Private Equity Investors as Matchmakers: Alliance Formation between PE-backed firms
Kirsten BURKHARDT
Université de Bourgogne-Franche Comté, IAE Dijon, CREGO, Centre de Recherche en Gestion des
Organisations (EA 7317).
Alliances as long term inter-firm cooperation are seen as an important factor of economic growth. They are particularly
important for small to medium sized companies whose internal resources are scarce. This article analyses the role of Private
Equity Firms that constitute a major source of financing for non-publicly traded small to medium sized companies, in the
formation of alliances for their portfolio companies. While previous studies analyse the question in the light of mainstream
theories, we rely on the dual theory of the firm, combining the contractual/mainstream view and the knowledge-based
view. Contrary to the current literature, our study does not rely on statistical tests but on a multiple and embedded case
study with explanatory design to test hypotheses. The present study is therefore the first that enables testing the causal
mechanisms at work beyond correlations. Results show that the roles that Private Equity Firms play can be intentional
(detecting new growth opportunities, driven by the Private Equity Firm’s competences) as well as unintentional (reducing
market inefficiencies through, mainly, informal mechanisms such as reputation and trust). Furthermore, our study
highlights the benefits of the joint use of these theories and the complementary nature of both theories in explaining the
phenomenon as a whole.
Keywords: Innovation, Alliance Formation, Private Equity, Governance, Entrepreneurship, KnowledgeBased View, Resource-Based Perspective, Mainstream Theories
JEL Classification : G300 ; P500
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Introduction
Alliances as a type of long term inter-firm cooperation are considered to be a main source of
firm innovation and are therefore an important factor of economic growth for developed
countries (Eurostat, Schmiemann, 2006). External growth via alliances is especially important
for small to medium sized companies largely dominant in Europe (up to 99% in terms of number
of companies), because their internal resources are limited. Since a few years, these facts lead
governments to undertake actions aimed to create environments that boost inter-firm linkages
and entrepreneurial clusters. In European countries, such actions are reinforced since the
financial crisis (McCahery and Vermeulen, 2010; Glachant et al., 2008).
Private Equity Firms intervene in this context because they represent the most important
source of capital for, mainly non-publicly traded, small to medium sized companies. They
provide finance in return for an equity stake for each firm’s life cycle stage, ranging from
Venture Capital to later stage financing solutions. As residual claimers, they generally stay on
the board of directors (or similar structure) and are active investors, providing their portfolio
companies with managerial assistance and advice. They can therefore be considered a
governance mechanism (Charreaux, 1997).
In our study, we investigate if Private Equity Firms are themselves able to help their portfolio
companies form alliances, thereby spurring entrepreneurial growth. We thereby analyse the role
of Private Equity Firms as a governance mechanism, focusing on their role as social
intermediaries. As active investors, do they provide their portfolio companies with the value
added service of forming alliances in addition to managerial advice?
More specifically, the study addresses the questions of how and why Private Equity Firms
act as relational intermediaries to help their portfolio companies form alliances. Both questions
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are investigated in the light of the Private Equity Firms’ contribution to the value creation
process that comes with alliance formation.
Within the predominant paradigm of efficiency, two main perspectives can be relied on in
terms of value creation: the contractual view (mainstream theories: Williamson; Jensen and
Meckling) and the knowledge-based view which underlies the resource-based perspective
(Penrose; Barney). A growing body of literature analyses the role of Private Equity Firms in
alliance formation in the light of mainstream theories (Lindsey, 2002, 2008; Hsu, 2006; Ozmel
et al., 2013). They mainly show that Private Equity Firms help to form alliances by reducing
market inefficiencies. However, by relying solely on those theories, it is not possible to account
for a potential role of Private Equity Firms in rent seeking (Mahoney and Pandian, 1992) by
detecting new growth opportunities and enabling their portfolio companies to take advantage
of them by forming alliances. We attempt to fill this theoretical gap and stress the necessity of
relying on both perspectives (dual theory of the firm), in order to gain a richer understanding
of the organizational phenomenon.
We rely on the French Private Equity market as ground for our investigations. Answers are
provided by means of the dual theory of the firm (Cohendet and Llerena, 2005; Conner and
Prahalad, 1996; Conner, 1991). The theoretical construct is tested empirically by means of a
multiple case study with explanatory design, based on eight alliances formed in the presence of
four French Private Equity Firms. Results show that French Private Equity Firms do play a role
in alliance formation. Those alliances are formed within their investment portfolio as well as
with external companies. The roles that Private Equity Firms play can be intentional (detecting
new growth opportunities, driven by the Private Equity Firm’s competences) as well as
unintentional (reducing market inefficiencies through, mainly, informal mechanisms such as
reputation and trust). Furthermore, our study highlights the benefits of the joint use of these
2
theories and the complementary nature of both theories in explaining the phenomenon as a
whole.
The paper proceeds as follows. In section one the extant literature is reviewed and we
illustrate the conceptual framework that leads us to the development of the theoretical
hypotheses. In section two we describe the method used to test our theoretical framework.
Results are presented in section three and discussed in comparison to the findings of previous
literature in section four. Section five summarizes the whole and draws conclusions.
