom he can share his strategic thoughts (EVCA, 2007). As mentioned in section 1.3.3, a wide variety of private equity firms with different characteristics, objectives and markets can be found. This makes it important to have a look at the different sectors buyout firms are active in, and if there is a difference between the sector and the role held by the investors. When looking at the point of view of the portfolio company a similar conclusion can be made. Each company is operating in a different context and each context demands different actions to survive. So, each industry will require a different role for the buyout firm.

H3: The industry where the firm is investing/specialized in has an impact on the role of a buyout firm in the board of directors of their portfolio companies.

4.4 Geographical Location Another factor that can motivate which role a buyout firm can play, is the geographical location of both the portfolio company and the buyout firm itself, also called the spatial proximity. Clearly, being close to the business allows for a better relationship between both investor and investee. This said, the geographical location is of most importance in the first stages of the portfolio company. When in the last stages, the geographical proximity is less important (EVCA, 2007). It is obvious that when both parties are located in different geographical regions, certain roles will be less convenient than others and some transaction costs could be higher. Monitoring

27

and supervision of an investment require face-to-face contact. The transaction costs related to these actions can be expected to rise as the geographical distance between the venture capital investor and the portfolio firm increases (Gompers, 1995; Lerner, 1995; Mason and Harrison, 2002; Sorensen and Stuart, 2001) because of longer travel times required for personal meetings and inspections on site (Fritsch and Schilder,2008). Investors would likely visit top management less when there is a time-consuming distance between the two. It is however important to realize that this spatial proximity has less of an impact on the last stages and these findings above are true for venture capital firms which typically invest in first stage companies. So, the impact may be smaller but still significant. This results in hypothesis 4:

H4: The spatial proximity between the buyout firm and the portfolio companies has an impact on the role of buyout firms in the board of directors of their portfolio companies.

4.5 Phase in Buyout Process Section 1.7.5 dealt with the buyout process which has 3 phases: the acquisition phase, the holding period and the divestment phase. It is most likely that depending on which phase the buyout process is currently in, the role of the buyout firm will change. This is the idea behind hypothesis 5:

H5: The phase in the buyout process has an impact on the role of buyout firms in the board of directors of their portfolio companies.

4.6 Background of PE Player A last possible determinant is the background of the private equity player. A study by Carter and Van Auken (1992) already discovered that the background of venture capitalists (business or non-business background) determines how the process proceeds. They say that a venture capitalist with, for instance, a technical background, may be more interested and will give higher priority to tasks and operations dealing with the technical side than a venture capitalist with a non-technical background. The latter may have a greater interest in the product, its market and competitors and will therefore put the focus of its strategy on these aspects. This also applies to banking, engineering, sciences, etc. This shows that, for venture capital, different private equity players with different backgrounds have a different perspective and will see different roles necessary to improve the companies’ performance. These conclusions for venture capital raise the question

28

whether this also applies when looking at buyout firms. The background of the buyout player is the last determinant I take into account.

H6: The background of the private equity player has an impact on the role of buyout firms in the board of directors of their portfolio companies.

Figure 7 gives a theoretical framework of the 2 research questions and the underlying hypotheses. All the possible roles a buyout firm can have, as discussed above, through the board of directors of their portfolio companies are summarized and divided in 6 groups based on the literature discussed above.

29

Buyout Firm

ROLES Determinants

1. Stage in BLC Controlling and monitoring

2. Fund Size Networking

3. Industry Management Incentives & Recruitment R

Q 2 4.

RQ 1 Mentoring & Expertise Advisor Geographical Location Strategic & Governing 5. Phase in Buyout Process Maintenance & Coordinating 6. Background PE Player

Portfolio Company

Figure 7: Theoretical Framework

30

Empirical Research Now that I have gone through the literature needed to build up and fully comprehend my research questions and hypothesis, I’ll continue with my empirical research. In the first part, I will lay out the methodology I used to retrieve my sample and I will explain how I collected my data. Next, I will discuss my hypotheses and variables and how these were measured through my questionnaire. This is followed by the results of my empirical research. These results are then turned into conclusions. I will end my thesis with limitations, paths for further research and implications.

5. Methodology 5.1 Sample and Data Collection Because this thesis is specifically directed at the role of buyout firms in the board of directors of their portfolio companies and since there is no or little data available regarding this topic, it was necessary for me to find a way to get in touch with these buyout firms. I defined my population as “all buyout firms”, with no exceptions. I decided to look at this population globally for two reasons. On the one hand, I picked buyout firms across continents in an effort to increase the validity and generalizability of my research. It is clear that when only conducting research in one country or region, the results will not be generalizable because there may be other factors and forces in place which are not accounted for. On the other hand, because I could contact all buyout firms throughout the world, my population and hence the ease of finding respondents increased significantly. It is no secret that it is not always easy to get in touch with the private equity world and its players and there is not a lot of data available on private equity. Buyout firms are not omnipresent, and certainly not in Belgium. So, now that I decided to look at all buyout firms across the world, I had to make a list of the buyout firms I was going to get in touch with. Again, there was nog exhaustive list or database where I could consult all the existing buyout firms, so I had to compile one myself. I first made a list with all the private equity firms I could possibly find. I used channels like Wikipedia, Google, and LinkedIn. Next, I checked all of the private equity firms and made sure they were active in the buyout market. If not, they were excluded. The 40 buyout firms I contacted are listed in Attachment 1. In order to get in touch with all of the buyout firms across the world, the most efficient and effective way for me was using the social media platform LinkedIn. This was even more appropriate when I was able to use the Premium LinkedIn profile of an employee who was at the time working at the HR firm Hudson. His premium profile, with over 500 connections, gave me

31

the possibility to see all the employees working within a buyout firm. This also gave me the option to filter the results in a way that I could only see the employees with a function in “venture capital and private equity”. Having found 40 buyout firms, I looked for all the relevant employees working within each firm. I made a list with all the names of the potential respondents. This resulted in a list of almost 500 people. Next, I used my personal LinkedIn profile to send out a message explaining my research question and asking for a connection. Three weeks of inviting respondents on LinkedIn, making phone calls, sending mails, etc. resulted in over 100 connections on LinkedIn. I then sent them a message asking to fill out my survey and to send the link to their colleagues and friends. I also asked several influential people to share the link to my survey on LinkedIn. This resulted in almost 3000 views. These efforts resulted in 44 respondents. This may seem like a relative low response rate, but this was partially expected because off the hard-to-reach characteristic of the buyout sector as well as the private equity sector in general. Some respondents even explicitly wished me good luck because they acknowledged the fact that it is not evident to communicate with private equity firms. However, the unit of analysis of my research is not the respondent himself but rather the portfolio company. I chose this unit because I want to analyze the role of buyout firms in these companies. And since each investment manager has a role in more than one portfolio company, it was more logical and effective to ask each respondent to the different roles they have in different portfolio companies. But because there were also respondents with a more general function, I had to make a distinction between two kinds of respondents. The first one being “Investment Manager” and the second one having a “General Function”. The respondents in this last group do not have a role in the portfolio company but rather have a role in the buyout firm itself. For example, CEO’s and CFO’s filled out the survey as a “General Function”. The method described above increased the data points to more than the 44 respondents. Thirty-four respondents answered as an investment manager and half of them filled out the survey for 2 or even 3 portfolio companies. This resulted in 56 data points. The “General Function” answers lead to 10 data points. As will be proven later on, it is not accurate to accumulate both groups. However, when analyzing the results, it was interesting to have both perspectives in order to confirm or contest my observations.

32

5.2 Questionnaire This section will lay out the structure and questions of my survey. The questionnaire was divided into three sections. The first section asked general questions about the buyout fund, more specifically the size and location of the fund, and the professional background of the private equity player. These were respondent-dependent, and not portfolio company dependent and thus only had to be asked once per respondent. The next question determined the set of questions each respondent was given. As briefly mentioned, there were 2 options: Investment manager and General function. The first one was described as “If you have a role in the portfolio companies of the buyout firm in any way”. The second option was recommended “If you have a role in the buyout firm itself rather than in the portfolio companies of the buyout firm”. This distinction was necessary due to the method by which I collected my respondents. Since I sent my survey to hundreds of people across the world with dozens of different jobs title’s, it was most likely that some of the respondents, who were CEO’s CFO’s, … were not active in the portfolio company itself but still have valuable information for my research. By giving them a different set of questions, I made sure to get as much information as possible from all my respondent. After this, depending whether the respondent selected Investment Manager or General Function, they were asked to answer a different set of questions. All the questions for the investment managers were portfolio company dependent. They were asked to keep in mind 1, 2, 3 or 4 portfolio companies in which they had or have a role. They were asked to choose the most diverse companies they can think of. They were then given a set of questions about the individual portfolio company such as: the location, industry, phase in the buyout process and phase in the business life cycle. Then the role the respondent had in the particular portfolio company was questioned. This can be found in the second part of Attachment 2. Depending on the number of portfolio companies the respondent had in mind, these portfolio company dependent questions were asked again 1, 2 or even 3 times. On the other hand, when the respondent had ticked off the General Function option, I could not question independent portfolio companies. In this case, I asked the same questions as discussed above but in the point of view of the buyout firm itself. For example, I now asked the industries the buyout firm invests in instead of asking in which industry the portfolio company is in.

