Competitive Strategy of Private Equity: Boundary of the Investment Firm vorgelegt von Diplom-Kaufmann Daniel Kukla aus Olmütz Von der Fakultät VII – Wirtschaft und Management der Technischen Universität Berlin zur Erlangung des akademischen Grades Doktor der Wirtschaftswissenschaften Dr. rer. oec. genehmigte Dissertation Promotionsausschuss: Vorsitzender: Prof. Dr. Jan Kratzer Berichter: Prof. Dr. Dodo zu Knyphausen-Aufseβ Berichter: Prof. Dr. Viral V. Acharya Tag der wissenschatlichen Aussprache: 21.12.2010 Berlin 2011 D 83 Contents 1 Introduction ................................................................................................................................ 1 1.1 Phenomenon and Research Motivation ............................................................................... 1 1.1.1 Practical Relevance ................................................................................................. 1 1.1.2 Theoretical Relevance ............................................................................................. 4 1.2 Research Objective ............................................................................................................. 5 1.2.1 Strategic Groups ..................................................................................................... 5 1.2.2 Boundary of the Investment Firm ........................................................................... 6 1.3 Structure and Scope of Dissertation .................................................................................... 7 2 The Ascent of Private Equity ..................................................................................................... 9 2.1 Origin .................................................................................................................................. 9 2.1.1 Classic Private Equity: Merchant Banking (14th – 19th Century) ........................... 9 2.1.2 Merchant Banking Wipeout in 1933 ..................................................................... 11 2.1.3 Renaissance of Private Equity in the 20th Century ............................................... 12 2.2 Contemporary Private Equity ............................................................................................ 16 2.2.1 Capital Commitment ............................................................................................. 16 2.2.2 Private Equity Investment ..................................................................................... 19 2.2.3 Credit Markets ...................................................................................................... 23 2.2.4 Exits ...................................................................................................................... 24 2.2.5 Performance .......................................................................................................... 26 3 Academic Knowledge on Private Equity ................................................................................ 27 3.1 Synthesis of PE Literature ................................................................................................. 27 3.1.1 Economic Impact .................................................................................................. 29 3.1.2 Asset Allocation .................................................................................................... 36 3.1.3 Design of the Monolithic PE Firm ........................................................................ 38 3.1.4 Governance ........................................................................................................... 55 3.1.5 Performance .......................................................................................................... 58 3.2 Strategy for the PE Firm ................................................................................................... 61 3.2.1 Conceptual Frames Related to Strategy for PE .................................................... 62 3.2.2 Inadequacy of Existing Business Model Frameworks .......................................... 64 3.2.3 Business Model Framework for PE Centered Investment Firm ........................... 65 - ii - 4 Research Design ........................................................................................................................ 69 4.1 Purpose Statement ............................................................................................................. 69 4.1.1 Philosophic Worldview ......................................................................................... 69 4.1.2 Mixed Methods ..................................................................................................... 71 4.2 General Research Thrust ................................................................................................... 72 4.2.1 Research Thrust: Strategic Groups ....................................................................... 72 4.2.2 Research Thrust: Boundary of the Investment Firm ............................................. 73 4.3 Empirical Research Design ............................................................................................... 73 5 Empirical Part I: Strategic Groups ........................................................................................ 77 5.1 Conceptual Framework and Hypotheses ........................................................................... 77 5.1.1 IO Research ........................................................................................................... 77 5.1.2 From Entry Barriers to Mobility Barriers ............................................................. 78 5.1.3 Strategic Groups ................................................................................................... 78 5.1.4 Hypotheses ............................................................................................................ 80 5.2 Methodology and Data ...................................................................................................... 82 5.2.1 Strategic Space and Strategic Variables ............................................................... 82 5.2.2 Data ....................................................................................................................... 86 5.2.3 Clustering Firms into Strategic Groups ................................................................ 88 5.2.4 Validation of Strategic Groups ............................................................................. 91 5.3 Empirical Results .............................................................................................................. 93 5.3.1 Correlation Analysis ............................................................................................. 93 5.3.2 Clustering Analysis ............................................................................................... 95 5.4 Interpretation and Discussion of Results ........................................................................ 107 5.4.1 Summary ............................................................................................................. 107 5.4.2 Limitations .......................................................................................................... 110 5.4.3 Implications ........................................................................................................ 111 5.4.4 Further Research ................................................................................................. 113 6 Empirical Part II: Boundary of the Investment Firm ........................................................ 115 6.1 Exploratory Framework .................................................................................................. 115 6.1.1 The Nature of the Firm ....................................................................................... 115 6.1.2 Conceptual Frames for the Boundary of the Firm .............................................. 117 6.1.3 Six Decades of Firm Boundary Seesaw .............................................................. 119 6.1.4 The Monitor of the Monitor ................................................................................ 121 6.2 Methodology ................................................................................................................... 122 6.2.1 Research Design ................................................................................................. 122 6.2.2 Conversation Guideline ...................................................................................... 125 6.2.3 Concurrent Strategic Grouping Approach .......................................................... 128 - iii - 6.3 Empirical Results ............................................................................................................ 129 6.3.1 Forces Shaping the Boundary of the Investment Firm ....................................... 129 6.3.2 Bundling of IF Activities .................................................................................... 147 6.3.3 Four PE Centered Investment Firm Models ....................................................... 155 6.4 Summary and Discussion ................................................................................................ 162 7 Conclusion and Outlook ......................................................................................................... 165 7.1 Academic Contributions ................................................................................................