1. Literature review and development of hypotheses
Previous studies analyse the role of Private Equity Firms in the formation of strategic
alliances in the light of the paradigm of efficiency, analysing the research question in terms of
value creation. Within this paradigm, traditionally two main perspectives can be relied on: the
contractual view and the knowledge-based view. Studies that rely on both perspectives are said
to appertain to the dual view of the firm (Cohendet and Llerena, 2005; Conner and Prahalad,
1996; Conner, 1991)
Existing literature mainly focusses on the contractual view and often restricts its study to the
investigation on the role of Venture Capital Firms (or even of Corporate Venture Capital Firms)
and their impact on alliance formation. They thereby restrict its investigations to the early stage
financing component of the large range of Private Equity Financing.
Lindsey (2002, 2008) provides evidence that alliances are more frequent among companies
sharing a common Venture Capital Investor. Along with Gompers and Xuan (2009), she argues
that Venture Capital Firms help to alleviate problems due to information asymmetries or
expropriation risks between future alliance partners. Stuart et al. (1999), Hsu (2004, 2006),
Colombo et al. (2006) and Nahata (2008) have shown that reputable Venture Capital Firms play
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a role in certifying the quality of start-ups without a prior track record, and, by doing so, have
a positive impact on the formation of alliances. Wang et al. (2012) argue that the formation of
alliances can be a way for Venture Capital Firms to mitigate external risks their portfolio
companies may face. Ozmel et al. (2013) analyse the extent to which Venture Capital Firms
and alliance partners can be complementary mechanisms or substitutes for start-ups, helping
them with their decisions to go public. Kamath and Yan (2010) show that in transactions
between companies backed by the same Venture Capital Firm, the Venture Capital Firm can
take advantage of his position as an intermediary and try to extract rents. More generally, the
present research topic adds to the literature that explores the value added services provided by
Venture Capital Firms to their portfolio companies, and their impact on the value creation
process (i.e.: Sapienza et al., 1996; Hellmann and Puri, 2002; Lerner, 2005).
All those studies test their hypotheses by means of statistical tests and by relying on the
American or Italian market for Venture Capital. Moreover, most studies restrict their
investigations to the study of alliances formed between companies acting in very specific
sectors such as the pharmaceutical or high technology sectors.
In the remainder of the present paper, we develop and test hypotheses by relying on both
perspectives of value creation (the contractual and the knowledge-based views), thereby gaining
a richer understanding of the phenomenon as a whole. Doing so, we rely on the dual theory of
the firm. Those hypotheses are developed for the whole range of Private Equity Investors, not
limiting the study to the restricted field of Venture Capital, and by studying alliances formed
between companies acting in all types of sectors.
1.1 Hypotheses based on the contractual view
The contractual view is based on the transaction cost theory and the positive agency theory,
and they are often referred to as “the mainstream theories”. Their mobilization enables to study
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the role of Private Equity Firms in the formation of strategic alliances in terms of mitigating
value losses. In the context of these theories, different organizational structures – hence
alliances as well – are defined as a nexus of contracts. They are efficient at some point in time
if they allow for the minimization of transaction and agency costs. Transaction costs are costs
that evolve during the process of searching for potential counterparts to the transaction, as well
as information costs ex ante to the transaction and costs incurred while negotiating, taking
decisions, controlling and executing contracts ex post to the transaction. Agency costs occur
because of conflicts of interest between the transaction partners. They mainly arise ex post.
Mainstream theories then focus their attention on governance mechanisms that enable
mitigation of values losses stemming from the presence of transaction and agency costs just
described. Main mechanisms are the informal mechanism of trust, reinforced by the mechanism
of reputation, and the formal mechanism of discipline and control.
With regard to our topic of interest, Nooteboom (1993, 1999) underlines that, compared to
publicly traded companies, transaction costs are more pronounced in the case of non-publicly
traded companies. Indeed, as stipulated above, they face a higher level of uncertainty and a
more pronounced asymmetry of information. This fact increases the transaction costs related to
the collection of information about potential transaction partners, their treatment and the setting
up of contracts. These contracts are mostly of an incomplete nature and include informal
information. The formation of a strategic alliance including at least one non-publicly traded
company typically financed by a Private Equity Firm is thus more costly than one formed
between only publicly traded companies, a reality which can lead to the failure of the
transaction. In addition, Private Equity-backed companies are mostly more vulnerable to
expropriation risks compared to big and well established companies, with higher agency costs.
In order to ensure that the transaction will not fail, it is necessary to set up ex ante
mechanisms that reduce information asymmetries and provide warrants or solutions that
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guarantee the credibility of the engagements by inducing confidence or a situation of trust.
Because the contracts are incomplete, one solution is to rely on a trilateral governance system.
This implies the participation of a third party playing the role of arbitrator (Kreps, 1998, p. 133).
Can Private Equity Firms play this role of arbitrator? Are they able to reduce the transaction
costs that can hinder the formation of the alliance? Are those costs then borne by the Private
Equity Firm? In our case, Private Equity Firms seem to be a natural fit for the role of arbitrator.
Indeed, Private Equity Firms can produce the information needed at a lower cost than the
companies forming the alliance because they have already collected such information for their
own purposes during the process of selection of future portfolio companies (Jensen et Meckling,
1976, p. 338). Because they provide financing to the companies in question, they have generally
analysed the candidates in detail before selecting them.