33

I used Qualtrics for making and sending out my survey. Now that you have a clear understanding of what I asked my respondents, the next section will combine these questions with my research questions and hypotheses.

5.3 Hypotheses and Variables First of all, to be able to answer my first research question I questioned the respondents about which roles they play in their portfolio companies. I used the roles as illustrated in the theoretical framework given in figure 7. I gave all the 6 roles, with definition to avoid confusion and overlap, and asked whether they have this role for the portfolio company they have in mind. These roles, including definition, can be found in Figure 8 in the next chapter. To deal with research question 2, I have to answer all 7 hypotheses. These are listed below in order to give a clear overview. • H1A: The role of a buyout firm in the board of directors of their portfolio companies in the maturity stage is a monitoring role.

• H1B: The role of a buyout firm in the board of directors of their portfolio companies in the decline stage is a strategic and networking role.

• H2: Fund size has an impact on the role a buyout firm plays in the board of directors of their portfolio companies.

• H3: The industry where the firm is investing/specialized in has an impact on the role of a buyout firm in the board of directors of their portfolio companies.

• H4: The spatial proximity between the buyout firm and the portfolio company has an impact on the role of buyout firms in the board of directors of their portfolio companies.

• H5: The phase in buyout process has an impact on the role of buyout firms in the board of directors of their portfolio companies.

• H6: The background of the private equity player has an impact on the role of buyout firms in the board of directors of their portfolio companies.

The first two hypotheses are concerned about the stage of the business life cycle the portfolio company is in. For the investment managers, I simply asked in which stage the portfolio company is in. The general functions are asked in which stages the buyout firm invests in.

34

For hypothesis 2, I made a distinction between 4 fund sizes. The 4 sizes are Small (<500mln), Mid-Market (501mln-1,5bn), Large (1,6-4,5bn) and Mega (>4,5bn). The respondent is simply asked in which category the buyout firm is placed in. Hypothesis 3 is handled similarly. I asked in which industry the portfolio company is in. For the general functions, I asked in which industries the buyout firm is active in. For hypothesis 4, I needed to determine whether the spatial proximity has an influence on the role of buyout firms in the board of directors of their portfolio companies. First I asked the location of the headquarter (HQ) of the buyout firm. I then asked for each portfolio company in which region it is located. When this region is different than the one operating in, spatial proximity may have an impact. The phase of the buyout process, which comes up in hypothesis 5, is the next variable asked for. There are three possible phases: acquisition phase, holding period and divestment phase. I simply asked in which phase each portfolio company is in, or in which phase the buyout firm invests. The last hypothesis looks at the background of the buyout firm. To determine the background, I asked in which sectors the respondent has experience in. This section gave a clear overview of why each question was asked and how data for each hypothesis was gathered. Now that the reader is up to speed regarding the methodology I will start to discuss the results of my survey.

5.4 Results In this part, I will discuss the results of my 44 respondents. To revise, I received 44 responses. 10 of which filled out the survey as General Function and 34 as Investment Manager. This translated into 56 portfolio companies and 10 buyout firms. An important remark is that each sample size, between the different determinants, will be different. Therefore, throughout the course of this section, I will discuss the data in a relative manner. For RQ1 this means that I divide the number of times that each role has been selected by the entire sample. For the determinants in RQ2 I will divide the number each role has been selected by the number of portfolio companies in the corresponding group. For instance, the Networking role has been selected 7 times in the portfolio companies that are in the maturity stage. In the maturity stage are 17 portfolio companies. Here from I get 41% or 7 divided by 17. I will refer to this methodology using the abbreviation RRS% (Relative Role Selection %).

35

5.4.1 Research question 1 Before going more in depth about the roles and its determinants in RQ2, RQ1 focuses on which roles buyout firms have in the board of directors of their portfolio companies. In order to get the data from my respondents to answer this question, I asked each one of them which roles they have in each portfolio company. Each respondent could answer for more than one portfolio company, they had to choose between 6 roles and multiple answers were possible. The roles and the corresponding definition, as showed to the respondents, can be found in Figure 8. It is important to have a good grasp of the 6 roles and what they mean in order to understand the following results and conclusions. In order to increase the comprehensibility, I will use the same colors as used in Figure 8 throughout the rest of this thesis for each role. The 6 roles are the same as in my theoretical framework from section 4. All the roles I found in existing literature have been summarized and grouped into these 6 roles.

Management incentives & Controlling & Monitoring recruitment Networking Verifying whether everything occurs in Recruiting executives and building conformaties with the plans adopted, Providing own network to portfolio executive teams for portfolio instructions issued and principles company. companies and providing strong equity established. incentives to the management teams of the portfolio companies.

Mentoring & expertise Maintenance & Strategic & Governing advisor coordinating Creating and helping with strategic Dealing with institutional pressure Using built expertise to advise and objectives and challenges and/or and/or negotiating and compromising guiding the portfolio companies and developing a governance system. with stakeholders and/or analyzing providing support. the external environment.

Figure 8: The 6 Different Roles

Now I will discuss the answers to this question in my survey. I will do so by drawing up some clear and revealing figures of the responses I received. The conclusions drawn from these, and following results, will be presented in section 5.6. The distribution between the 6 different roles for the 56 portfolio companies can be found in Figure 9. The percentage between brackets is the RRS%.

36

60 Sample Size = 56 49 (88%) 50 47 (84%)

38 (68%) 40 35 (63%) 33 (59%)

30

20 17 (30%)

10

0 Controlling Strategic & Networking Mentoring & Management Maintenance and Governing expertise incentives & & Monitoring advisor recruitment coordinating

Figure 9: Role Distribution (Portfolio Companies)

Going from most selected on the left, to least selected on the right, we clearly see a difference. We can see that Controlling & Monitoring was selected 49 times, and took the first place. This means that out of the 56 portfolio companies, 88% stated to have this role in their portfolio companies. This is also the role that in previous literature often came forward as the most prominent role of private equity firms. It is only normal that when private firms are investing huge amounts of capital into portfolio companies, the least they want is to oversee where their money is going and what they are doing with it. The private equity firm wants to verify whether everything occurs in accordance with the plans adopted, instructions issued and principles established. With two portfolio companies less, Strategic & Governing places itself on the second most selected role. This was a role in 47, or 84%, of the portfolio companies. All these portfolio companies had a buyout firm which created and helped with strategic objectives and challenges and/or developed a governance system. In the middle, we find Networking (with 38 picks or 68%), Mentoring & Expertise Advisor (with 35 picks or 63%) and Management Incentives & Recruitment (with 33 picks or 59%). These roles are still present in more than half of the portfolio companies. Buyout firms seem to provide their own network to their portfolio company. They also use their accumulated expertise to advise and guide their portfolio companies and provide support. Thirdly, they recruit executives and build executive teams for their portfolio companies and provide strong equity incentives to the management teams of their portfolio companies. The last role is the role where buyout firms deal with institutional pressure and/or negotiate and compromise with stakeholders and/or analyze the external environment. This was defined as

37

Maintenance & Coordinating. Allegedly, only 17 portfolio companies got help, regarding this aspect, from the buyout firm. This is only 30 % or less than 1 out of 3 portfolio companies. I will now apply the same method but for the 10 respondents who answered as GF. This cannot be added to the previous results because here the unit of analysis changes: not the portfolio company but rather the buyout firm itself becomes the unit. With only 10 buyout firms, these results are less reliable. Nevertheless, it can be an indication that the previous results are accurate if the same trend is visible between the roles.

10 9 9 Sample Size = 10 9 8 8 8 8 7 6 5 5 4 3 2 1 0 Strategic & Management Controlling Networking Mentoring & Maintenance Governing incentives & and expertise & recruitment Monitoring advisor coordinating

Figure 10: Role Distribution (Buyout Firms)

Though we clearly see a different sequence of colors compared to the 56 portfolio companies, the difference between the first 5 roles is caused by only one respondent’s answer. These 5 roles are present in 80 or 90% of the buyout firms. This can be explained by the perspective of this question. A buyout firm has a lot of different portfolio companies and a wide toolset which they can use in order to add value to their portfolio companies. There are few roles they cannot have and thus they might select, on average, more roles than when asking the roles for one specific portfolio company. However, we do see that, again, the role of Maintenance & Coordinating is last. Only half of the buyout firms state that they take this role upon themselves. This was also clear at the previous figure and seems to be a recurring result.

5.4.2 Research question 2 My second research question deals with the determinants of the roles discussed in the first research question.

