Private equity investment tenure and financial performance: Evidence from European PIPE transactions

Abstract

The role of private equity investments in a modern economy is growing. Private equity funds, which operate in the industry, attract capital, and distribute it across a wide range of portfolio companies. These funds hold their stakes in target companies’ capital for different periods of time. Why would a private equity fund choose to invest in portfolio companies for a certain period of time and what would be the impact of such investments on a portfolio company? Is there any relationship between the tenure of investment and the performance of a target company? This paper examines the relationship between the tenure of private equity investments in public equity and financial performance of European companies. Performance is measured by cash flow growth and net debt to EBITDA ratios. Private investments in public equity transactions with public company targets located in Western European countries during a period from 2005 to 2016 were analyzed. The findings reveal the impact of private equity investor presence on the performance of target companies and confirm non-linear effects of the relationships. A nonlinear relationship between private investments in public equity investment tenure and target company’s performance have been found both in terms of its solvency and cash flow growth rate.