The reduction of information asymmetries enables future transaction partners (in our case,
future alliance partners) to trust each other. However, trust can only evolve by the interaction
of at least two individuals and requires a certain time to establish itself or else depends on a
warranty ex ante. It seems therefore easier to establish when the alliance is formed between
companies sharing a common Private Equity Investor (Lindsey, 2008, 2002). What about
alliances including a partner external to the investment portfolio of a Private Equity Firm? If
future transaction partners did not know each other before the transaction being established,
one way to develop trust is to rely on the mechanism of reputation. Indeed, reputation is a
complementary and necessary mechanism in the smooth functioning of the mechanism of trust
(Charreaux, 1990). The reputation of the Private Equity Firm investing in the company may
therefore provide such a trust-enforcing mechanism if the potential alliance partner is external
to the investment portfolio of the Private Equity Firm. These arguments support the literature
which highlights the idea that when the quality of a young company cannot be observed directly,
external actors rely on the quality of actors operating with them to draw conclusions about their
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quality (Megginson and Weiss, 1991; Stuart et al., 1999, p. 315; Hsu, 2004, pp. 18051806; Nahata, 2007, p. 127 ). Hsu (2004) shows that the Venture Capital sector constitutes an
ideal market for affiliation between young companies and reputed actors. These young
companies are willing to accept a lower amount of liquidities in exchange for a part of their
equity if they value the certification played by the Venture Capital Firms (Hsu, 2004, p. 1807;
Alexy et al., 2010). Consistent with these results, Hsu (2006) shows that the presence of a
Venture Capital Firm has a positive impact on the formation of long term cooperation between
the biotechnological start-ups they finance as well as on the probability of these companies
going public. He also shows that Venture Capital Firms differ according to their reputational
capital and that their reputational capital has a positive impact on cooperative activities between
the companies they finance and their probability of going public. These developments lead us
to formulate the following hypothesis:
Hypothesis 1: “All else being equal, the reputational capital of Private Equity Firms reinforces
the mechanism of trust, and, thereby, has a positive impact on the formation of alliances for
their portfolio companies”.
In addition to the risk of adverse selection, potential contracting partners may fear the
adoption of non-cooperative behaviours by the transaction partner after the alliance is formed.
Like all teamwork, cooperation through an alliance gives each partner an incentive to take
advantage of the work of the other party (Alchian and Demsetz, 1972, pp. 779-780). This risk
is related to the choice of how much effort the companies want to undertake after alliance
formation. Informational asymmetries make it costly to observe the behaviour of the partner.
The transaction partners can thus take advantage of this situation. By taking advantage of the
partner’s effort and work, the partner who makes less effort, alone, profits from his behaviour,
while the related costs (a decrease in production) are borne by all transaction partners (Alchian
and Demsetz, 1972, p. 780).
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In this context, the Private Equity Firm, having seats on the board of directors of the
companies forming the alliance, are able to observe and to monitor their contribution. They are
also able to determine the modes of compensation of those companies. They can thus play a
disciplinary role in relation to the actors holding specific knowledge, i.e. by linking their
payments to the profitability of the alliance (Hansmann, 1988, pp. 282-283). Finally, Private
Equity Firms can proceed directly to an expropriation by selling their shares (Lindsey, 2008,
p. 1138), thus appropriating the gains of the transfer (Alchian and Demsetz, 1972, p. 783).
Private Equity Firms are also able to control and to sanction the adoption of non-cooperative
behaviours, i.e. by direct expropriation. They can act as a mechanism which disciplines
managers through their presence on the board of directors. This disciplinary role, however,
seems to be more important and effective if the Private Equity Firm has a majority stake. These
considerations lead us to formulate the following hypothesis:
Hypothesis 2: “All else being equal, the presence of a Private Equity Firm reduces the agency
conflicts between the transaction partners of an alliance. This reduces the mistrust between
future contracting partners, and, therefore, has a positive impact on alliance formation. This
fact seems more important if the Private Equity Firm takes a majority stake”.
1.2.
Hypotheses based on the knowledge-based view
The application of the knowledge-based view to our research topic enables us to take into
account the fact that Private Equity Firms are active and not passive investors, providing skills
in form of managerial advice to their portfolio companies. Furthermore, it enables us to analyse
the role of Private Equity Firms in the origin of value creation by forming alliances. The theories
which make up the knowledge-based view adopt a vision of the company as a pool of inimitable
resources (Penrose, 1959), a pool of key competences or knowledge, a hierarchy of
organizational routines (Nelson et Winter, 1982) or productive services, to borrow the
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expression of Penrose (1959). Strategic alliances can then be defined as a form of organizational
cooperation between at least two companies which remain independent but that pool their
resources, their key competences, their organizational routines or their knowledge in order to
develop an activity, to generate synergies or to encourage organizational growth that they could
not have accomplished had they remained alone (i.e.: Teece, 1986; Persais, 2001; MenguzzatoBoulard et al., 2003; Colombo, 2006, p. 1166; Hoffmann, 2007, p. 829).
Like anonymous (2014) shows, the suggestion and the formation of a strategic alliance
between their portfolio companies may sometimes result from the detection of a growth
opportunity by the Private Equity Firms. The alliance formation then results from an initiative
taken by the Private Equity Firms in order to enable their portfolio companies to take advantage
of the growth opportunity. In this case, the Private Equity Firms display entrepreneurial
competences (Penrose, 1995, pp. 34-36, 183 ff.; Schumpeter, 1928, pp. 483-486; 1935, pp. 330,
422-425, 450 and 473) and are at the origin of the growth of the companies forming the alliance
(Penrose, 1995). Consequently, the Private Equity Firms are directly involved in the value
creation process and have the right to demand a part of the value created (Schumpeter, 1935,
p. 350).