38

The business life cycle is the first likely determinant. While looking at the distribution between the different stages of the business life cycle, a surprising result was found. It was, based on previous literature, expected that most portfolio companies would be in the maturity and decline stage. However, zero portfolio companies and only one buyout firm were in the decline stage. The majority of the portfolio companies were in the growth or maturity stage. This distribution can be found in Attachment 3. Consequently, I will not be able to draw results for hypothesis H1B. I will, however, look at hypothesis H1A and also, since I have the data available, I will have a look at the portfolio companies in the growth stage. I took all 56 portfolio companies and filtered out the ones that are in the maturity stage. This left 17 portfolio companies in the sample. I then looked at the roles for these companies. The results are shown in Figure 11 below.

1 Sample Size = 17 88% 88% 88% 0,9 84%

0,8

68% 0,7 65% 63% 59% 59% 0,6

0,5 41% 0,4 30% 0,3 24%

0,2

0,1

0 Controlling and Strategic & Networking Management Mentoring & Maintenance & Monitoring Governing incentives & expertise advisor coordinating recruitment

Figure 11: Maturity Stage

Comparing the color-order with the previous results (on the right side of each pair), it looks almost the same. Controlling & Monitoring and Strategic & Governing are, again, unmistakably selected most. These are also followed by the next 2 roles which are, percentage wise, almost similar to figure 9. And also in line with previous results, Maintenance & Coordinating is selected least. The only difference is that Management Incentives & Recruitment and Mentoring & Expertise Advisor have switched places. Mentoring & Expertise Advisory appears to be less

39

common relative to Management Incentives & Recruitment. This role is only selected by 41% of the portfolio companies whereas before, 63% of the portfolio companies selected this role. The other roles have almost exactly the same percentages. This result can be backed by previous discussed literature. Lynall, Golden and Hillman (2003) already argued that in the last two stages of the business’ life cycle (maturity and decline) the board takes a monitoring role because there are already proven systems in place. Mentoring and Expertise Advisory is less called upon in this stage because these portfolio companies are already well defined and established. As stated before, I have no single portfolio company that is indicated to be in the decline stage. Since the majority of the portfolio companies are in the growth stage, it might be interesting to have a look at these companies.

1 86%88 % Sample Size = 37 0,9 84%84 %

0,8 73% 70% 68% 0,7 63% 59%59 % 0,6

0,5

0,4 35% 30% 0,3

0,2

0,1

0 Controlling and Strategic & Mentoring & Networking Management Maintenance & Monitoring Governing expertise incentives & coordinating advisor recruitment Figure 12: Growth Stage

Compared to the first research question, figure 12 shows that the first 2 and the last 2 are standing at the exact same place. Compared to the number of portfolio companies, they have been selected the same number of times. And, however Networking has gone down from the third to the fourth place, it has been selected by 70% of the portfolio companies that are in the growth stage compared to 68% by all of the portfolio companies. This is not a significant difference. The shift of place can be ascribed to the Mentoring & Expertise Advisor role. Before, this role was selected by 63% of the portfolio companies. Now, when only looking at the portfolio companies in the growth stage, 10% more companies selected this role (or 73%).

40

This can also be explained by existing literature. Huse and Zattoni (2008) state that the primary tasks of the board in the growth stage are taking strategic decisions, collecting information and data and giving specialized advice. The strategic decisions are reflected in Strategic & Governing role. Collecting information and data can be translated in the role of Networking & Expertise Advisor. Giving specialized advice is almost the same as the Mentoring & Expertise Advisor. It is this role that shifted upwards when in the growth stage and thus lays in line with previous research. Above I analyzed the first hypothesis of RQ2 and tried to find an underlying reason for the movement each role made when looking at different stages in the business life cycle. We saw that the implementation of these roles shift up and down and that the roles are selected differently across different stages. This insight is needed to come up with sound conclusions on this determinant and will be given in the next chapter. The second hypothesis looks at fund size as determinant. The sizes where the respondents could choose from are Small (<500mln), Mid-Market (501mln – 1,5bn), Large (1,6 – 4,5bn) and Mega (>4,5bn). The distribution between the sizes is given in Attachment 4. Precisely half of the responses (22) came from a Small fund. Mid-Market came second with 14 responses. The remaining responses is evenly shared between Large and Mega funds with each 4 funds. Figure 13 first needs some clarification. The role is on the x-axis and I made a differentiation between the different fund sizes. The most left bar in each color is a Small fund, followed by Mid- Market and so on. The last bar, highlighted with a black line, is how the role was selected in RQ1 and thus when looking at all the portfolio companies together. By comparing, for each role, the 4 bars with the last bar, it is able to see whether or not fund size determines the role and if it deviates from the entire sample or not. I want to highlight that there are only 2 Mega funds and that as a result the fourth bar is very unstable and not as representative as the other 3 fund sizes.

41

SAMPLE SIZE = 31/15/8/2

% % % %

100 100 100 100 %

93 % %

% % % 88 88 87

84 84 %

% 77

%

73 % 71 % %

68 % % % 67 67

% 63 63 63 % 59 58

% % %

50 50 50 % 45

% % % 33

32 30 % 25

% 0

CONTROLLING STRATEGIC & NETWORKING MENTORING & MANAGEMENT MAINTENANCE & AND GOVERNING EXPERTISE INCENTIVES & COORDINATING MONITORING ADVISOR RECRUITMENT

Figure 13: Fund Size

There seems to be a difference when looking at different fund sizes and the roles the buyout firms have. For instance, when looking at Controlling & Monitoring the difference between the highest and lowest RRS% is 16%. For Strategic & Governing, Networking, Mentoring & Expertise Advisor, Management Incentives & Recruitment and Maintenance & Coordinating the RRS% difference is respectively 23%, 38%, 17%, 22% and 33%. This difference is caused by the different fund sizes. If fund size would not affect the roles of buyout firms, the bars would all have the same percentages for each role. After fund size, the next determinant is the industry where the portfolio company is in. The respondents could choose between 12 industries. These, together with the distribution of the portfolio companies, are given in Attachment 5. The portfolio companies were most found in the Industrials, Business Services, Information Technology and Healthcare industry. I could analyze the 12 different industries and try to see which roles are more present in which industries. However, this is not the objective of this thesis. I am trying to figure out which determinants have an influence on the role of a buyout firm. This is the reason why I chose the design of figure 14. The important story behind this graph is the movement. If the industry is not a determinant, the lines would not be going up and down when switching from industry to industry from left to right. Hypothesis 3 asks whether the role of a buyout firm is dependent on the industry

42

the firm is investing/specialized in. This graph makes it able to draw conclusions regarding this question. Although there seems to be a lot of movement, it is dangerous to jump too quickly to these conclusions. First, you have to look at each role individually and figure out how big the movement is. Also, having a relative sample size, movement is more easily created. I will take these considerations into account in the conclusions chapter.

43

SAMPLE SIZE = 22/17/13/6/24/20/46/27/14/6/20/2

Controlling and Monitoring Strategic & Governing Mentoring & expertise advisor

Management incentives & recruitment Networking Maintenance & coordinating

60%

50%

40%

30%

20%

10%

0%

Figure 14: Experience

44

For the next hypothesis, I needed to determine the spatial proximity between buyout firm (respondent) and the portfolio company. When we look at the location of the buyout firms’ HQ, as shown in Attachment 6, we notice that the majority (75%) of the respondents was sending from the Benelux. The reasoning behind this result could be that respondents living in the same geographical region as I do, and people affiliated with the university I am writing for, are more easily inclined to answer the survey. For respondents on the other side of the globe, a random survey from an unknown university may be more easily ignored. When looking at the other actor needed to determine spatial proximity we see a similar result. The majority of the portfolio companies is also located in the Benelux. The other part is found in the rest of Europe. Only one portfolio company is located in Asia. This trend is the same for the 10 buyout firms. Based on my sample, it seems that most buyout firms invest in portfolio companies nearby. This can be explained by several reasons, which were also discussed in section 4.4. It is harder to play a role in a company that is located overseas than one close by. Even more, Gompers et al. (1995) stated that transaction costs can be expected to rise as the geographical distance between the investor and the portfolio firm increases because of longer travel times required for personal meetings and inspections on site (Fritsch and Schilder, 2008). Also, industries that are located further away are less known by the investor and they might want to stick with their specialty and in the field of expertise they know best. Now that we have both the location of the buyout firm and the portfolio company, the difference between both variables can be used as the spatial proximity determinant. I put both sides against each other and looked whether there is a geographical distance between the buyout firm and the portfolio company. After comparing the 56 portfolio companies with the 44 respondents’ HQ’s, the result is that only one of the portfolio companies was located far enough to suspect spatial proximity. When both sides were located in the Benelux or the same country, as was the case for this data, the distance should not be a concern. The HQ of this one fund was found in New York whereas the portfolio company is located in Mumbai, India. Unfortunately, this lack of data means I do not have sufficient data to analyze hypothesis 4.

