Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms [1 ed.] 9783959341219, 9783959346214

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Copyright © 2015. Diplomica Verlag. All rights reserved. Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

Franke, Alexander M.: Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms. Hamburg, Diplomica Verlag, 2015 Buch-ISBN: 978-3-95934-621-4 PDF-eBook-ISBN: 978-3-95934-121-9 Druck/Herstellung: Diplomica® Verlag GmbH, Hamburg, 2015 Covermotiv: © buchachon - Fotolia.com Bibliografische Information der Deutschen Nationalbibliothek: Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet über http://dnb.d-nb.de abrufbar.

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Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

Vorwort Sehr geehrter Leser, im Jahre 2010 entschloss sich der Bundesverband Alternative Investments e. V. (BAI), wissenschaftliche Arbeiten im Bereich der sog. Alternativen Investments zu fördern. Zu diesem Zweck wurde damals der BAI-Wissenschaftspreis ins Leben gerufen. Einer der Hauptgründe sowie die Intention für diese Förderung waren und sind, dass das Wissen über Alternative Investments sowohl in der Breite als auch in der Tiefe leider immer noch sehr rudimentär ist. In weiten Teilen der Öffentlichkeit, der Politik, der Medien, aber auch auf Seiten der Investoren herrschen oftmals vielfache Missverständnisse hinsichtlich Nutzen und Risiken von Alternative Investments. Mit dem Wissenschaftspreis will der BAI einen Anreiz für Studenten und Wissenschaftler in Deutschland schaffen, Forschungsarbeit in diesem für institutionelle Investoren zukünftig immer wichtiger werdenden Bereich zu leisten. Viele deutsche Hochschulen erklärten sich auf Anhieb bereit, den BAI bei der Bekanntmachung des Wissenschaftspreises zu unterstützen. Daraus resultierend erreichten den BAI zahlreiche anspruchsvolle Bewerbungen in den vier Kategorien „Dissertationen“, „Master-/Diplomarbeiten“, „Bachelorarbeiten“ und „Sonstige Wissenschaftliche Arbeiten“. Für diese wurde jährlich neben einem Award ein Preisgeld von 10.000 Euro an die Gewinner ausgelobt. Wir freuen uns sehr, dass der Diplomica Verlag die Reihe „Alternative Investments“ ins Leben gerufen hat. Diese Publikation wird sicherlich auch dazu beitragen, das Thema Alternative Investments einer Vielzahl von Personen näherzubringen. Wir wünschen dem Leser nun eine spannende Lektüre!

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Ihr Bundesverband Alternative Investments e. V.

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Copyright © 2015. Diplomica Verlag. All rights reserved. Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

Vorwort von Prof. Dr. Christoph Schalast Der Markt für Finanzinvestoren/Private Equity hat sich in den letzten Jahren – nicht zuletzt angestoßen durch die Finanzkrise – erheblich verändert. Nachdem noch die so genannte 6. M&A Welle von 2004 bis Mitte 2007 maßgeblich durch Megadeals, d.h. Unternehmensübernahmen durch Finanzinvestoren mit einem Volumen von über € 1 Mrd., geprägt war, ließ sich dies insbesondere nach der Lehman Insolvenz nicht mehr darstellen. Die Deals wurden kleiner, weniger und zunehmend verkaufte ein Finanzinvestor an den anderen (Secondary/Tertiary). Nun war vor allem Flexibilität gefragt und deswegen öffneten sich auch zunehmend Fonds – ein gutes Beispiel dafür ist der deutsche „Klassiker“ DBAG – der Idee von Minderheitsbeteiligungen. Im Grundsatz widerspricht dabei eine Minderheitsbeteiligung dem Private Equity Ansatz, der gerade durch die intensive Kontrolle und Führung seiner Portfoliounternehmen Mehrwert schaffen will. Die zentralen Erfolgsfaktoren von Private Equity sind eben Einfluss, finanzwirtschaftliches Knowhow, Reporting und Managementauswahl verbunden mit Incentivierung. All dies – vielleicht mit der Ausnahme von Reporting – stellt sich bei Minderheitsbeteiligungen komplexer dar und deswegen ist es so verdienstvoll, dass Alexander Franke in seiner Arbeit das Thema eingehend untersucht hat. Besonders hervorzuheben ist dabei, dass er auf der Grundlage von ausführlichen Einzelinterviews, auf die dann auch die zahlreichen informativen Case Studies aufbauen, gearbeitet hat. Die Untersuchung fügt sich dabei sehr gut in die anderen von der Frankfurt School in diesem Bereich initiierten Arbeiten ein. So erschien 2008 ein Working Paper über die Historie von Buyouts in Deutschland vor der Finanzkrise und Benita Barten untersuchte die Haltung deutscher Familienunternehmer gegenüber Private Equity (Working Paper Series 107). Die Wirkung der Incentivierung des Managements wurde schließlich in einer Reihe von empirischen Untersuchungen 2011/2012 (Working Paper Series 161) ausführlich analysiert. Ich freue mich, wenn die Arbeit von Herrn Franke zu weiteren Arbeiten in diesem Bereich, der zunehmende Bedeutung im deutschen aber auch internationalen Kontext erhalten wird, motiviert.

Frankfurt am Main, im Februar 2015 Copyright © 2015. Diplomica Verlag. All rights reserved.

Prof. Dr. Christoph Schalast

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Abstract Private equity minority investments have become an increasingly attractive financing alternative for family firms. However, admitting a private equity investor as a minority shareholder seems to contradict with the objective of the owner family to preserve their continuous and unlimited influence on the businesses since they must at least partially cede control over the firm to the private equity investor. Therefore, the purpose of this thesis is to identify the primary decision drivers for family firm entrepreneurs in seeking private equity financing despite the therein related partial loss of control. In the first step, the family firms’ financing needs that result in a demand for private equity minority investments are identified. In the second step, the role of potential non-financial benefits provided by private equity during the decision process for minority investments is evaluated. By giving special consideration to the potential cooperation mechanisms between the shareholders, this thesis goes beyond the scope of previous studies. Cooperation is considered as a prerequisite for the success of minority investments because due to its minority position, the private equity investor is not able to implement its value creation strategy against the will of the family firm entrepreneur.

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In the context of a qualitative research approach, thirteen interviews with both family firm representatives and private equity managers resulting in a total number of ten case studies are used to examine the financing needs of family firms, their demand for non-financial benefits and cooperation mechanisms. The results of this empirical study indicate that the family firms’ need for private equity financing is either attributable to the economic situation of the company, e.g., growth, or to family issues, e.g., wealth extraction or the exit of a shareholder. Moreover, non-financial benefits seem to play a key role during the decision process for private equity minority investments. In particular, private equity involvement is associated with improved corporate governance and a higher professionalisation of the family firms. The private equity investor’s role as a sparring partner is referred to as the primary cooperation mechanism. Overall, this thesis indicates that a private equity minority investment is not a financial vehicle of last resort, but rather a financing alternative for special financing needs that require equity financing or for family issues that demand the neutrality and expertise of an external party.