Even though the companies may be efficient at a particular moment in time, they need to be
efficient over the long term in order to avoid succumbing to the natural selection process. In an
evolutionary context (as adopted by the knowledge-based view), this means that they need to
be innovative and that they need to be able to take continuous advantage of their innovation
(Nelson and Winter, 1982; Nelson, 1991). The environment the managers face depends on their
skills and existing knowledge, on their past experiences and on the resources they have on hand
(Penrose, 1995, pp. 44-45, 215). The environments faced and the strategies adopted thus differ
from one company to another (Nelson and Winter, 1982, p. 276; Nelson, 1991, p. 69). One can
assume that Private Equity-backed companies are highly specialized in their field of activity.
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In contrast, they typically lack resources and skills in fields such as marketing, finance, etc.
(Nooteboom, 1993). Private Equity-Firms, on the other hand, are a priori less specialized in the
fields of specialization of their portfolio companies, but possess skills or contacts in other fields
like accounting or marketing as well as experiences that may be sectorial (Bertoni et al., 2010),
regional or international (Lockett et al., 2008; Lutz and George, 2010, p. 19). One can thus
assume that Private Equity-backed companies have a narrower vision of the environment they
face than that of Private Equity Firms. Hence, Private Equity Firms can perceive different
environmental changes and growth opportunities from those perceived by their portfolio
companies. This can lead the Private Equity Firms to adopt a strategic position that differs from
that adopted by the portfolio companies. Anonymous (2014) further argues that the
opportunities Private Equity Firms may detect depend on their own competences and expertise.
In other words, different types of Private Equity Firms may enable their portfolio companies to
detect different types of growth opportunities, hence, form different types of alliances. She
develops the following hypotheses:
Hypothesis 3: “All else being equal, Private Equity Firms enable their portfolio companies to
take advantage of growth opportunities by forming alliances between them”.
Hypothesis 3a: “All else being equal, sectorial and regional Private Equity Firms display a
higher probability to enable their portfolio companies to form intra-sectorial alliances”.
Hypothesis 3b: “All else being equal, Private Equity Firms investing in different countries
display a higher probability to enable their portfolio companies to form transnational
alliances”.
Furthermore, Anonymous (2014) shows that from a Private Equity Firm’s point of view,
alliance formation is motivated by a diversification strategy. Like the companies they back,
Private Equity Firms face a dynamic and competitive environment. Private Equity Firms
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therefore need to be profitable over the long term in order to avoid being eliminated by the
natural selection process. One way to innovate is to adopt a strategy of diversification by
providing additional services to portfolio companies. This leads her to the following hypothesis:
Hypothesis 4: “All else being equal, providing portfolio companies with contacts that end up
in the formation of alliances is part of the Private Equity Firms market diversificationstrategy”.
The following sections presents the methodology used to empirically test the hypotheses
developed.
2. Methodology
The research design is a multiple case study. Case studies are particularly adapted to
investigate the questions of how and why a phenomenon arises (Yin, 2009, p. 175; David, 2005;
Miles et Huberman, 2003). The case study is multiple, embedded and of explanatory design
(Koenig, 2009a and 2009b; Scapens, 1990, p. 265 ; pp. 270-272; Yin, 2009; Miles and
Huberman, 2003, p. 84), based on the French Private Equity market. It is said to be “multiple”
because more than one case is analysed – eight in total. Multiple cases enable replication logic
(Graebner and Eisenhardt, 2004, p. 367). The cases are treated as experiments, each
strengthening the results that can be drawn from each single case. The term “embedded” is used
to indicate that there is more than one level of investigation. Indeed, we analyse the role of
Private Equity Firms in the formation of alliances. The case study focusses on the companies
forming the alliance as well as on the Private Equity Firm that accompanies at least one of the
companies. Section 2.1. presents the case selection process. Section 2.2 presents the cases.
Section 2.3. describes data collection and the procedure of analysis.
2.1. The selection process
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Multiple embedded explanatory case studies are complex to design (Yin, 2009, p. 59)
because cases need to be selected to make sure that each criterion in relation with the variables
outlined by the research hypotheses is represented at least twice to make replication possible.
In our case, we need to distinguish between the cases and the field of research. The case is the
alliance formed between at least two companies, whereby at least one of them is accompanied
by a Private Equity Firm. The field of research is the Private Equity Firm within whose presence
the alliance is formed. The selection of the fields and cases of research is intentionally, guided
by the theoretical concept (Yin, 2009; Miles and Huberman, 2003; David, 2005; Scapens,
1990).
The fields of research – the Private Equity Firms – are chosen in such a way that each
research-variable in connection with the research hypotheses is represented twice, as well as its
contrary. For example, for the “majority stake” variable, we need to select at least two Private
Equity Firms that take a majority stake as well as at least two Private Equity Firms that take
minority stakes. Furthermore, each selected Private Equity Firm needs to be able to deliver us
two examples of alliance formation. This selection process enables us to make replications
among cases as well as among fields of research. Results can therefore be claimed to be
particularly robust. Contact with the Private Equity Firms has been established by sending
emails to the investment directors and general partners, followed by several phone calls.
We sampled four Private Equity Firms. Each of them gave us two cases of alliance
formation. Eight cases of alliance formation are therefore analysed. Contrary to statistical tests,
the number of case studies is not of great importance. Of course, the more cases can be analysed
for replication, the more robust are the results. However, because of the considerable time
required for the conduction and analysis of a case study, gains and losses of adding a case to
the study need to be balanced against each other (Baxter and Jack, 2008, pp. 546-547).