45

The second last hypothesis looks at the buyout process as discussed in the literature review part. Attachment 7 shows the different stages in the buyout process and the number of portfolio companies that are in each stage. More than 60% of the portfolio companies are in the holding period. Second is the exit, and last, we find the acquisition phase. The order for the buyout firms is not the same. First is the holding period, second the acquisition phase and the exit comes last. Now that we have an idea of the descriptive statistics on the buyout process, I will examine whether the phase determines the role a buyout firm has in the board of directors of their portfolio companies. Figure 15 below shows this comparison.

120%

100%100 % 100% 92% 83% 83% 75% 75% 77% 77% 80% 66% 63% 63% 62% 62% 60% 54% 54%

40% 25% 20% 20%

0% Acquisition phase Holding period Exit

Controlling and Monitoring Strategic & Governing Networking Mentoring & expertise advisor Management incentives & recruitment Maintenance & coordinating

Figure 15: Buyout Process

When comparing the biggest group, the Holding Period, with the results from RQ1, we see that the color sequence is exactly the same. When looking at the percentage of each role being selected, this is almost exactly the same as the entire sample as well. This result could either mean that the holding period does not demand other roles to be executed or that this phase is overrepresented in the entire sample and thus behaves in line with the entire sample. The Exit is the second biggest group. Mentoring & Expertise Advisor has gone to the last place. In this phase, Management Incentives & Recruitment and Maintenance & Coordinating has been selected more than Mentoring & Expertise Advisor. The difference seems small, being 8%, but it is a huge difference that here Maintenance & Coordinating has been selected in 62% of the portfolio companies in the exit phase, whereas in the holding period this role has only been selected

46

in 20% of the portfolio companies and 25% in the acquisition phase. In the entire sample, the grey role had been selected in 30% of the portfolio companies. The rise from 30% to 62% should be examined further and will be discussed in the conclusion section. The Acquisition Phase is the smallest and thus also the less stable of the three. Taking into account this small sample, the roles distribute almost the same when comparing to the entire sample. Only Management Incentives & Recruitment appears to increase in times selected relative to the number of portfolio companies in this group. This will also be discussed more in depth in the conclusion section. In order to get data to deal with the last hypothesis, I asked the respondents to select the fields they have experience in. The resulting bar chart is given in Attachment 8. I gave the respondents the option between 26 industries, based on the NACE code. One respondent could select multiple experiences, so the total exceeds the number of respondents. In order to be able to work with the data, I had to split up each respondent’s answer. If someone had experience in A, B and C, I had to duplicate this into three portfolio companies where each portfolio company has either A, B or C as experience. This methodology resulted in 147 data points instead of 56. First I counted the number of respondents that had experience in each category. I set the limit at 4 or higher, groups with less than 4 would be considered unreliable. As a result, 9 experiences were removed from the dataset. Next, I divided the number of times each experience selected each role by the total number of respondents within each role. For example, from the 20 respondents who had experience in Accountancy and Finance, 18 selected the Strategic & Governing role. 18 divided by 20 gives me 90%. Doing this for all the experiences, I had a more reliable and comparable dataset. With this matrix, I could see whether the experience is a variable that influences the role of the respondent. I am not searching for the experiences that select certain roles more, but simply whether experience influences the role at all. Trying to answer this question I generated the graph, given in figure 16, in a same way as for hypothesis 3. This allows us to see whether there is movement for each role when going from one experience to another. If the experience was not a determinant, the lines of the roles in the graph would not be allowed to move up and down when switching from experience on the x-axis. This will be discussed more in depth in the next chapter. In this section, I looked at all the responses of my questionnaire and represented the data in such a way that I am able to come up with conclusions in the next chapter. I also looked at the movements and the reasons behind these changes in order to make sure that these were accounted for. The next chapter will go a step further and analyzes the data using regression analysis.

47

120%

100%

80%

60%

40%

20%

0%

Aantal van Strategic & Governing Aantal van Controlling and Monitoring

Aantal van Networking Aantal van Mentoring & expertise advisor

Aantal van Management incentives & recruitment Aantal van Maintenance & coordinating

Figure 16: Experience

48

5.5 Regression Analysis Now I will apply regression analysis on my data instead of using a frequency method. Although my sample does not have the ideal size, it might confirm certain results or give an idea which determinants are significant and which are not. The regression analysis is conducted using the statistical program SPSS. The 6 roles are my dependent variables. These are dichotomous since the respondent could either select the role or not. This means that I will use logistic regression and I will do this 6 times, once for each role. Linear regression is not applicable since some of the assumptions are not met. Multinomial logistic regression was not an option because the dependent variables were not exclusive. The independent variables are: business life cycle, fund size, industry and buyout process. As mentioned before, spatial proximity has too little data and experience would be too complex to analyze in a regression analysis. I transformed each variable so that it was usable for statistical analysis. This means that I gave every group within a variable number. For instance, the variable fund size got a 1 for Small, 2 for Mid-Market, etc. The 6 roles acted as dependent variables and the 4 determinants as covariates. Because of the nominal characteristic of some of the independent variables, I made sure the logistic regression model created dummy variables for business life cycle, industry and buyout process. The variable fund size is ordinal and does not require a dummy. The results of the 6 binary logistic regressions can be found in Attachments 9.1 through 9.6. The Omnibus Test of Model Coefficients gives the appropriateness of the model and indicates the explanatory value of the model. For Controlling & Monitoring the chi-square is 15,374 with 17 degrees of freedom and is not significant, as illustrated in attachment 9.1. Translated into words, this means that this model does not fit the data or has a low explanatory value. Only Networking and Mentoring & Expertise give a significant result for the Omnibus test and thus only 2 from the 6 roles are tested using a correct model according to this test. This does not seem very promising and to make sure of these results I also looked at the Hosmer and Lemeshow test. This is not significant in any of the 6 roles but the interpretation is the opposite of the Omnibus test. When it gives an insignificant result, the data does fit the model. However, a characteristic of this test is that it gives a positive result when the sample size is too big or too small. Unfortunately, my sample size could be defined as too small. With this in mind I will discuss the results of the logistic regression. As can be seen in Attachment 9, there is no consistent result. There are only 2 roles which give a significant result. For the role Management Incentives & Recruitment only the fund size comes up as significant at

49

a 5% level. For the least popular role Maintenance & Coordinating, the buyout process seems to be significant. The interpretation of a logistic regression is not the same as the linear regression model. The correct interpretation for fund size is the following. The ratio of selecting the role / not selecting the role increases with 323% ((4,230-1)*100%) when fund size increases from small à mid- market, mid-market à large and large à mega. For the exit phase, in the Maintenance & Coordinating role, the interpretation is different. Here, the odds of selecting the role decreases with almost 100% when comparing to the acquisition phase. But only one of the three stages came up significant over the 6 different roles. This is not a very reliable result and we cannot deduct from these results that the buyout process is a determinant. Concluding, when looking across the 6 roles, only 1 determinant (fund size) came up significant once. This gives the regression model as illustrated in figure 17.

Figure 17: Logistic Regression Model

The overall results from the logistic regression analysis are very extreme, unreliable and not trustworthy, as illustrated by the the Omnibus Test of Model Coefficients, the Hosmer and Lemeshow test and the unusual numbers. It does however indicate that fund size and buyout process could influence the roles of buyout firms in the board of directors of their portfolio companies. It is not appropriate to draw conclusions from this model since the significant determinants were not consistent over the 6 roles. Fifty-six portfolio companies were not sufficient when looking for determinants through logistic regression. As a consequence, I will not carry these results forward to the conclusions part of my thesis. For the completeness of my analysis I also looked at possible interaction terms. I took the only remaining determinant, size, and added the possible interaction terms one by one. I did this for the 6 roles giving 36 possible interaction terms. None of these came up as significant. This can also be ascribed to the data constraint.