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Table of Contents Vorwort ..................................................................................................................................... 5 Vorwort von Prof. Dr. Christoph Schalast ............................................................................ 7 Abstract ..................................................................................................................................... 9 List of Abbreviations .............................................................................................................. 14 List of Tables ........................................................................................................................... 15 List of Figures ......................................................................................................................... 16 1 Introduction ......................................................................................................................... 17 1.1 Relevance of the topic and motivation ........................................................................... 17 1.2 Research questions ......................................................................................................... 19 1.3 Research approach .......................................................................................................... 20 1.4 Structure of the thesis ..................................................................................................... 20 2 Theoretical Part ................................................................................................................... 21 2.1 Definitions ...................................................................................................................... 21 2.1.1 Family firms ............................................................................................................ 21 2.1.2 Private equity investors ........................................................................................... 22 2.1.3 Private equity minority investments ........................................................................ 22 2.2 Literature review............................................................................................................. 23 2.2.1 Potential benefits of private equity investments ...................................................... 23 2.2.2 Resource deficits of family firms ............................................................................ 25

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2.2.3 Reasons for family firms to demand private equity financing ................................ 28 2.3 Expectations for the empirical part ................................................................................. 29 3 Empirical Foundations ........................................................................................................ 33 3.1 Development of the research questions .......................................................................... 33 3.2 Methodology................................................................................................................... 34 3.2.1 Research method ................................................................................................. 34

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3.2.2 Development of interview guidelines ......................................................................36 3.2.3 Interview process .....................................................................................................37 3.3 Sample characteristics .....................................................................................................38 4 Empirical Part ......................................................................................................................41 4.1 Individual case study analysis .........................................................................................41 4.1.1 Case A: Capital injection in times of crisis ..............................................................41 4.1.2 Case B: Paving the way toward an IPO ...................................................................42 4.1.3 Case C: Solving family issues..................................................................................44 4.1.4 Case D: Sharing risk and diversifying family wealth ..............................................44 4.1.5 Case E: Accelerating growth ...................................................................................45 4.1.6 Case F: Increasing company value ..........................................................................46 4.1.7 Case G: Replacement of a departing shareholder ....................................................47 4.1.8 Case H: Strengthening the capital base ....................................................................48 4.1.9 Case I: Redeeming silent participations and expanding business ............................48 4.1.10 Case J: Solving succession problems .....................................................................49 4.2 Comprehensive case study analysis ................................................................................50 4.2.1 Reasons for demanding private equity minority investments ..................................50 4.2.1.1 Economic challenges.........................................................................................53 4.2.1.2 Shareholder issues .............................................................................................53 4.2.2 The role of non-financial benefits ............................................................................54 4.2.2.1 Corporate Governance ......................................................................................56 4.2.2.2 Professionalisation ............................................................................................59 4.2.2.3 Financial expertise ............................................................................................60 4.2.2.4 Internationalisation ...........................................................................................62 4.2.2.5 Network of portfolio companies .......................................................................63 Copyright © 2015. Diplomica Verlag. All rights reserved.

4.2.3 Cooperation mechanisms .........................................................................................64 4.2.3.1 Good personal relationship as a prerequisite for cooperation ...........................65 4.2.3.2 Private equity investor’s tool set for exerting influence ...................................66 4.2.3.3 The sparring partner role of the private equity investor....................................69 4.2.3.4 Exit scenarios as incentives for cooperation .....................................................70

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Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

5 Conclusion ............................................................................................................................ 73 5.1 Major findings ................................................................................................................ 73 5.2 Lessons learned............................................................................................................... 74 5.3 Limitations and implications for future research ............................................................ 75 References ............................................................................................................................... 77 Appendix A: Cover Letters.................................................................................................... 81

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Appendix B: Interview Guidelines ........................................................................................ 85

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List of Abbreviations DBAG

Deutsche Beteiligungs AG

CEO

Chief Executive Officer

CFO

Chief Financial Officer

GDP

Gross Domestic Product

IPO

Initial Public Offering

KKR

Kohlberg Kravis Roberts

M&A

Mergers and Acquisitions

MBI

Management Buy-in

MBO

Management Buyout

PE

Private Equity

U.S.

United States

USA

United States of America

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Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

List of Tables Table 1: Evaluation of the family firm’s set of resources ........................................................ 26 Table 2: Theoretical implications and expectations for the empirical part .............................. 31 Table 3: Case study characteristics........................................................................................... 39 Table 4: Description of private equity investors ...................................................................... 39 Table 5: Reasons for family firms to seek private equity financing......................................... 52 Table 6: The role of non-financial benefits .............................................................................. 55 Table 7: Private equity investor’s tool set for exerting influence ............................................ 68

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Table 8: Exit Strategies ............................................................................................................ 71

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List of Figures Figure 1: Potential benefits of private equity ............................................................................24 Figure 2: Selection of research method and research design ....................................................35 Figure 3: Firm size by revenue .................................................................................................40 Figure 4: Firm size by head count.............................................................................................40

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Figure 5: Time elapsed since minority investment ...................................................................40

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1 Introduction

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In the aftermath of the so-called “Heuschreckendebatte” (Locust Debate) that was provoked in 2005 by Franz Müntefering, the then chairman of the Social Democratic Party of Germany who used a locust metaphor when referring to private equity financing that has been longassociated with professional financial investors who put the survival of companies at risk for their own short-term profit maximisation objectives. The locust metaphor particularly created a nightmare scenario for the family-owned, mid-sized companies sector that are considered as the backbone of the German economy. The self-conception of these family firms that places a high value on tradition and continuity seemed incompatible with that of private equity investors who, in the context of their value creation plans, usually implement radical strategic changes in their respective portfolio companies. In contrast hereto, we have recently been able to witness an increasing number of family firms demanding private equity financing. Private equity minority investments in particular are becoming an increasingly important financing alternative for the German sector of mid-sized companies that is largely dominated by family firms. This development seems to stand in sharp contrast to the family firm entrepreneur’s objective of long-term preservation of the family’s continuous and unlimited influence on the firm. On the investors’ side, minority investments have become a popular alternative in the aftermath of the financial crisis when the willingness of banks to finance large buyout transactions considerably declined. In addition to the German private equity firms that traditionally focus on minority investments, the Anglo-Saxon type of private equity firms such as KKR or Blackstone that are primarily known for large buyout transactions have recently entered the German market for minority investments. This development is astonishing considering that minority investments widely differ from traditional buyout transactions in terms of structural aspects, exit strategies, corporate governance and value creation objectives. Above all, minority investments seem to contradict with the aspiration of private equity investors to have full control over their portfolio companies since cooperation is viewed as a prerequisite for the success of minority investments. The purpose of the following thesis is to reflect this development by analysing the major drivers of demand for private equity minority investments in German family firms. In addition to the identification of the financing needs that cause family firms to seek private equity financing, the role of the potential non-financial benefits that can be provided by private equity, e.g., the improvement of corporate governance structures, during the decision process for this type of financing is examined.