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Following Yin (2009), a multiple case study with five or six cases for replication leads to robust
results. The next section presents the selected fields of research and the cases.
2.2. Field and case description
The variables stemming from the hypotheses in relation to the characteristics of the sampled
Private Equity Firms are summarized in table one. Four Private Equity Firms (Fonds Lorrain
des Matériaux (FLM); Industries & Finances Partenaires (I&FP); Siparex Groupe; Demeter
Partners), providing us each with two cases of alliance formation have been sampled. They are
presented next.
Hypothesis
H1
H2
H3a
H3b
H4
Variables / Fields of research
Cases for literal replication
Reputation
Age of the Private Equity-Firm
Stake
Focus of investments
Geographic focus
Publicity
Meeting clubs
FLM
2
low
young
minority
sectorial
regional
no
no
IFP
2
medium
medium
majority
general
national
no
no
Siparex
Demeter
2
2
high
high
1st French PE-Firm
old
minority/majority minority/majority
general
sectorial
international
international
yes
yes
yes
yes
Table 1: Characteristics of the selected fields of study.
Fonds Lorrain des Matériaux (“FLM”) is a sectorial and regional Private Equity Firm
specialized in the domain of materials. It is located in Metz (Lorraine region) and it takes
minority stakes. Established in 2009, it is a comparatively young Private Equity Firm, still
positioning itself on the Private Equity market. It mainly invests in companies located in
Moselle, or, that enable business cooperation with other companies in Moselle. 11 companies
are nowadays accompanied. Most of them formed alliances via the FLM. For our study, the
Private Equity Firm delivers us two cases of alliance formation, where the companies develop
products together with the aim to end up in a supplier-customer relationship.
Industries & Finances Partenaires (“I&FP”) is a Private Equity Firm investing mainly in
France, in all types of sectors and is specialized in build-ups. It takes majority stakes. I&FP
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suggested studying the long term synergies created between companies of an emblematic buildup in the mass catering sector.
Siparex Groupe is the first French Private Equity Firm. It was the first to create a meeting
club for its portfolio companies. The club was established about 35 years ago. Siparex Groupe
invests in companies active in all sectors and in all stages of a company’s life time. It is mainly
active in France with multi-regional implantations, but also has partners in the Euromed zone
(Morocco, Tunisia, Egypt) as well as in Italy and Spain. Siparex Groupe takes “big” minority
stakes and currently invests in more than 240 companies. Siparex Groupe systematically helps
its portfolio companies form alliances because the meeting club has been specifically created
for that purpose. The Private Equity Firm suggests us to study two alliances focussing on ecommerce. Companies from different sectors work together in a long term relationship in order
to develop common commercial offers on the internet.
Demeter Partners is a sectorial Private Equity Firm, active in the field of eco-industries and
eco-energies. It is present in France (more than 50% of the investments are made in France), as
well as in Spain and Germany and it has developed partnerships with emerging German,
Spanish and English funds in the field of Cleantech. In the matter of alliance formation,
Demeter Partners, positions itself by advertising on its website that it helps “develop industrial
and commercial synergies amongst the participations” via the “Demeter Partners
Entrepreneurs” internal meeting club. Created in 2007, the club enables its portfolio companies
to establish long term relationships with each other. Demeter Partners suggests us to analyse
two alliances in the shape of supplier-customer relations after a phase of common product
development.
2.3. Data collection and analysis
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Our data follows primary data collection and is mainly of qualitative nature. Our main
sources are interviews as there exist no written documents or databases that can provide the
information needed. We conducted 33 interviews in total over a time period of three years,
questioning 18 individuals. Interviews were led with individuals that are the most influential on
the pursued firm’s strategy: the CEO of the companies forming the alliances and the general
partner or investment manager of the Private Equity Firms, accompanying the CEOs.
The interviews were between 30 and 90 minutes long and followed an interview guide. We
first conducted semi-directive pilot interviews, followed by directive interviews. Semi-directive
pilot-interviews were used to ensure the field of research (Private Equity Firm) met the required
characteristics. The directive interview guides first contained a series of questions related to the
description of the Private Equity Firm and the formed alliances. A second series of questions
directly related to the hypotheses. A third and final series of questions related to the respondent.
All interviews were tape-recorded if accepted by the respondent and transcribed. The
transcriptions were sent back for control to the respondents. The transcriptions totalled 321 one
point five-spaced A4-pages. To make sure respondents provided accurate data, we interviewed
individuals with different perspectives (mainly the CEOs of the companies that formed the
alliances and the person in charge of accompanying the CEOs within the Private Equity Firm).
If the responses of persons with different perspectives converge, they can be considered more
reliable. Furthermore, we promised confidentiality if this was necessary for the respondents to
speak openly.
Data analysis has been achieved considering that the study comprehends multiple cases and
is embedded. We therefore proceeded on two levels per hypothesis (Graebner and Eisenhardt,
2004). The first level of analysis consists of an intra/within-field inquiry. The viewpoints of the
CEOs of all companies forming the alliances are confronted as well as the viewpoint of the
investment manager of the Private Equity Firm involved. This is done for all fields of research
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(four in total). The second level of analysis is the inter/cross-field inquiry: it confronts the
conclusions of all intra-field inquiries. The hypothesis is infirmed or confirmed when all
viewpoints’ overall levels of analyses converge. The conclusions drawn are based on the
transcriptions and summarized in tables to make comparisons more relevant. The next section
details the results.