50

5.6 Conclusion Buyout firms are omnipresent these days, and as demonstrated this trend is promising for the future. This omnipresence also means that it is important to have a good understanding regarding buyout firms. Existing literature briefly discusses the roles of buyout firms in the board of directors of their portfolio companies but to date I did not find any framework mapping the roles and determinants that influence the presence of these roles. This paper discusses and questions the roles and determinants based on existing literature. I contacted over 500 people globally through LinkedIn wherefrom more than 100 accepted my invitation. This resulted in 44 respondents. I questioned my respondents with buyout-, respondent- and fund-dependent questions in order to get the data I needed to be able to answer my 2 research questions. Using this data, I examined each determinant and whether these determinant influences the roles the investment managers had in their portfolio companies. The end goal of this chapter is to adjust my theoretical framework from before and turn it into a conceptual model which grasps the roles and determinants buyout firms have in the board of directors of their portfolio companies. The answer to my first research question and thus the roles that are mostly executed by the buyout firms can be found in Figure 9. This figure shows each role and what percentage of the sample indicated to have each role for their portfolio company. Controlling & Monitoring and Strategic & Governing is undeniably dominant. These roles, even considering my relative small sample, distinguish themselves from the other roles and are not affected by the determinants investigated. Networking, Mentoring & Expertise Advisor and Management Incentives & Recruitment is to be considered as the average role because they are not as present as the first 2 roles, but they still distinguish themselves from the last role. They are present in more than half of the portfolio companies and are definitely an important task of the buyout firm. The only role that is not as significant as its forerunners is Maintenance & Coordinating. Only 30% of the investment managers have this role, and under certain determinants this percentage drops even lower. Buyout firms appear not to put a lot of time, importance and priority to dealing with institutional pressure and/or negotiating and compromising with stakeholders and/or analyzing the external environment. Knowing which roles buyout firms have in the board of directors of their portfolio companies is already half of my thesis. Digging deeper, I examine which determinants, based on existing literature, influence the roles of the buyout firms. The 6 determinants I take into account are the stage in the business life cycle, fund size, industry, spatial proximity, phase in the buyout process

51

and experience or background of the investment manager. I looked at each determinant one by one and discovered that only the business life cycle, fund size, buyout process and experience determine the role of buyout firms in the board of directors of their portfolio companies. For the other 2 determinants, I did not have significant respondents to look at the spatial proximity and the industry proved not to be a determinant. Business Life Cycle. When looking at the maturity stage, we see that Mentoring & Expertise Advisor has been selected in 41% of the portfolio companies, compared to 63% of the entire sample. This already indicates that the stage in the business life cycle affects the roles the investment managers have. This is confirmed when looking at the growth stage. Here, the Mentoring & Expertise Advisor role has been selected in 73% of the portfolio companies, compared to 41% in the growth stage. So, based on these findings, depending on which stage the portfolio company is in, the roles of the investment managers change. Or in other words, the business life cycle determines the role of buyout firms in the board of directors of their portfolio companies. Existing literature provides theories which confirm these results. Lynall, Golden and Hillman (2003) state that in the maturity stage, mentoring and expertise advisory is less called upon because these portfolio companies are already well defined and established. And in the growth stage, Huse and Zattoni (2008) discuss that the primary tasks of the board are taking strategic decisions, collecting information and data and giving specialized advice. This last task is in this study the same as mentoring and expertise advisor. Fund Size. When going back to Figure 5, the first observation is that for each role the different fund sizes have different percentages. Networking even changes 38% depending on the fund size. This means that depending on the fund of the buyout firm, its role in the board of director of its portfolio company’s changes. Or in other words, fund size is a determinant. From a practical point of view, this is realistic. As a buyout firms’ fund grows, more resources and capital becomes available to inject in the portfolio company. A bigger fund, for instance, will have more employees, a bigger network, more connections and thus will the Networking role become more significant relative to the other roles. Also, as more capital becomes available, management’s incentives can increase and the buyout firm can put more resources and time in recruiting the most competent people for the right functions. This can be found in Figure 5 where the Management Incentives & Recruitment role increases as fund size increases. With these observations and reasoning, we can conclude that fund size is a determinant for the role that buyout firms have in the board of directors of their portfolio companies. Industry. When looking at Figure 6, at first sight there seems to be a lot of movement when switching from industry. However, when looking at the numbers behind the graph, hypothesis 3

52

seems less accurate. If I compare the average of each role and compare this to the percentages per industry, the biggest deviation from the average is only 18%. This does not seem a whole lot, certainly not in this relative small sample. When looking at industrials, which has the largest sample of 46, the biggest difference is 17%. Taking into mind the small sample of portfolio companies, and thus the high volatility, there is not enough support to conclude that the industry determines the role of buyout firms in the board of directors of its portfolio companies. Buyout Process. When looking at the different phases in the buyout process, we can easily come to a conclusion whether this is a determinant or not. The first role indicating this conclusion is the Maintenance & Coordinating role. Going through the 3 phases, the percentage of investment managers that selected this role goes from 25% to 20% to 62%. There is a huge increase in this role when going towards the end of the buyout process. This seems logical since by the time the buyout firm wants to exit the portfolio company they will have to put more effort and energy in communicating with the external environment since they want to divest their investment. Also, Strategic & Governing, Mentoring & Expertise Advisor and Management Incentives & Recruitment decreases when getting closer to the exit. These roles seem to make place for the Maintenance & Coordinating and Networking role. This makes sense since buyout firms will try to increase the value of the firm as soon as possible. For instance, they will replace management teams and put incentives in place as soon as they have a say in the portfolio company. Doing this in the exit phase would be too late. This also counts for the other roles. These illustrations show that depending on which phase of the buyout process the portfolio company is in, a buyout firm will put their time and effort in different roles. In the beginning of the process they will mostly pass their time by playing strategic, governing and mentoring roles. And when getting nearer the exit of the process, they will prioritize the maintenance, coordinating and networking roles in order to be able to divest their investment more easily. The important conclusion is that the buyout process is a determinant for the role buyout firms have in the board of directors of their portfolio companies. Experience. As illustrated by the results, and illustrated by Figure 9, the experience proves to be a determinant. We see that when following each line on the graph that, going from left to right, each role has some serious ups and downs. And, in contrast with the industry, now the differences between the percentages are significant. For instance, Maintenance & Coordinating changes from 25% to 100% depending on the experience the investment manager has. This means that each role behaves differently for different experiences. Or in other words, there is enough support to state that experience determines the role of a buyout firm in the board of directors of its portfolio companies. This is not far-fetched when thinking about what this means. When you have

53

a certain background, and experience, you will focus and prioritize different aspects within a company. An investment manager with a banking background will focus more on the financial numbers than an investment manager who worked his entire career in Marketing. Summarizing, buyout firms have mostly a Controlling & Monitoring and Strategic & Governing role. Also, Networking, Mentoring & Expertise Advisory and Management Incentives & Recruitment are present and are common. Maintenance & Coordinating does not belong to the roles of most buyout firms and is less significantly present. These roles are determined by the stage in the business life cycle and buyout process the portfolio company is in, the fund size of the buyout firm and the experience of the investment manager. This means that there is data to support hypotheses H1A, H2, H5 and H6. There was either not enough data or the data did not back the other hypothesis to support these as well. In an effort to refute or boost my results I also conducted a binary logistic regression. Due to the relative small data sample this regression model did not come up with significant and usable results. The regression analysis could come up with more reliable results if the sample would have been bigger. Figure 18 gives the conclusions from above in an adjusted conceptual model. The 6 roles are given in a pie chart according their RRS% in the entire sample. Also, the remaining determinants are given that influence these roles. This model visualizes the connection between buyout firm and portfolio company and gives an idea of which roles the buyout firm will or can have in the board of directors of their portfolio companies and which determinants there are that can influence or affect these roles.

54

Buyout Firm

ROLES Determinants

Maintenance & Coordinating Controlling and Monitoring Management Stage in BLC incentives & recruitment

Fund Size

Phase in Buyout Process Strategic & Mentoring & Governing Expertise Background PE Player Advisor

Networking

Portfolio Company

Figure 18: Conceptual Model

55

5.7 Limitations, Implications and Further Research Although my research was carefully prepared and it reached its aim for most of the determinants, I am aware of its limitations and shortcomings. In this section I will lay these out as well as paths for future research in order to cope with these limitation and shortcomings in the future. Secondly, I will give the implications of my research. The first, and most important limitation is the sample size. Due to the time constraint of this thesis, and the low response rate, I could only do so much. Contacting people across the world through LinkedIn takes some time, and some respondents only accepted my connection or filled out the survey by the time I was finishing this thesis. Having more time would also have given me the possibility to send out the survey to a test-group to see whether I should adjust certain aspect of my survey or not before sending it out. Having more time available could bypass these problems and increase the sample. This limitation endangers the generalizability, validity and reliability of this research. The study should have more respondents and the sample should be significantly larger to be able to generalize these results to a broader subject. For instance, some experiences or industries only had a few respondents and the sample size was thus too small to generalize. This could, as highlighted, be resolved by contacting more investment managers and giving them more time to answer the survey. Another positive result of a bigger sample size would be the results of the regression analysis. The results were not usable due to the unreliable numbers and models. A bigger sample size could solve this problem and would give the ability to use trustworthy conclusions. Another limitation is the subjectiveness of my research. Since this thesis was written by myself and I did not have a lot of input aside from my promotor, there may be some subjectiveness present. This could be avoided by sharing my research with other researchers and organize groups to discuss and question certain results and conclusions. Further research is required to have a better understanding regarding the roles of buyout firms and the determinants of these roles. Building upon my conceptual model, it could be interesting to involve more and different determinants in the mix. There are most definitely a lot of determinants out there that are not included in my analysis. Also, applying this research on venture capital could reveal more roles and determinants. There may also be other ways to contact different investment managers in order to get a wider, more diverse population. Other guidelines for further research are the definitions of my variables. I was not able to investigate spatial proximity as a determinant due to the lack of data for this variable. This could be avoided if the respondent was motivated to choose 2 portfolio companies that were as far away