1.1 Relevance of the topic and motivation Family firms are considered as the backbone of the German economy. According to a study by the German “Stiftung für Familienunternehmen” (2011, p. 43), 90% of the German companies are private businesses that are owned and managed by a family. Therefore, family firms are regarded as the predominant business form in this country. The important role of

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family firms as an organisational form of business is not limited to Germany. In fact, the business environment of most countries worldwide is dominated by family firms (Chrisman, Chua & Steier, 2003, p. 442). For example in the USA, where family firms represent a substantial portion of the economy regardless of whether they are measured in their contribution to the GDP, employment or tax revenues. (Astrachan & Shanker 2003, pp. 217-218) The research interest for family firms not only arises from their importance to the global economy, but also because of the distinct characteristics that distinguish them from other forms of business. Family firms stand out through the interaction between the family and business spheres and the reduced agency costs due to the unity of management and ownership (Klöckner, 2009, p. 1). Furthermore, family firms are perceived to follow a long-term approach to management (Bertrand & Schoar, 2006, p. 75) and to apply a set of core values to their business resulting in a reputation for social responsibility (Tagiuri & Davis 1992, p. 43).

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Irrespective of whether measured in terms of published journal articles, universities establishing research centres for family firms or memberships in family firm associations, the interest in research on family firms has strongly increased in recent years (Sharma, 2004, pp. 1-2). Even though much progress in developing a theory of the family firm has been made, the majority of the research still concentrates on only a few topics such as succession (Zahra & Sharma, 2004, p. 331). On the other hand, the research on private equity investments in family firms is still under-researched even though family firms have gained great importance as an investment target for private equity investors (Scholes et al. 2009, pp. 7–8). Moreover, the majority of research conducted in this field solely focuses on buyout situations where the private equity firm acquires full control over the company. To date, only very few research projects have examined private equity minority investments in family firms and the reasons for family firms to demand private equity minority investors still remain as not fully understood. The starting point for the study at hand is the consideration that the number of private equity minority investments in family firms will increase in the future. The reasons for this development are to be found in both the demand and supply sides. Private equity is considered as an attractive financing alternative by family firms that face succession problems or lack capital to grow (Upton & Petty 2000, p. 27). A private equity minority investment enables the family firm to derive the benefits of private equity while concurrently maintaining the family control over the company. On the supply side, the financial crisis has limited the capability of private equity investors to execute large buyouts with a high degree of leverage. Kaplan and Strömberg (2009, p. 143) suggest that private equity investors have developed better operational engineering capabilities in the past and will therefore be able to add value without taking over the full control over the company. Consequentially, this will result in private equity investors taking up more minority stakes in the future. The goal of this thesis is therefore to contribute to the development of a theory on private equity minority investments in family firms.

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1.2 Research questions In this section, the research questions for the empirical thesis are posed and the associated research gap is described. Following up these considerations, Section 3.1 delineates the elaboration of the research questions and outlines the thoughts behind the research questions in detail. The first research question of this thesis is mainly related to the clear identification of the financing needs of the family firm to establish a basis for understanding the demand of these types of companies for private equity financing. For the investigation of the financing need, the differentiation between the reasons that emerge from the economic situation of the company and the reasons that arise out of changes in the shareholder structure are considered as particularly important. The following research question is the starting point in order to gain a comprehensive understanding of the motivation of family firms to demand private equity minority investments:

Why do family firms demand private equity minority investments?

The results of previous research on minority investments show that non-financial benefits derived from the corporation with the investment managers play an important role as decision drivers for family firms entering into private equity minority investments (Tappeiner et al., 2012, p. 45). Although it has already been stated that family firms value non-financial benefits when deciding on private equity financing, very little knowledge exists regarding the distinct fields in which these benefits are actually provided. In order to fill this research gap and establish a comprehensive understanding of non-financial benefits provided by private equity, the following research question is posed:

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How do non-financial benefits influence the family firm’s decision for private equity minority investments?

In previous research, the demand of family firms for private equity financing was primarily analysed by focussing on the expectations of family firm owners in an ex-ante perspective. As a result, the actual value creation process in the course of the minority investment was placed vaguely in the background. The consideration underlying the third research question is that private equity investors need to establish some kind of cooperation with the family firm entrepreneurs in order to be able to implement value-adding strategies in the company despite their minority position. The purpose of the third research question is therefore to identify the cooperation mechanisms that are available to the private equity investor for exerting influence. Hence, the third research question is posed as follows:

Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

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What are the mechanisms that incentivise the cooperation between family firms and private equity investors in the course of private equity minority investments?

1.3 Research approach Due to the limited prior knowledge on the characteristics of private equity minority investments in family firms, this thesis is of an explanatory nature and is conducted as a theorybuilding research project. The thesis applies an empirical research approach and has the objective of contributing to the development of a theory on private equity minority investments in family firms by deriving propositions based on empirical evidence from selected case studies (Dul & Hak, 2012, p. 175). Either a quantitative or a qualitative research approach can be applied in conducting an empirical research project. The selection of the appropriate research approach should thereby depend on the nature of the research project, the type of research questions and the previously conducted research on this topic (Yin, 2009, pp. 8-9). Primarily, the nature of the research project is analysed to decide between the qualitative and the quantitative research approach. Private equity is by definition private, i.e., information about private equity transactions is not, or only in a very limited way, available to the public. The same is true in general for family firms that are very sensitive about making information regarding their business or shareholders available to outsiders (Dyer, 2006, p. 264). Moreover, in the special case of private equity minority investments, the number of observable transactions is relatively low. For these reasons, a quantitative research requiring an adequate data set seemed unsuitable in answering the research questions of this thesis. Finally, the majority of previous research conducted in this field also followed a qualitative empirical approach (Klöckner 2009, p. 6; Tappeiner et al., 2012, p. 40). Considering these reasons, the qualitative approach is judged as the suitable approach for this thesis.

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1.4 Structure of the thesis This thesis is divided in five chapters. Following the introduction, Chapter 2 outlines the theoretical background of this thesis. In this theoretical part, the definitions of the research objects are posed and the most recent literature on family firms, private equity and minority investments is reviewed. Expectations for the empirical part are derived on this basis. Chapter 3 describes the conceptual framework and the empirical foundations of this research project. In addition to the elaboration of the research questions, the research methodology applied within this thesis is described. The empirical part of this thesis (Chapter 4) is divided into an individual analysis and a comprehensive analysis of the case studies. Whereas the individual analysis primarily refers to the financing needs of the family firm and the background of the minority investments, the comprehensive analysis explicitly answers the three research questions. The final chapter highlights the major findings of the thesis, elaborates implications for practitioners and provides an outlook on further research by formulating the limitations of the present study.

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2 Theoretical Part The goal of this thesis is to add insight to the research field of private equity minority investments in family firms. To this end, a qualitative research approach is applied to examine the characteristics of the selected case studies. This empirical part requires a definition of the research objects which will be given in Section 2.1. A review on the literature of private equity investments in family firms then builds the theoretical foundation for this thesis (Section 2.2). Three dimensions are covered with the literature review: (1) The potential benefits private equity investors can make available to their portfolio companies, (2) the resource deficits family firms show in comparison to non-family firms in their peer group and (3) reasons indicated by research literature as to why family firms seek private equity financing. Eventually, by combining these three dimensions in section 2.3 propositions why family firms show demand for private equity minority investments are formulated. These propositions build the foundation for the empirical part in Chapter 3.