3. Results
Because of the volume of the corpus of the analysis, due in great part to the eight case studies
and their embedded character, we will only report an extract: the results of the cross-field
analysis. We start with the hypothesis of a positive impact of the Private Equity Firm’s
reputation on alliance formation. We then present the results of taking a majority stake. Finally,
we present the results of the hypotheses stemming from the knowledge-based perspective.
3.1. The impact of the Private Equity Firm’s reputation on alliance formation
Table 2 presents the results of the cross-field analysis.
Siparex Groupe
Demeter Partners
Industries et Finances
Partenaires
Fonds Lorrain des
Matériaux
Support of
the
hypothesis
Yes
Yes
Yes, but indirect
Yes
The presence of the
Private Equity-Firm is like
a guarantee that enables
the establishment of trust
and seriousness of the
accompanied company. It
reassures potential
alliance partners.
I&FP's reputation has a
positive impact on
attracting prospects to
invest in. In general,
alliance partners I&FP
suggests to its portfolio
companies are
companies that have
previously been
prospects.
The presence of FLM
reassures potential
alliance partners because
they know that a Private
Equity-Firm undertakes
detailed and accurate
analyses of the
companies they invest in.
This fact is a caution of
quality of the
accompanied companies.
Causal mechnism
Reputation
The presence of the
Private Equity-Firm is like
a guarantee that enables
the establishment of trust
and seriousness of the
accompanied company. It
reassures potential
alliance partners.
Table 2: Cross-field conclusions about hypothesis one.
Across all four Private Equity Firms, we can conclude on a positive impact of the Private
Equity Firm’s reputation on alliance formation for its portfolio companies. The Private Equity
16
Firm’s reputation is more important when the alliance includes a partner that is external to the
Private Equity’s investment portfolio.
However, the following characteristic can be noticed: a Private Equity Firm’s reputation has
two components. The first is the reputation of a Private Equity Firm in general. The second is
the specific reputation of a Private Equity Firm compared to its peers. The component that is
always at play is the first one. Depending on the actors on which it has an impact, it can be
positive or negative. In the first case, the actors consider a Private Equity Firm to be an agent
that establishes detailed and accurate analyses of the companies before making the decision to
invest. Moreover, the process is often very selective. This fact can lead potential alliance
partners to be confident and trustful in regard to a small to medium sized company accompanied
by a Private Equity Investor. In the second case, certain actors associate a negative effect of the
presence of a Private Equity Firm. In most cases, it concerns potential customers that stay in a
supplier-customer relation with the Private Equity-backed company. From their point of view,
the fact that its supplier is Private Equity-backed raises the risk of price fluctuation (raising
prices due to the intrusive behaviour of the Private Equity Firm). In general, even if both effects
can be observed, the first, positive effect, dominates in regard to potential alliances partners.
The second component of a Private Equity Firm’s reputation (the part that is specific to each
Private Equity Firm compared to its peers) is mainly noticed only by and among the Private
Equity Firms. CEOs of companies often cannot judge about the specific reputation of a Private
Equity Firm compared to its peers, except if they already know the Private Equity Firm in
question. This can be the case if the Private Equity Firm is sectorial or, if the companies who
judge the Private Equity Firm in case are not part of its investment portfolio but have been
earlier prospects. Like the first component of a Private Equity Firm’s reputation, this second
component can also have a positive as well as a negative impact.
17
In summary, for three of the four fields of study, all respondents see a positive impact of a
Private Equity Firm’s reputation on alliance formation. The presence of a Private Equity Firm
enables rapid establishment of trust between future alliances partners. In the specific case of
I&FP, the causal relationship between the Private Equity Firm’s reputation and alliance
formation is more indirect. The Private Equity Firm’s reputation has more a positive impact on
attracting potential prospects for the Private Equity Firm to invest in. Later on, these prospects
can be a source of ideas for alliances to be formed. In total, the supposed causal link between
the Private Equity Firm’s reputation and alliance formation is confirmed.
3.2.
The impact of a majority stake on alliance formation
Table 3 summarizes the cross-field conclusions.
Siparex Groupe
Demeter Partners
Industries et Finances
Partenaires
Fonds Lorrain des
Matériaux
Support of
the
hypothesis
Yes
Yes
Yes
Yes
Causal mechanism
Majority
stake
Causal mechanism is
supported. From the
viewpoint of the Private
Even if the respondents
Even if the respondents
Even if the respondents
Equity Firm, the majority
support the causal
support the causal
support the causal
stake in necessary. From
mechanism, they all
mechanism, they all
mechanism, they all
the viewpoint of the
indicate that a minority
indicate that a minority
indicate that a minority
Private Equity-backed
stake has a similar impact stake has a similar impact
stake has a similar impact
companies, only one
on alliance formation as a
on alliance formation as a on alliance formation as a
confirms the necessity of a
majority stake
majority stake
majority stake
majority stake. For all the
others, a minority stake
has the same impact.
Table 3: Cross-field conclusions about hypothesis two.