56

from the headquarter as possible. Another way in which this could have been avoided is by setting up a different population with more geographically distributed headquarters. Using this methodology, spatial proximity could be analyzed as determinant. Other variables I would define differently are the roles, industries and backgrounds of the respondents. I experienced that due to the fact that I gave the respondent more than 10 experiences to select from, this made the analysis part of my research significantly harder. Fewer groups would result in bigger groups and this could lead to more robust and reliable results. In line with this remark is the fact that it could also be more convenient and reliable if I gave the respondent less than 6 roles to choose from. I already downsized the existing roles from 12 to 6, but even fewer roles could enhance the analysis of my research and the results. This also counts for the industries. Last but not least, I will discuss the implications of my research and the conceptual model that came to be thanks to this research. The research questions “What is the role of buyout firms in the board of directors of their portfolio companies?” and “What are the determinants that influence the role of buyout firms in the board of directors of their portfolio companies?” can now be answered. And the framework that resulted from my research can be used in several ways by different parties. First of all, having an idea which roles a buyout firm has in its portfolio companies gives an insight for both the portfolio company and the buyout firm. Using this model, the portfolio company can see which roles he can expect when dealing with a buyout firm. For instance, he should not expect the buyout firm to deal with external pressure and institutions but rather expect the buyout firm to intervene through Controlling & Monitoring and Strategic & Governing. He can then make sure that the roles that buyout firms do not have are covered by the portfolio company itself. On the other side, buyout firms have a better insight in the roles buyout firms have in general. The determinants also have several implications for both sides of the buyout deal. The portfolio companies have a better understanding of which roles the buyout firms will have within their board. For instance, a portfolio company in the exit stage should be expecting more Maintenance & Coordinating roles rather than Management Incentives & Recruitment roles. On the other hand, buyout firms have a better understanding in which roles they should be focusing on for each different portfolio company. It is clear that not all the portfolio companies should be treated the same, and using my model they have a better overview on where to focus on. Also, since experience is a determinant, buyout firms now should be aware that they look at the background of their investment managers when recruiting and hiring. Different investment managers with different backgrounds will focus on different aspects within a portfolio company and thus it is important to look at past experience. They now also know that different BLC stages

57

and buyout process phases demand different roles. Thus, buyout firm firms should only have those roles that belong to the phases and stages they invest in. Concluding, having a better insight in the roles buyout firms have and the determinants that influence these roles can help both buyout firm and portfolio company. The portfolio company has a better idea of what to expect from its buyout partners and can use this knowledge in its strategy. The buyout firm on the other hand has a better idea about which roles are most appropriate for each of its portfolio companies and which determinants he has to take into account when dealing with different portfolio companies with different characteristics.

58

REFERENCE LIST

Acharya, V. V., Gottschalg, O. F., Hahn, M., & Kehoe, C. (2013). Corporate governance and value creation: Evidence from private equity. Review of Financial Studies, 26(2), 368-402. Adams, R. B., Hermalin, B. E., & Weisbach, M. S. (2010). The role of boards of directors in corporate governance: A conceptual framework and survey. Journal of Economic Literature, 48(1), 58-107. Agard, K. A. (2010). Leadership in nonprofit organizations: A reference handbook (Vol. 1). Sage. Amit, R., Brander, J., & Zott, C. (1998). Why do venture capital firms exist?: Theory and Canadian evidence. Journal of business Venturing, 13(6), 441-466. Arrow, K. J. (1985). Informational structure of the firm. The American Economic Review, 75(2), 303-307. Arthurs, J. D., & Busenitz, L. W. (2003). The boundaries and limitations of agency theory and stewardship theory in the venture capitalist/entrepreneur relationship. Entrepreneurship Theory and Practice, 28(2), 145-162. Baker, M. (2010). Re-conceiving managerial capture. Accounting, Auditing & Accountability Journal, 23(7), 847-867. Barney, J., Wright, M., & Ketchen Jr, D. J. (2001). The resource-based view of the firm: Ten years after 1991. Journal of management, 27(6), 625-641. Bender, M. (2011). Introduction. In Spatial Proximity in Venture Capital Financing (pp. 1- 9). Gabler. Berg, A., & Gottschalg, O. F. (2005). Understanding value generation in buyouts. Journal of Restructuring Finance, 2(01), 9-37. Berg, A., & Gottschalg, O. F. (2005). Understanding value generation in buyouts. Journal of Restructuring Finance, 2(01), 9-37. Blau, P. M. (1964). Exchange and power in social life. Transaction Publishers. Bottazzi, L., Da Rin, M., & Hellmann, T. (2008). Who are the active investors?: Evidence from venture capital. Journal of Financial Economics, 89(3), 488-512. Bruton, G. D., Fried, V. H., & Manigart, S. (2005). Institutional influences on the worldwide expansion of venture capital. Entrepreneurship Theory and Practice, 29(6), 737-760. Bruton, G., Fried, V., & Hisrich, R. D. (1997). Venture capitalist and CEO dismissal. Entrepreneurship: Theory and Practice, 21(3), 41-55.

I

Buchner, A., Kaserer, C., & Wagner, N. (2010). Modeling the cash flow dynamics of private equity funds: Theory and empirical evidence. The Journal of Alternative Investments, 13(1), 41- 54. Busenitz, L. W., Fiet, J. O., & Moesel, D. D. (2004). Reconsidering the venture capitalists’ “value added” proposition : An interorganizational learning perspective. Journal of Business Venturing, 19(6), 787-807. Carter, R. B., & Van Auken, H. E. (1992). Effect of professional background on venture capital proposal evaluation. Journal of Small Business Strategy, 3(1), 45. Cornelli, F., & Karakaş, O. (2008). Private equity and corporate governance: Do LBOs have more effective boards? Cotter, J. F., & Peck, S. W. (2001). The structure of debt and active equity investors: The case of the buyout specialist. Journal of Financial Economics, 59(1), 101-147. Cressy, R., Munari, F., & Malipiero, A. (2007). Playing to their strengths? Evidence that specialization in the private equity industry confers competitive advantage. Journal of Corporate Finance, 13(4), 647-669. Cumming, D. (Ed.). (2010). Venture capital: Investment strategies, structures, and policies (Vol. 9). John Wiley & Sons. Cumming, D., Sapienza, H. J., Siegel, D. S., & Wright, M. (2009). International entrepreneurship: managerial and policy implications. Strategic Entrepreneurship Journal, 3(4), 283-296. Cumming, D., Siegel, D. S., & Wright, M. (2007). Private equity, leveraged buyouts and governance. Journal of Corporate Finance, 13(4), 439-460. De Clercq, D., & Dimov, D. (2008). Internal knowledge development and external knowledge access in venture capital investment performance. Journal of Management Studies, 45(3), 585-612. Donaldson, T., & Preston, L. E. (1995). The stakeholder theory of the corporation: Concepts, evidence, and implications. Academy of management Review, 20(1), 65-91. Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of management review, 14(1), 57-74. Elango, B., Fried, V. H., Hisrich, R. D., & Polonchek, A. (1995). How venture capital firms differ. Journal of Business Venturing, 10(2), 157-179. European Venture Capital Association. (2007). Guide on private equity and venture capital for entrepreneurs. EVCA Special Paper.

II

Fama, E. F., & Jensen, M. C. (1983). Agency problems and residual claims. The Journal of Law and Economics, 26(2), 327-349. Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. The journal of law and Economics, 26(2), 301-325. Fenn, G. W., Liang, N., & Prowse, S. (1995). 168 The Economics of the Private Equity Market. Filatotchev, I. (2006). Effects of executive characteristics and venture capital involvement on board composition and share ownership in IPO firms. British Journal of Management, 17(1), 75-92. Fraser-Sampson, G. (2011). Private equity as an asset class. John Wiley & Sons. Freeman, R. E. (1984). Stakeholder management: framework and philosophy. Pitman, Mansfield, MA. Freeman, R. E., & Evan, W. M. (1990). Corporate governance: A stakeholder interpretation. Journal of behavioral economics, 19(4), 337-359. Fried, V. H., & Hisrich, R. D. (1994). Toward a model of venture capital investment decision making. Financial management, 28-37. Fried, Vance H., Garry D. Bruton, and Robert D. Hisrich. "Strategy and the board of directors in venture capital-backed firms." Journal of business venturing 13.6 (1998): 493-503. Fritsch, M., & Schilder, D. (2008). Does venture capital investment really require spatial proximity? An empirical investigation. Environment and Planning A, 40(9), 2114-2131. Gomez-Mejia, L. R., Balkin, D. B., & Welbourne, T. M. (1990). Influence of venture capitalists on high tech management. The Journal of High Technology Management Research, 1(1), 103-118. Gompers, P., & Lerner, J. (2001). The venture capital revolution. The journal of economic perspectives, 15(2), 145-168. Gompers, P., Kaplan, S. N., & Mukharlyamov, V. (2016). What do private equity firms say they do? Journal of Financial Economics, 121(3), 449-476. Gorman, M., & Sahlman, W. A. (1989). What do venture capitalists do?. Journal of business venturing, 4(4), 231-248. Guide to Private Equity (2012). Retrieved from https://www.bvca.co.uk/Portals/0/library/Files/Website%20files/2012_0001_guide_to_private_e quity.pdf Guo, S., Hotchkiss, E. S., & Song, W. (2011). Do buyouts (still) create value?. The Journal of Finance, 66(2), 479-517.