2.1 Definitions In this section, the definitions for the research objects family firms, private equity investors and minority investments are posed and their application in the selection process for the case studies is described.

2.1.1 Family firms

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The objective of a definition for family firms should be to capture the characteristics that make family firms distinct from other organisational forms of businesses. The consideration in family firm research is that family ownership alone is not sufficient to define a family firm. As a result, family influence was identified as the significant distinguishing feature when comparing family and non-family businesses (Chrisman, Chua & Sharma, 2005, p. 559). In the research literature, the family’s influence over strategic decisions, the self-perception as a family firm, the willingness of the family to retain the business under their control and distinct family firm behaviour serve as definition criteria for family firms (Chrisman, Chua & Sharma, 2005, p. 556). Following these considerations, the family firm definition applied within this thesis is required to cover the following aspects: (1) Family ownership, (2) family influence on strategic decisions and (3) the self-perception of the company as a family firm. Ultimately, the definition from the family firm guideline by the German “Stiftung Familienunternehmen” was considered as the most appropriate one and therefore provides the basis for the family firm definition in this work. Herein, family firms, independent of their size, are considered as such if (1) “the majority of the decision-making rights is in the possession of the natural person(s) who established the firm, or in the possession of the natural person(s) who has/have acquired

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the share capital of the firm, or in the possession of their spouses, parents, child or children’s direct heirs, (2) the majority of the decision-making rights are indirect or direct, (3) at least one representative of the family or kin is formally involved in the governance of the firm.” (Stiftung Familienunternehmen, 2013). Applying the described definition, only privately held businesses with natural persons as majority owners are taken as case studies for the empirical analysis of this thesis. Another requirement is the family involvement in the management or advisory board. Following the advice of Westhead and Cowling (1998, p. 31ff.), the self-perception of the company as a family firm was added as a third definition criterion. For this purpose, the chosen companies are explicitly addressed as family firms in the case study selection process. Furthermore, the family firm status was verified with the interviewee and double-checked with secondary sources such as, e.g., press articles and web pages.

2.1.2 Private equity investors

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Private equity investors are professional asset management firms that usually make equity investments in companies that are not listed on a stock exchange with the aim to exit their investment profitably within a certain time horizon ranging from about three to five years (Fraser-Sampson 2010, p. 2). Nevertheless, private equity investments can take several forms: Private equity firms may invest mezzanine capital or junior debt instead of equity, they may purchase stakes in companies with different control rights, e.g. majority or minority stakes, invest in companies that are at different points in their business cycle, e.g., start-ups or mature companies, and companies facing different economic situations, e.g., growth, turnaround or buyout (Talmor & Vasvari, 2011, p. 21). Due to the different varieties that exist in private equity, a single, clear and comprehensive definition is impossible to formulate. However, in order to establish comparability, the private equity investors examined in the present empirical study are required to meet a certain set of conditions. For the present thesis, private equity investors are defined as professional financial investors (1) That collect money either from their shareholders or from institutional investors, foundations and wealthy individuals to make equity investments in privately held companies with a profit objective, (2) that receive shares containing voting rights of the company they invest in and (3) that are not venture capital firms investing in start-ups. The terms private equity investor and private equity firm are used synonymously throughout this thesis.

2.1.3 Private equity minority investments In practise, different manifestations of private equity minority investments in family firms exist. First of all, private equity firms may join a so-called “club deal”, where each private equity investor takes a minority position while they collectively take over the control of the company. As the scope of this thesis lies on true private equity minority investments, i.e., financial investors obtaining less than 50% of the control rights, this alternative was excluded from the case study selection process. Minority investments are only eligible as case studies 22

Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

for this thesis if private equity investors had purchased an equity stake in the family firm that resulted in obtaining less than 50% of the decision-making rights thereby leaving the family in the majority position.

2.2 Literature review The literature review of this thesis is divided into three parts. First, the potential benefits of private equity investments are described in 2.2.1. Second in Section 2.2.2, the resource-based view is taken to show the deficits of family firms. With this, special attention is paid to the overlapping of the family and business spheres that is considered to be unique to family firms. Furthermore, the escalation of the commitment theory is taken as another indicator for the deficiencies of family firms. And thirdly in Section 2.2.3, recent research literature on the motivation for family firms in obtaining private equity financing is reviewed. While all three perspectives are initially considered independent of each other, they are combined in Section 2.3 to develop a comprehensive view on the possible rationales for family firms to demand private equity minority investments.

2.2.1 Potential benefits of private equity investments

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The majority of research on the potential benefits of private equity focuses almost exclusively on buyouts. For minority investments, only partial aspects of private equity benefits have been examined, as for example, the impact of private equity minority investments on the financial network of SMEs in Italy (Tutino and Paoloni, 2012). In order to receive a comprehensive picture, the potential benefits of private equity are analysed independent of the type of investment, i.e., minority or majority investment and the type of investment target, i.e., family or non-family firm. In a second step, the potential benefits of private equity are examined regarding their effectiveness for minority investments in family firms (Section 2.3). The following figure provides an overview of the potential benefits of private equity and divides them into benefits arising from direct and indirect involvement of private equity investors. Based on the illustration, the value creation potential of private equity is described in detail.

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Figure 1:: Potential beenefits of priv vate equity (A Author’s visu ualisation based on Wulf eet al., 2010, p.. 7)

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o Private equuity investoors create ecconomic vaalue by appllying financcial, governnance and operational engiineering to their respeective portffolio compaanies (Kapllan & Ström mberg, 200 09, p. 130). Withh financial managemen m nt being onee of their co ore competeencies, privaate equity investors are peerceived to provide p add ded value too their portffolio compaanies by suppporting theem in working caapital optim misation and d capital struucture decisions that in n turn lead to greater finanf cial efficieency. Moreover, private equity innvestors ussually fosterr the professsionalisatio on of accountingg and receivvables manaagement aft fter a buyou ut resulting in a lower working capital level (Singgh, 1990, p. 111). The review w of recent empirical sttudies sugggests that priivate equity y investmennts are assocciated with corpoorate governnance benefi fits that evenntually resu ult in a betteer performannce for the target t company ((Cumming, Siegel & Wright, 20007, p. 451). Governaance engineeering is th he approach of pprivate equiity investorss introducinng an adviso ory board within w their pportfolio co ompanies and bbecoming acctively invo olved in straategic issuees in their capacity c as members of o the advisory bboard. Family firms beenefit from having fam mily-externaal members on the adv visory board becaause they contribute c additional a oobjectivenesss and havee the abilityy to serve as an 24

Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

arbitrator for family conflicts (Brenes Madrigal & Requena, 2011, pp. 284–285). Studies have also shown that advisory boards of private equity portfolio companies are run more efficiently than the boards of comparable public companies (Cornelli & Karakas, 2008, pp. 74-75). Furthermore, private equity involvement is perceived to improve management incentives. Kaplan (1989, p. 242ff.) shows that the changes in operational results of private equity backed companies are, to a large extent, attributable to the practice of private equity investors to incentivise management by increasing their ownership in the company. Private equity investors also monitor the management of their portfolio companies closely and are not reluctant to substitute the managers if they show poor performance (Kaplan & Strömberg 2009, p. 144). To a large extent, research literature attributes the value appreciation of private equity investments to the use of leverage and incentive alignment (Jensen, 1989, p. 17). This approach neglects that operational engineering, i.e., the provision of operational and industry knowhow by the private equity investors, has gained great importance in recent years and plays a key role in the economic value generation of private equity investors. Acharya et al. (2013, p. 368ff.) show that the superior performance of certain private equity firms can be partially attributed to the operational expertise of their investment managers. They have found a correlation between the investment strategy and the professional background of the private equity managers: Investment managers who are industry experts or have previously worked as a consultant are associated with a significant outperformance in deals focussing on internal value creation programs and investment managers with a finance or accounting background are linked to superior performance in deals involving huge mergers and acquisitions (M&A) transactions. Furthermore, private equity investors foster efficiency and diminish hierarchical complexity within their portfolio companies through the decentralization of responsibilities (Phan & Hill, 1995, p. 707). Regarding knowledge transfer, the fact private equity investors can have a positive influence on their portfolio companies by encouraging them to engage external consultants and cooperate with other portfolio companies for outside advice, if necessary, becomes apparent (Wulf et al., 2010, p. 13).

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2.2.2 Resource deficits of family firms The following section regarding the resource deficits of family firms is based on the resourcebased view conveying that the success of a company depends on which resources a company has available and how it uses them (Wernerfelt, 1984, pp. 172-173). In general, resources can be thought of as the strengths and weaknesses that are linked to a specific firm. Barney (1991, p. 101) defines firm resources as “all assets, capabilities, organisational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable a firm to conceive of and implement strategies that improve its efficiency and effectiveness”. The assumption underlying the resource-based view is that not all companies have access to the same set of resources. Following the resource-based view, a firm can obtain a sustainable competitive advantage if it has access to valuable and rare resources that are only imperfectly imitable and cannot be easily substituted (Barney, 1991, p. 116).

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Family firms are characterised by the interaction of family and business. Due to the unification of ownership and management, the emotional attachment of the family to the company in combination with their aspiration for sustainability and social responsibility, family firms are perceived to have a unique set of resources available. In the research literature, this special set of resources providing family firms with potential competitive advantages over non-family firms is referred to as “familiness” (Cabrera-Suárez, Saá-Pérez & García-Almeida, 2001, p. 38). With the examination of the capabilities and competencies of family firms, five sources of family capital can be deducted: Human, social, patience, survivability and corporate governance (Hitt & Sirmon, 2003, p. 340). Nevertheless, “familiness” is also connected with certain limitations for the family firm that can interfere with successful business performance. Table 1 highlights the five sources of family capital and concurrently provides an overview of the resulting limitations for family firms compared to non-family firms.

Resource

Definition

Aquired knowledge, Human Capital skills and capabilities of a person.

Advantage Extraordinary commitment; warm, friendly and imitate relationships; potential for deep firm-specific tacit knowledge.

Components embedded Resources embedded in in family; legitimacy with Social Capital network, accessed constituencies enhanced; through relationships. development of human capital.

Patient Financial Capital

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Survivability Capital

Governance and Structure Costs

Limitation

Non-family Firms

Difficult to attract and Not characterised by the retain qualified positives, but have fewer managers; path limitations. dependencies. Networks can be more diverse, maybe Limited number of opportunistic in networks accessed; accessing and often exluded from elite leveraging; sometimes networks. used for managers´ benefit implying agency costs.

Generational outlook, not accountable to strict Non-family investors short-term results; Invested in financial excluded; limited to capital without threat of effective management availability of family´s of capital; allows pursuit liquidation. financial capital. of creative and innovative strategies. Pooled personal Helps sustain the resources that family business during poor Not all family firms have members loan, economic times or this. contribute and share during redevelopment of with business. the business; safety net. Some family firms may Costs associated with Family owned and not have an effective control of firm; operated firm structures, structure, trust and examples include trust and family bonds strong family bonds, incentives, monitoring reduce governance thereby producing and control. costs. greater governance costs.

Largely do not have the benefits or limitations.

Do not enjoy due to the lack of commitment by employees and stakeholders. Professional management and capital diversification often increase governance costs.

Table 1: Evaluation of the family firm’s set of resources (Author’s illustration based on Hitt & Sirmon, 2003, p. 345)

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Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

Family firms are known for having strong ties to their employees and for their capability of building high levels of social and human capital resulting in the extraordinary commitment of family firms’ employees. These good relationships with employees can provide family firms with a competitive advantage. On the other side, the strong connections between family firms and employees can interfere with the objective valuation of resources and even restrain the shedding of dispensable resources (Hitt & Sirmon 2003, p. 347). Therefore, family firms might be reluctant in shedding resources compared to non-family firms. This can cause the family firm to forgo profits because resources are not economically allocated. Furthermore, the strong ties between the family firm and its employees become apparent in the long tenure of family firm managers who, on average, stay with the company from between 15 to 25 years (Miller & Le Breton-Miller, 2006, p. 73ff.). As a consequence, changes in the top management team can rarely be observed in family firms. In this context, human capital deficiencies can emerge in family firms because the top management team might indeed have a thorough understanding of the specific company and its customers, but has not gained significant experience outside the family firm (Hitt & Sirmon 2003, pp. 348–351). Research findings indicate that this weakness is exacerbated by the fact that family firms have difficulties in attracting highly qualified managers (Dyer, 2006, p. 262) and that family firm managers are often not chosen based on their achievements, but rather based nepotism, birth order or gender (Dyer, 2003, pp. 405-407). In the long-term, this can result in a reduced level of competitiveness of the family firm compared to other types of companies.

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The patient capital resource refers to the owner family acting as a long-term oriented shareholder and capital supplier for the family firm. This is perceived as a potential advantage for family firms because with patient capital, the threat of liquidation is reduced. Furthermore, with patient capital, the family firms are less dependent on short-term profits and are thereby given the capability to develop innovative and creative strategies. On the other hand, this principle excludes external investors and limits the company’s accessibility to financial capital. Empirical evidence confirms that family firms are reluctant to use external capital (López-Gracia & Sánchez-Andújar, 2007, p. 269ff). This aversion against external sourcing of funding is connected with the families’ aspiration for independence (Poutziouris, 2001, p. 282). At some point, a family firm may have reached a development stage where the family wealth is not sufficient as source of funding. In this case, patient capital might be the source of a resource deficiency because it limits the excess to external funding. Due to the unification of ownership and management, the strong family bonds and the trust connected with family firms, they are perceived to have lower agency costs compared to nonfamily firms (Hitt & Sirmon, 2003, pp. 344-345). As this might be true for a group of family firms, strong family ties can also be responsible for inefficient governance structures resulting in higher agency costs. Gomez-Mejía, Nickel and Gutierrez (2001, p. 81) indicate that family contracting, i.e., a contract involving family ties between the agent and the principal, is governed more by emotional rather than economic criteria and therefore produces higher agency costs. Furthermore, as a consequence of the unification of ownership and management, the power within a family firm is often concentrated in the hands of a single person, the owner-manager (Feltham, Feltham & Barnett, 2005, p. 1). As a result, other family members

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and employees are less prone to engage in useful debates, question the strategic course of the firm and provoke conflicts that might prevent manager-owners from decision errors (Kellermanns & Eddleston, 2004, p. 221). This concentration of decision power is the reason why family firm managers tend toward escalation of commitment, i.e., adhering to a decision despite new evidence that suggests that the costs of proceeding outweigh the potential benefits, which has a negative influence on the family firm’s performance (Woods, Dalziel & Barton, 2012, p. 19). In particular, this behavioural pattern is dangerous for family firms that have grown significantly in size and still rely solely on the experience of the owner-manager resulting in a lacking objectivity during the decision-making process and ignoring the necessary adaption of the organisational structure to the complexity of the firm (Wulf et al., 2010, p. 11).