All cases through all fields of research support the fact that a majority stake has a positive
impact on alliance formation and therefore supports hypothesis 2. However, via all cases, one
can notice that a majority stake does not have a greater impact on alliance formation than a
minority stake. Thus, even in the case of a minority stake, Private Equity Firms can only suggest
(and not enforce) the idea of alliance formation. The CEOs of the Private Equity-backed
companies all converge, saying that: a) the suggested ideas of alliance formation of Private
18
Equity Firms taking minority stakes retain as much attention as those stemming from Private
Equity Firms taking majority stakes. If the ideas are good, they will be followed by facts in both
cases; b) French Private Equity Firms that take majority stakes do not impose alliance formation
to their portfolio companies. They only suggest the idea; c) finally, what has the most impact is
the relationship, the intuitu personae, between the Private Equity Firm and the CEOs of the
accompanied companies. In case of conflictual situations, all Private Equity Firms,
independently of their stake, can imagine intervening with the same effect. All respondents
(Private Equity Firms and CEOs of the accompanied companies forming the alliances) converge
on this point.
Thus, even if the hypothesis is supported, the “majority stake” variable does not seem to be
decisive. Taking a minority stake seems to have the same impact on the potentially disciplinary
role played by Private Equity Firms. The disciplinary role played by Private Equity Firms in
alliance formation is confirmed but not the variable that is supposed to capture the role.
3.3. Hypotheses stemming from the knowledge-based perspective
The hypotheses stemming from the knowledge-based perspective have already been tested
with the same methodology as presented in this paper by Anonymous (2014). We therefore
only report a summary.
The role of Private Equity Firms in detecting growth opportunities for their portfolio
companies and helping them to take advantage of them by forming alliances is confirmed by
all respondents over all cases studied and all fields of research. Moreover, results support the
hypotheses that the type of alliances a Private Equity Firm may help its portfolio companies to
form depends on the Private Equity Firm’s competences and expertise. The case studies show
that the sectorial and/or regional Private Equity Firms form more intra-sectorial alliances than
Private Equity Firms with other competences. Generalist Private Equity Firms form alliances
19
between firms of all types of sectors. Finally, Private Equity Firms that invest on a national
basis are more inclined to form alliances between national firms, whereas Private Equity Firms
that invest in companies acting in different countries are more inclined to help their portfolio
companies form transnational alliances. Of course, those facts do not exclude that Private
Equity Firms also help their portfolio companies form alliances beyond their specialized
expertise. However, hypotheses 3a and 3b find support.
The second hypothesis stemming from the knowledge-based perspective is that providing its
portfolio companies with the service of alliance formation is part of the Private Equity Firm’s
market diversification strategy. This hypothesis is confirmed via the point of view of all Private
Equity Firms part of the multiple cases study. However, from the point of view of all companies
forming the alliances, part of the case study, it is not confirmed. As discussed by the author,
this result may be better explained by the fact that the Private Equity Firms do not communicate
enough about their diversification strategy for the CEOs of their portfolio companies to take
notice of it, rather than be seen as a result refuting the hypothesis.
4. Discussion
Let us discuss the findings compared to those of previous studies. Our findings concerning
hypothesis one, on the link between a Private Equity Firm’s reputation and alliance formation,
are consistent with previous findings of Hsu (2006). However, we are able to add more
information. First, while Hsu analyses the hypothesis for Venture Capital Firms, our study
generalizes the findings to the whole market of Private Equity financing, and confirms the
hypothesis on the French Private Equity market, that has not been studied in this light before.
Moreover, as we rely on case studies to test the hypothesis and not on statistical tests, we are
able to also test the causal mechanism behind the hypothesis. Additionally, our study is the first
to show that the Private Equity Firm’s reputation has two components: the reputation of the
20
Private Equity Investor in general, and, the specific reputation of a Private Equity Firm
compared to its peers. The component that is always at play is the first one. The second only
has an impact on alliance formation if potential alliance partners already know the Private
Equity Firm in case. This is only the case in specific situations. In other words, contrary to
previous studies arguing that particularly well-established Private Equity Firms with a high
reputation have a positive impact on alliance formation, our study shows that even young
Private Equity Firms, that are still establishing itself on the Private Equity market, can have a
positive impact on alliance formation, due to the first component of their reputation that is
always at play. Finally, the Private Equity Firm’s reputation is more important when the alliance
includes a partner that is external to the Private Equity’s investment portfolio.
Hypothesis two predicting that Private Equity Firms play a disciplinary role in alliance
formation is corroborated. This finding supports arguments form previous studies (Lindsey,
2008, 2002), that did, however, not specifically test their arguments. The case study presented
in this paper enables testing the causal mechanism supposed to be at play.
The hypotheses stemming from the knowledge-based perspective are borrowed from
Anonymous (2014). Hypothesis 3 drawing a link between the Private Equity Firms’
competences and expertise and the type of alliances it may help their portfolio companies form,
generalize previous findings of Colombo et al. (2006). Looking at Italy, they show that certain
types of investors (Venture Capital sponsors or Corporate Venture Capital Sponsors versus non
Venture Capital sponsors) can give access to different types of alliances.
Previous literature (Wang et al., 2012) argues that there is intentionality of Private Equity
Firms in forming alliances for their portfolio companies in the way that they use alliances to
mitigate environmental risks that their portfolio companies face. Anonymous (2014) argues that
there is intentionality in alliance formation by Private Equity Firms because they follow a
21
diversification strategy on the Private Equity market (hypothesis 4). More generally, this result
is conforming to the literature focusing on diversification in the light of the resource-based
view. Based on the fundamental work of Penrose (1959), this stream of literature explains that
the direction of the diversification strategy pursued by a company is dependent on the
companies’ resources and competences, as well as on the opportunities offered by the
environment in which it acts (Mahoney and Pandian, 1992, pp. 366-367). Hence, the Private
Equity Firms’ resources and competences can be a driving force of their pursued diversification
strategy. Following these arguments, the service of alliance formation stems from the Private
Equity Firms’ competences as active investors and from the resources in terms of contacts they
can provide to their portfolio companies.