III

Hanney, J. (1986). The management buy-out—An offer you can't refuse. Omega, 14(2), 119- 134. Hart, O. (1995). Corporate governance: some theory and implications. The economic journal, 105(430), 678-689. Heughebaert, A., & Manigart, S. (2012). Firm valuation in venture capital financing rounds: the role of investor bargaining power. Journal of Business Finance & Accounting, 39(3-4), 500- 530. Higgins, R. C., & Reimers, M. (1995). Analysis for financial management (No. s 53). Chicago, IL: Irwin. Hillman, A. J., & Dalziel, T. (2003). Boards of directors and firm performance: Integrating agency and resource dependence perspectives. Academy of Management review, 28(3), 383-396. Hillman, A. J., Cannella, A. A., & Paetzold, R. L. (2000). The resource dependence role of corporate directors: Strategic adaptation of board composition in response to environmental change. Journal of Management studies, 37(2), 235-256. Hochberg YV, Ljungqvist A, Lu Y. 2007. Whom you know matters: Venture capital networks and investment performance. Journal of Finance 62: 251–301 Hung, H. (1998). A typology of the theories of the roles of governing boards. Corporate governance, 6(2), 101-111. Huse M., & Zattoni, A. (2008). Trust, Firm Life Cycle, and Actual Board Behavior. International Studies of Management & Organizations, 38(3), 71-97 Huse, M. (2005). Accountability and creating accountability: A framework for exploring behavioral perspectives of corporate governance. British Journal of Management, 16(s1), S65- S79. Ireland, R. D., Hitt, M. A., & Sirmon, D. G. (2003). A model of strategic entrepreneurship: The construct and its dimensions. Journal of management, 29(6), 963-989. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305-360. John, K., & Senbet, L. W. (1998). Corporate governance and board effectiveness. Journal of Banking & Finance, 22(4), 371-403. Kaplan, S. N., & Strömberg, P. (2009). Leveraged buyouts and private equity. The Journal of economic perspectives, 23(1), 121-146. Kaumann, S. (2009). Financing Patterns of European Buy-outs. diploma. de. Knockaert, M., & Ucbasaran, D. (2013). The Service Role of Outside Boards in High Tech Start-ups: A Resource Dependency Perspective. British Journal of Management, 24(1), 69-84.

IV

Knockaert, M., Ucbasaran, D., Wright, M., & Clarysse, B. (2011). The relationship between knowledge transfer, top management team composition, and performance: the case of science- based entrepreneurial firms. Entrepreneurship Theory and Practice, 35(4), 777-803. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2000). Investor protection and corporate governance. Journal of financial economics, 58(1), 3-27. Lee, C., Lee, K., & Pennings, J. M. (2001). Internal capabilities, external networks, and performance: a study on technology-based ventures. Strategic management journal, 22(6-7), 615- 640. Lerner, J. (1995). Venture capitalists and the oversight of private firms. The Journal of Finance, 50(1), 301-318. Lynall, M. D., Golden, B. R., & Hillman, A. J. (2003). Board composition from adolescence to maturity: A multitheoretic view. Academy of Management Review, 28(3), 416-431. Mace, M.L. (1971), “Directors: myth and reality”, Harvard University Press, Boston, cited in Hung, H. (1998), A typology of the theories of the roles of governing MacMillan, I. C., Kulow, D. M., & Khoylian, R. (1989). Venture capitalists' involvement in their investments: Extent and performance. Journal of business venturing, 4(1), 27-47. Mahadeo, J. D., Soobaroyen, T., & Hanuman, V. O. (2012). Board composition and financial performance: Uncovering the effects of diversity in an emerging economy. Journal of Business Ethics, 105(3), 375-388. Manigart, S., & Witmeur, O. (2009). Venture capital gids in België. Manigart, S., & Wright, M. (2013). Venture capital investors and portfolio firms. Foundations and Trends® in Entrepreneurship, 9(4–5), 365-570. Manigart, S., De Waele, K., Wright, M., Robbie, K., Desbrières, P., Sapienza, H. J., & Beekman, A. (2002). Determinants of required return in venture capital investments: a five- country study. Journal of Business Venturing, 17(4), 291-312. Mason, C. M., & Harrison, R. T. (2002). Is it worth it? The rates of return from informal venture capital investments. Journal of Business Venturing, 17(3), 211-236. Mathiasen, K. (1999). Board passages: Three key stages in a nonprofit board's life cycle. National Center for Nonprofit Boards. Mayers, D., & Smith Jr, C. W. (1981). Contractual provisions, organizational structure, and conflict control in insurance markets. Journal of Business, 407-434. Megginson, W. L., & Weiss, K. A. (1991). Venture capitalist certification in initial public offerings. The Journal of Finance, 46(3), 879-903.

V

Metrick, A., & Yasuda, A. (2010). The economics of private equity funds. Review of Financial Studies Meuleman, M., Amess, K., Wright, M., & Scholes, L. (2009). Agency, strategic entrepreneurship, and the performance of private equity-backed buyouts. Entrepreneurship Theory and Practice, 33(1), 213-239. Meyer, J. W., & Scott, W. R. (1983). Centralization and the legitimacy problems of local government. Organizational environments: Ritual and rationality, 199, 215. Montgomery, C., & Baker, G. (1994). Conglomerates and LBO associations: a comparison of organizational forms. Working paper, Harvard Business School, Boston, MA. Oliveira, S. F. M. (2014). Private Equity in Portugal: An analysis of post-exit portfolio companies# 180; operating performance and capital structure. Pfeffer, J., & Salancik, G. R. (2003). The external control of organizations: A resource dependence perspective. Stanford University Press. Private Equity (2017). Retrieved from https://nl.wikipedia.org, kkr.com, bvca.com, http://academlib.com, http://www.investopedia.com Rosenstein, J. (1988). The board and strategy: Venture capital and high technology. Journal of Business Venturing, 3(2), 159-170. Rosenstein, J., Bruno, A. V., Bygrave, W. D., & Taylor, N. T. (1993). The CEO, venture capitalists, and the board. Journal of Business Venturing, 8(2), 99-113. Sahlman, W. A. (1990). The structure and governance of venture-capital organizations. Journal of financial economics, 27(2), 473-521. Sapienza, H. J. (1992). When do venture capitalists add value? Journal of Business Venturing, 7(1), 9-27. Sapienza, H. J., Manigart, S., & Vermeir, W. (1996). Venture capitalist governance and value added in four countries. Journal of Business Venturing, 11(6), 439-469. Smith, A., (1990), Capital ownership structure and performance: the case of management buyouts. Journal of Financial Economics, 13, 143-165. Sorenson, O., & Stuart, T. E. (2001). Syndication networks and the spatial distribution of venture capital investments 1. American journal of sociology, 106(6), 1546-1588. Steier, L., & Greenwood, R. (1995). Venture capitalist relationships in the deal structuring and post-investment stages of new firm creation. Journal of Management Studies, 32(3), 337-357. Thompson, S., & Wright, M. (1995). Corporate governance: The role of restructuring transactions. The Economic Journal, 105(430), 690-703.

VI

Thomson, I., & Bebbington, J. (2005). Social and environmental reporting in the UK: a pedagogic evaluation. Critical Perspectives on Accounting, 16(5), 507-533. Timmons, J. A., & Bygrave, W. D. (1986). Venture capital's role in financing innovation for economic growth. Journal of Business venturing, 1(2), 161-176. Tyebjee, T. T., & Bruno, A. V. (1984). A model of venture capitalist investment activity. Management science, 30(9), 1051-1066. Unquote (2008) EUROPE – European Commission to discuss transparency proposals. Unquote, 23 September 2008. Van Den Berghe, L. A., & Levrau, A. (2002). The role of the venture capitalist as monitor of the company: a corporate governance perspective. Corporate Governance: an international review, 10(3), 124-135. Wacera, D. C. (2016). Effect of citizen participation on budget implementation in Kenyan counties: a case study of Nyandarua county (Doctoral dissertation, University of Nairobi). Wright, M., Amess, K., Weir, C., & Girma, S. (2009). Private equity and corporate governance: Retrospect and prospect. Corporate Governance: An International Review, 17(3), 353-375. Wright, M., Jackson, A., & Frobisher, S. (2010). Private Equity in the US: Building a New Future. Journal of Applied Corporate Finance, 22(4), 86-95. Thriving Through Stages of Nonprofits (2017). Retrieved from https://www.therightbank.com/sites/www.therightbank.com/files/files/Business%20Resources/ White%20Papers/Nonprofit/white-paper-thriving-through-stages-of-nonprofits.pdf