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2.2.3 Reasons for family firms to demand private equity financing Private equity can work as a financing solution for family firms lacking resources and capabilities to grow or manage generational succession while still sustaining the family presence in the company (Dawson, 2011, p. 189). Family firms often neglect succession planning that when combined with the dependency on a small group of key people can endanger the continuity of business in these firms. Although succession problems are commonly connected with negative consequences, they can also reveal opportunities for the family firm. Involving private equity in the succession planning process is particularly helpful when a large share of the family wealth is bound within the firm. In order to diversify family wealth, a family firm entrepreneur who has no internal successor available can sell the company with the help of a private equity investor in the context of an management buyout (MBO) or management buy-in (MBI), thereby retrieving capital while still ensuring the continued independent ownership of the firm (Howorth, Westhead & Wright, 2004, p. 511). In addition to succession planning, private equity can support family firms during growth phases or periods of strategic change. Scholes et al. (2009, p. 8) indicate that private equity “can improve the operating efficiency and enable growth by catalysing entrepreneurial activity”. In doing so, private equity not only provides family firms with access to funds enabling organic or inorganic growth, but also with external know-how and experience. Empirical evidence shows that the participation of private equity investors in succession planning leads to stronger strategic change regarding the enhancement of efficiency and the acceleration of growth compared to firms where private equity is not involved in the transition process (Ball et al., 2008, p. 4). Research further indicates that due to the discontinuation of the pursuit of non-economic family goals, private equity investors foster professionalisation and economisation in their portfolio companies (Klöckner, 2009, pp. 334–335). Moreover, private equity can be applied in a variety of challenges arising at the shareholder level and especially to resolve family conflicts. For example, private equity can serve as a financing alternative in the case that some family members want to withdraw from the company and sell their shares (Dawson, 2011, p. 191). Concerning the shareholder level, another reason for family firms to seek private equity financing is consolidation of control. Private equity can support a family firm entrepreneur who wants to concentrate ownership 28

Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

in one family line to accelerate decision-making processes or wants to cash out a family member who has contradicting views on strategic decisions (Tappeiner et al. 2012, p. 49). Private equity can play a key role in diminishing the adverse effects of family firms’ resource deficits. Of course, family firms choose private equity financing primarily because they have a financial need. However, family firms value the non-financial benefits that are connected with private equity during their decision process for this type of financing. Research indicates that family firms do not view private equity as a financing of last resort, but rather show a demand for “smart money” and use the private equity investor’s external know-how to professionalise management and governance structures (Tappeiner et al., 2012, p. 45). Particularly in times of family conflict, private equity investors can create value by adding neutrality to the advisory board (Tappeiner et al., 2012, p. 49-50). Along with improvement of governance and economisation, family firms can obtain further nonfinancial benefits from the cooperation with private equity investors. Empirical evidence suggests that family firms can learn from private equity in M&A, financing, governance and strategy issues (Prym, 2011, p. 200). In particular, private equity can support family firms in financing issues and professionalisation of controlling and accounting systems (Achleitner, Schraml & Tappeiner, 2008, pp. 71–72). The engagement of private equity investors in family firms is perceived to have a positive signalling effect on banks because their investment is viewed as an indication for the firm’s quality (Hennsen, 2011, p. 156).

2.3 Expectations for the empirical part

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Expectations for the empirical part of this thesis are formulated based on the theoretical findings. For this purpose, the insights on the benefits of private equity and the resource deficits of family firms gained from the literature review in Section 2.2 were combined. The reasons for family firms to demand private equity financing are then broken down into three subgroups, (1) reasons that result from the financial need of the company which is determined by its present economic situation, (2) reasons that emerge on the shareholder level and (3) non-financial objectives that arise from specific family firm resource deficits requiring external know-how. First, family firms are expected to seek private equity financing in order to have a reliable partner that facilitates or even accelerates future growth. For example, private equity can close a funding gap if a family firm does not have sufficient resources to pursue its growth plans. In particular, private equity can be a solution for family firms that have reached their target debt-to-equity ratio or have limited access to external capital. Family firms have often grown significantly in size while the family does not have sufficient resources available to support the further growth that is essential to maintain competitiveness. Second, family issues that provoke conflicts at the shareholder level are expected to trigger a family firm’s demand for private equity financing. Particularly in multigenerational family firms where two or more family lines share ownership, these conflicts can endanger the continuity of the business. Private equity as a temporary financing partner helps family

Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

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firms resolve such conflicts. For example, private equity financing can be applied to cash out family members who want to withdraw from the company or to consolidate ownership when different family members have deviating views on the future strategic direction of the company. In this context, family firms are anticipated to especially value the neutrality of private equity, i.e., the pursuit of purely economic and rational objectives. Furthermore, private equity can be applied as a solution to the succession problems of family firms. Finally, families that have bound their entire wealth in their family firm are assumed to seek private equity financing in order to extract capital from the firm without jeopardising the substance of the company and endangering future growth.

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.

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Family Firms´ Deficits

Implications

Limited access to external capital

Family firm does not have sufficient resources to pursue future growth plans.

Expectations

Private equity provides resources Family firms demand private equity because they are searching for a and capabilities for growth; financing know-how and M&A reliable partner to accompany the further development of the expertise belong to core company. competencies.

Family conflicts

Family issues endanger economic Private equity can replace Family firms demand private equity performance of family firm; family departing shareholders and provide because it can serve as a members deviate in strategic neutrality in family conflicts; temporary partner to solve family decisions; exit of individual family provision of capital to cash out conflicts. members; consolidation of family members. ownership.

Family capital is bound in the firm

At some point, the family wants to Capital can be withdrawn due to retrieve capital of the firm without changes in private asset allocation endangering the competitiveness while family influence on the firm and growth perspectives of the is preserved. company.

Family firms show demand for private equity due to reasons of wealth diversification.

Having no internal successor Lack of succession available endangers the continuity planning of business and the independence of the firm.

Private equity can help to resolve succession issues; fostering strategic change in transition phases.

Family firms facing succession problems demand private equity financing; private equity as temporary partner to prepare a trade sale or IPO as a long-term solution.