Compared to the literature on the role of private Equity Firms in alliance formation, our
study is the first relying on the dual theory of the firm. Our study stresses the importance of
relying on both perspectives (the contractual view and the knowledge-based view) to gain a
richer understanding of the phenomenon. Our results seem in line with previous findings of
Cohendet and Llenera (2005, p. 181). The authors argue that companies acting in uncertain
environments (like Private Equity-backed companies) are forced to develop competences that
enable them to continuously innovate. In those cases, the knowledge-based perspective can be
seen as the more influential perspective and the contractual view as helping to institute
favourable contractual settings to pursue this main objective. Our findings seem to confirm this
argument. It seems that the main reason for alliance formation is, from the point of view of the
Private Equity-backed firms, to take advantage of growth opportunities. From the viewpoint of
Private Equity Firms, alliance formation can be seen as part of their diversification strategy
(hypothesis 4). In order to realize the growth opportunities, favourable conditions (low
transaction and agency costs) are necessary in order to ensure that the alliance may not fail.
Private Equity Firms help their portfolio companies in both ways. They are able to detect and
22
to help their portfolio companies form alliances (hypothesis 3) and enable them to reduce
market inefficiencies due to the presence of transaction and agency costs (hypotheses 1 and 2).
Before concluding, let us comment the possibility of generalizing our results. This question
is often raised when using case studies. First, our case study was designed to be as robust as
possible, using multiple and embedded case studies. The hypotheses were only corroborated by
facts if, on a first level of analysis, they were supported from both points of view of the
companies forming the alliances and the Private Equity Firms engaged, and if, on a second level
of analysis, the conclusions resulting converged over all cases and fields of research studied.
This procedure can be seen as particularly robust (Ying, 2009; Miles and Huberman, 2003;
Graebener and Eisenhardt, 2004). Our results are therefore at least generalizable to alliances
formed in analogous situations and contexts (in the presence of at least one French Private
Equity Firm). More generally, our results augment the catalogue of findings from previous
studies arguing that Private Equity-Firms (or Venture Capital Firms) do play a role in alliance
formation. The combination of their results with our findings then enables generalizing the
findings beyond the specific context of the French Private Equity market. Even more generally,
our study contributes to the literature arguing for a complementary use of the contractual and
the knowledge-based view of the firm. It is thus in combination with other studies that also rely
on the dual theory of the firm, that the generalization process is progressively achieved (David,
2005). Our study constitutes an element of this process.
5. Conclusion
The aim of this study was to analyse how and why Private Equity Firms form alliances for
their portfolio companies. We therefore relied on the dual theory of the firm. After a short
literature review, hypotheses based on the contractual view and the knowledge-based view of
23
the firm, were developed. The hypotheses were then tested empirically by means of a multiple
and embedded case study with explanatory design, based on the French Private Equity market.
Results show that French Private Equity Firms do play a role in alliance formation. Those
alliances are formed within their investment portfolio as well as with external companies.
Private Equity Firms enable their portfolio companies to detect new growth opportunities and
to take advantage of them by forming alliances. The growth opportunities Private Equity Firms
detect are driven by their own competences. Put differently, Private Equity Firms with different
types of competences can lead their portfolio companies to form different types of alliances.
Furthermore, Private Equity Firms play a role in reducing market inefficiencies thereby
preventing alliance formation failure. This is mainly achieved through informal mechanisms
such as reputation and trust. From the Private Equity Firm’s point of view, alliance formation
seems to be part of their diversification strategy. Finally, our study highlights the benefits of
the joint use of these theories and the complementary nature of both theories in explaining the
phenomenon as a whole.
Our main contributions are the following: (1) we aim to fill a gap of present literature,
analysing the role of Private Equity Firms in the formation of strategic alliances by relying on
the dual theory of the firm. Apart from reducing market inefficiencies, Private Equity Firms are
able to detect and to help their portfolio companies take advantage from growth opportunities
by forming alliances. They therefore spur entrepreneurial growth. (2) Our study supports the
stream of literature arguing in favour of joint use of the two theoretical approaches in explaining
organizational phenomena. (3) Our study is the first that relies on a multiple case study.
Contrasting with previous studies, we are therefore able to test the plausibility of causal
mechanisms that underlie the explanation of the results. Furthermore, the case study is of
explanatory design. Even if the use of case studies with explanatory design is largely accepted
(Scapens, 1990; Yin, 2009; Miles and Huberman, 2003; Koenig, 2009b), their use remains
24
scarce compared to case studies with exploratory design. (4) Our study concerns the whole
Private Equity market and not only the Venture Capital market, limited to early stage financing.
We are therefore able to show that this phenomenon, analysed in previous studies, can be
generalized to at least the French Private Equity market and to the whole range of Private Equity
financing, concerned with all the life-cycle stages of a firm. Furthermore, the study
differentiates, when necessary, alliances formed between companies that share a common
Private Equity Investor from alliances formed with companies external to the investment
portfolio of a Private Equity Firm. (5) We contribute to the current debate on the role of certain
actors helping small to medium sized companies connect, which is a main source of firm
innovation and of economic growth in developed countries, thereby spurring entrepreneurial
growth.
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