VII

ATTACHMENTS

Attachment 1: Contacted Buyout Firm

• 3D Investments • 3i Group Plc • Ackermans & van Haaren • Apollo Global Management • Argos Soditic • • Bain Capital • Bank van Breda • Belfius • Beluge Invest • Blackstone – Private eQuity • BNP Paribas Fortis • Buysse & Partners • CVC Capital Partners (Benelux) • Egeria • Ergon Capital Partners • Fin.co • Fortress Investment Group • Gilde Buy Out Partners • Gilde Equity Management • Hellman & Friedman • ING • KBC • Kohlberg Kravis Roberts (KKR) • Mandarin Capital Partners • Merrill Lynch • Metric Capital Partners • Mezzanine Partners 1 • MidOcean Partners • PAI Partners • • Parcom • PMV • Profinpar • Quest for Growth (QFG) • The Carlyle Group • Think2Act • TPG Capital • Waterland Private Equity • TPG Capital • Waterland Private Equity

VIII

Attachment 2: Survey Q1 Dear Respondent My name is Stan Jeanty, I am a master student conducting research towards the completion of my master’s degree at the Ghent University. I am looking for respondents with experience in the buyout market. With my thesis, I am investigating the role of buyout firms in the board of directors of their portfolio companies. The determinants of these roles are the second focus of my thesis. If you are currently working, or have experience, in the buyout market, I would much appreciate it if you would use 5-10 minutes of your time to answer my survey. Your assistance, by completing the online questionnaire, would be greatly appreciated and it would help me to obtain my master’s degree in corporate finance. If interested, there is the possibility to leave your email address behind to which I will send my findings and conclusions. All answers will be analyzed discretely and no names or personal information will be used in my thesis. Thank you in advance, Stan – Master Student Business Economics - Corporate Finance @ Ghent University (You can also fill out this survey using your smartphone.) (For questions or problems feel free to contact me through LinkedIn or mail [email protected])

Q2 What is the size of the buyout fund? m Small: m Mid-Market: 501mln - 1,5bn m Large: 1,6 - 4,5 bn m Mega: >4,5bn

Q3 In which country is the buyout firms headquarter located?

Q4 Which sector(s) do you personally have experience in? (Multiple answers possible) q Accountancy & Finance q Banking q Business, consulting and management q Charity and voluntary work q Creative arts and design q Energy and utilities q Engineering and manufacturing q Environment and agriculture q Healthcare q Hospitality q Event Management q Information technology q Law q Law enforcement and technology

IX

q Leisure, sports and tourism q Marketing, advertising and PR q Media and Internet q Property and construction q Public services and administration q Recruitment and HR q Retail q Sales q Science and pharmaceuticals q Social Care q Teaching and education q Transport and Logistics

Q5 Select the function you have within the buyout firm. m Investment manager (Select this function if you have a role in the portfolio companies of the buyout firm in any way) m General function (Select this function if you have a role in the buyout firm itself rather than in the portfolio companies of the buyout firm and do not have a role in the portfolio companies)

INVESTMENT MANAGER

Q6 The following questions will be about the role you have in portfolio companies of the buyout firm. Please keep 2, or more, portfolio companies in mind and answer the following questions about the portfolio company you have in mind. When choosing your portfolio companies, please choose the most diverse portfolio companies you can think of. The first questions will be about the first portfolio company you have in your mind.

Q7 Which geographical area is the portfolio company located in? m Africa m Asia m Benelux m Rest of Europe m Oceania m North America m South America

Q8 Which industry is the portfolio company in? m Industrials m Information Technology m Business Services m Consumer Discretionary m Healthcare m Food and Agriculture m Telecoms & Media m Energy & Utilities m Materials

X

m Other (specify here): ______

Q9 Which phase of the buyout process is the portfolio company in? m Acquisition phase m Holding period m Exit

Q10 Which stage of the business life cycle is the portfolio company in? m Start-Up m Growth m Maturity m Decline

Q11 Select the role(s) you have in the board of directors of the portfolio company. (Multiple answers possible) q Controlling and Monitoring (Verifying whether everything occurs in conformities with the plans adopted, instructions issued and principles established) q Networking (Providing own network to portfolio company) q Management incentives & recruitment (Recruiting executives and building executive teams for portfolio companies and providing strong equity incentives to the management teams of the portfolio companies) q Mentoring & expertise advisor (Using built expertise to advise and guiding the portfolio companies and providing support) q Strategic & Governing (Creating and helping with strategic objectives and challenges and/or developing a governance system) q Maintenance & coordinating (Dealing with institutional pressure and/or negotiating and compromising with stakeholders and/or analyzing the external environment)

Q13 This is the end of your first portfolio company. Please do this again for the second portfolio company you have in mind by clicking on the “Next” button. If you only have/had a role in one portfolio company, click "End survey" m End Survey

GENERAL FUNCTION Q35 Which geographical area(s) does the buyout firm invest in? (Multiple answers possible) q Africa q Asia q Benelux q Rest of Europe q Oceania q North America q South America

XI

Q36 Which industry/industries does the buyout firm invest in? (Multiple answers possible) q Industrials q Information Technology q Business Services q Consumer Discretionary q Healthcare q Food and Agriculture q Telecoms & Media q Energy & Utilities q Materials q Other (specify here): ______

Q37 Which phase(s) of the buyout process does the firm invest in? (Multiple answers possible) q Acquisition phase q Holding period q Exit

Q38 Which stage(s) of the business life cycle does the buyout firm invest in? (Multiple answers possible) q Start-Up q Growth q Maturity q Decline

Q39 Select the role(s) the buyout firm has in its portfolio companies. (Multiple answers possible) q Controlling and Monitoring (Verifying whether everything occurs in conformities with the plans adopted, instructions issued and principles established) q Networking (Providing own network to portfolio company) q Management incentives & recruitment (Recruiting executives and building executive teams for portfolio companies and providing strong equity incentives to the management teams of the portfolio companies) q Mentoring & expertise advisor (Using built expertise to advise and guiding the portfolio companies and providing support) q Strategic & Governing (Creating and helping with strategic objectives and challenges and/or developing a governance system) q Maintenance & coordinating (Dealing with institutional pressure and/or negotiating and compromising with stakeholders and/or analyzing the external environment)

Q41 Dear respondent Thank you for taking the time to fill out my survey. If you want to continue helping me and send this survey to colleagues or other possible respondents, please use the follow link to send them this survey: https://qtrial2017q2az1.az1.qualtrics.com/jfe/form/SV_eCKQKaYW9pswIcdIf

XII

you are interested in the results of my thesis, you can leave you email address below and I will get back to you as soon as I have my results. Email address:

XIII

Attachment 3: Distribution Business Life Cycle: Portfolio Company (PC) and Buyout Firm (BO)

PC

40 37

35

30

25

20 17

15

10

5 2 0 0 Start-Up Growth Maturity Decline

BO

9 8 8 7 7 6 5 4 3 2 2 1 1 0 Start-Up Growth Maturity Decline

XIV

Attachment 4: Distribution Fund Size

Fund Size

9% Small 9%

Mid-Market 50%

Large 32%

Mega

XV

Attachment 5: Distribution Industry: Portfolio Company (PC) and Buyout Firm (BO)

BO Firm Industry

8 7 6 5 4 3 2 1 0

PC's Industry

14 12 10 8 6 4 2 0

XVI

Attachment 6: Distribution Geographical Area: Portfolio Company (PC), Buyout Firm (BO) and Respondent

Geographical Area BO

9 8 8 7 7 6 5 4 3 2 1 1 1 1 1 1 0 Africa Asia Benelux North Oceania Rest of South America Europe America

Geographical Area PC

45 41 40 35 30 25 20 14 15 10 5 0 1 0 0 0 0 Africa Asia Benelux North Oceania Rest of South America Europe America

XVII

Geographical Area Respondent

25 20 20

15 11 10

5 3 3 3 1 2 1 0

Attachment 7: Distribution Buyout Process: Portfolio Company (PC) and Buyout Firm (BO)

PC Phase Buyout Process

40 35 35

30

25

20

15 13

10 8

5

0 Acquisition phase Holding period Exit

XVIII

BO Firm Buyout Process

10 9 9 8 8 7 6

5 4 4 3 2 1 0 Acquisition phase Holding period Exit

XIX

Attachment 8: Experience Distribution

5 Teaching and education 1 1 Science and pharmaceuticals 3 2 Retail 7 2 Public services and administration 1 5 Media and Internet 10 3 Leisure, sports and tourism 7 3 Law 7 9 Event Management 1 0 Healthcare 10 8 Engineering and manufacturing 13 7 Creative arts and design 3 5 Business, consulting and management 27 28 Accountancy & Finance 26 0 5 10 15 20 25 30

XX

Attachment 9: Logistic Regression

9.1 Controlling & Monitoring

Th

XXI

9.2 Networking

XXII

9.3 Management Incentives & Recruitment

XXIII

9.4 Mentoring & Expertise Advisor

XXIV

9.5 Strategic & Governing

XXV

9.6 Maintenance & Coordinating

XXVI