Familiness: Family firms are characterised by emotional attachment of family; due to Pursuit of noneconomic objectives aspiration for social responsibility, family firms are reluctant to shed resources.

Private equity can prevent the pursuit of non-economic family goals thereby fostering professionalisation and economisation.

Non-financial benefit of private equity that is valued by family firms in their financing decision.

Family firms often depend on single individuals or a small group of key persons; escalation of commitment; inefficient and nontransparent organisational structures.

Private equity is associated with corporate governance benefits, e.g., adding managerial expertise and improving organisational structures.

Non-financial benefit of private equity that is valued by family firms in their financing decision.

Inefficient governance structure

Human capital deficiencies

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Private Equity Benefits

Family firms have difficulties in Private equity has the potential to create value through involvement attracting qualified managers; family firms lack managerial in financial management, strategy expertise due to long tenure and and business development; the little outside work experience of family firm is given access to family managers. network of private equity investors.

Non-financial benefit of private equity that is valued by family firms in their financing decision.

Table 2: Theoretical implications and expectations for the empirical part (Author’s illustration)

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Third, non-financial objectives are considered to play a key role in family firms’ decision for private equity financing. Private equity is expected to create value by improving corporate governance structures, compensating human capital deficiencies and discontinuing the pursuit of non-economic objectives that is typical to family firms. In the special case of a private equity minority investment, family firms are able to obtain these benefits while still maintaining majority ownership. Table 2 delineates the expectations for the empirical part of this thesis.

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Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

3 Empirical Foundations The development of the research questions described in Section 3.1 provides the conceptual framework for this thesis. Section 3.2 outlines the methodology of the empirical part. In this context, the applied research method, the development of the interview guidelines and the interview process are delineated. Finally, Section 3.3 highlights the major characteristics of the case study sample.

3.1 Development of the research questions

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The first research question is formulated as: Why do family firms demand private equity minority investments? This research question is elaborated in order to obtain a wide range of reasons for family firms to accept private equity minority investments. The priority in the data gathering process for this part of the empirical study is to obtain a clear picture of the economic, financial and managerial situation of the family firm at the starting point of the equity minority investment. The thinking behind this approach is that in family firms, the family literally plays a key role that results in considerable distinctions when compared with other organisational forms of business. Research indicates that the strategic decisions of family firm owners are, to a large extent, driven by non-financial aspects that can be summarised with the term “socio-emotional wealth” (Mejía et al., 2007, p. 106). Due to their strong identification and emotional attachment to the business, owner families show a strong commitment to the preservation of family control in the firm. This is the reason why the strategic decisions of family firms and the ability of the family to take risk are highly dependent on the requirements of maintaining the optimal level of socio-emotional wealth (Mejía et al., 2007, p. 134). Family firms’ demand for private equity financing, even in form of minority investments, seems to contradict with the concept of socio-emotional wealth preservation because to some extent, the family loses control over their business. Consequently, this thesis seeks to discover the reasons why family firms demand private equity minority investments despite this partial loss of control. The second research question is formulated as: How do non-financial benefits influence the family firm’s decision for private equity minority investments? The reasoning behind asking this research question is mainly attributable to capital structure theories. Studies on the capital structure decisions of companies have indicated that the financing decisions of companies follow a pecking order framework in which external equity is considered as the financing of last resort (Myers, 1984, p. 576). An empirical study conducted by Tappeiner et al. (2012, p. 45) shows that family firms have a demand for “smart money” and therefore value the experience, know-how and network of private equity investors when providing them with voting rights. With regard to the potential benefits of private equity as described in the literature review (Section 2.2.1), the family firms’ demand for non-financial benefits in the fields of

Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

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corporate governance, professionalisation, financial network, M&A expertise, internationalisation and access to the portfolio companies’ network have been examined in the context of the empirical study at hand. Kaplan & Strömberg (2009, p. 143) indicate that private equity investors have developed operational engineering methods that enable them to create value as minority shareholders, i.e., without taking over the control over the whole company. In this regard, the third research question addresses the cooperation mechanisms between family firms and private equity investors: What are the mechanisms that incentivise the cooperation between family firms and private equity investors in the course of private equity minority investments? The consideration behind this question is to identify the mechanisms that allow private equity investors to implement their value creation strategy and apply their operational engineering methods in the family firm despite their minority position. There are basically two possibilities for private equity minority shareholders to exert influence on in the family firm. First, the private equity investor has the possibility to compensate for the lacking control rights through the determination of special contractual privileges. Second, the private equity investor can work together with the family firm management on the basis of cooperation. Considering the second alternative, the private equity investor must align the interests of the family firm owners with their own. The main goal of this research question is therefore to identify the mechanisms that incentivise cooperation between the family firm and the private equity investor. Following this approach, the private equity investor’s influence on the advisory board, the implementation of a catalogue of rights requiring approval, the existence of veto rights and the design of information rights are examined. Finally, the sparring partner role of the private equity managers is evaluated.

3.2 Methodology In the methodological part of this thesis, the applied research method, the development of the interview guidelines and the interview process are described.

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3.2.1 Research method As is outlined in Section 1.3, the nature of the present research project requires a qualitative research approach that offers various research methods, e.g., experiments, surveys, archival analysis or case study. The following decision tree illustrates the selection process of the research method:

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Figuree 2: Selection of research m method and research r desig gn (Author´ss visualisation n)

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The case study research method m has been selectted as the most m promissing to answer the re-searcch questionns since it is i particularrly suitablee for research on conttemporary events. e Thee mainn advantagee of the casee study metthod is that it allows th he researchher to deal with w a widee rangee of evidennce, includin ng interview ws of persons who werre directly iinvolved in n the eventss (Yin 2009, p. 11). This is viewed as helpful forr the analyssis of familyy firms since they aree charaacterised byy lacking transparenc t cy and the dependenccy of decissions on in nterpersonall relatiionships. Case study analysis a is th the favoured d research method m for complex an nd context-sensiitive researcch topics th hat to date, do not hav ve much ressearch literaature availaable (Dul & Hak, 2012, p. 24). This is another keyy determinaant for choo osing the caase study method sincee the rresearch quuestions ask ked within this thesis have an explorative e and contex xt-sensitivee charaacter that iss reflected by b their obj ective to ex xamine whyy and how ffamily firmss engage inn privaate equity minority m inveestments. M Moreover, a multi-case design is im mplemented d because itt offerrs substantiaal analytic benefits b com mpared to single-case designs d (Yinn, 2009, p. 61). In thiss conteext, the thessis particulaarly benefitss from the diversity d of family firm ms analysed in terms off revennue, firm agge, level of professiona p alisation and d internation nalisation. The pprimary souurces of infformation foor the case studies are interviews.. Following g the advicee of W Wright & Keellermanns (2011, p. 1995), the inteerviews aree conductedd with a multiple rangee of reespondents to increasee the validiity of the study. s Both family firm m represen ntatives andd privaate equity innvestment managers m arre questioneed about the characteriistics of thee respectivee minoority investm ments. Whiile the famiily firm rep presentatives seem to bbe the mostt promisingg sourcces for sofft factors, e.g., e non-finnancial ben nefits arisin ng from prrivate equitty minorityy invesstments, thee private eq quity manaagers’ persp pective is beneficiary b in analysin ng the hardd factoors, e.g., transaction structure, s fi financial co ovenants an nd veto rigghts. Furtheermore, thee

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interviews with the private equity managers are used as a control element to foster the validity of the results derived from the interviews with the family firm managers. Considering the different characteristics of the case studies analysed and the broad range of interview partners, semi-structured interviews are selected as the appropriate research design. The reasoning behind this is that semi-structured interviews contain specific questions that guide the interview, but still leave the researcher with the discretion to add or leave out questions, if necessary, to cover all important aspects (Hesse-Biber & Leavy 2011, p. 102). The interviewees are asked open-ended questions to give them the possibility to express their opinion freely and to highlight the aspects that seemed to be of special importance in the specific case. Following the recommendation of Wright & Kellermanns (2011, p. 196), additional background information on the cases is gathered from secondary sources, e.g., annual reports, press articles and the webpages of the companies and is used to prepare the interviews and verify the statements of the interviewees afterward.

3.2.2 Development of interview guidelines The interviewees are provided with a short description of the research project and interview guidelines (Appendix B) that enables them to prepare and reflect upon the questions prior to the interview. The interview guidelines are developed based on the research questions posed in Section 1.2 and the expectations for the empirical part arising from the literature review (Section 2.3). Thereby, the goal is to delineate the important points of the interview and to establish a framework that renders the answers of the interviewees as comparable in order to increase the validity of the present study. In this context, the questions posed in the interview guidelines have been complemented with additional, situation-related questions.

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As both family firm representatives and private equity managers are the addressees of the empirical part of this thesis, two different interview guidelines are designed. These guidelines consist of four sections and are shown in Appendix B. In the first section, (Questions 1.1-1.4) the family firm representative is asked general questions about their position within the firm, their involvement in the transaction and their experience with private equity. In the case of the private equity investors, the interviewee is questioned about the investment policy of their fund, the relevance of minority investment and what they perceive as the driving success factors for minority investments. The answers to these questions are also used as an indicator to classify the private equity firms and establish potential relationships between the private equity investors’ background and the family firms’ expectations for the minority investment. The second part of the interview guidelines (Questions 2.1-2.8) is directed toward analysing the financing need of the company and the structure of the minority investment. First, information is gathered regarding the changes in the financing and ownership structure of the family firm after the private equity minority investment. Afterward, the interviewee is explicitly questioned on what the trigger for the minority investment is. Following up this question, the interview partner is asked to assign the financing need of the family firm to either reasons resulting from the economic situation of the company or to issues arising at the shareholder 36

Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

level. With the next questions (2.5 and following), the selection process of the private equity investor is examined in detail. Depending on the type of interviewee, additional questions regarding special challenges that arise throughout the investment process or factors favouring the acceptance of a private equity minority shareholder are asked. The third part of the interview guidelines (Questions 3.1-3.5) is intended to highlight the structure of the minority investment, especially regarding the involvement of the private equity investor in the decision-making process, i.e., influence on the advisory board, rights of say, information and veto rights available to the private equity investor. In this context, the interviewee is asked to provide information about the intended investment horizon, the potential exit scenarios including buy-back rights for the owner family and drag-along rights for the private equity investor. Furthermore, questions are posed to examine the cooperation between the shareholders. The last part of the interview guidelines (Questions 4.1 to 4.5) is particularly directed toward analysing the potential non-financial benefits provided by private equity. Based on the implications emerging from theoretical part of this thesis, the influence of private equity on governance structures, the financial network and M&A activity of the respective family firm is evaluated. Family firm managers are also asked to evaluate the sparring partner role of the private equity managers and to indicate whether they have had negative experiences with the private equity manager.

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3.2.3 Interview process Compared to buyouts, private equity minority investments are still not a widespread phenomenon in Germany (Tappeiner et al., 2012, p. 40). Therefore, a broad variety of sources is used to identify the set of potential case studies. First, with the help of the database, Merger Market, and a web-based search is processed for a list of private equity minority investments for the last twenty years. A longer time period than twenty years seemed unreasonable since the criterion for the selection is the active involvement of the interviewees in the investment. As a second source of possible case study candidates, a press database is searched for articles containing the key terms: minority investment, private equity and family firm. Third, the key players in the German private equity market for minority investments are identified and their portfolio companies are searched for transactions meeting the family firm and minority investment definition of this thesis. Fourth and in order to extend the list of potential case studies, family firm research centres at German universities, German family firm associations, German private equity associations and researchers who have already published studies regarding private equity investments in family firms are contacted. After the completion of the list containing private equity minority investments in German family firms for the last twenty years, the case study selection process is initiated. Following Dul & Hak’s (2012, p. 185) recommendation and applying the framework of theory-building research, the identification of cases is guided by two principles: Convenience and maximisation of the probability that a connection between the processes studied will be observed within the selected case studies.

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Eleven family firms and nineteen private equity investors were ultimately contacted by letter (Appendix A) in May 2013. Regarding family firms, contact is always made with the Chief Executive Officer (CEO), the Chief Financial Officer (CFO) and a member of the owner family who is directly involved in the company, either as a manager or as a member of the advisory board. In the case of the private equity firms, the managing director and the investment manager directly involved in the respective minority investments are asked for an interview. By the middle of June 2013, five family firms and nine private equity investors gave a positive response and were available for interviews. After having received a positive feedback, the potential case studies are again reviewed regarding the satisfaction of the definition for family firms and minority investments. Furthermore, a double-check that the interviewees had been actively involved in the proposed case study transactions is conducted. In this context, one respondent had to be excluded from the interview process, resulting in a final number of thirteen interviews. The interviews were conducted in the German language between the 13th of June and the 30th of July 2013. Due to time constraints on the side of the investigator as well as on the side of the interview partners, not all interviews could be conducted face-to-face. Finally, four interviews were conducted face-to-face at the family firms’ or the private equity investors’ headquarters and nine via telephone resulting in a total number of ten case studies. The interviews lasted between 30 minutes and one hour and 20 minutes. With the approval of the respondents, all interviews were recorded and protocolled afterward. The case study protocols are made anonymous for reasons of confidentiality. It is thereby ensured that the interviewees could disclose details regarding the transactions and express their experience with the minority investments freely.

3.3 Sample characteristics

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Ten minority investments in family firms conducted by nine different private equity investors serve as the case studies for this thesis. In order to gain an overview of the case study characteristics, the family firms are ranked according their present revenue and assigned alphabetical letters afterward. The private equity investors are indicated with the corresponding Greek letters for purposes of anonymity and are classified according to their essential characteristics: (1) fund structure, (2) shareholders and/or investors, (3) investment focus, (4) investment horizon and (5) regional focus.

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Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

Case

Company

Interviewee

A

Machine Tool Company

CFO

B

Food Ingredients Producer

C

Hydraulic Components Company

CFO; PE Manager CEO/ Owner; PE Manager

D

Optical Industry Company

E

Clean Tech Company

F

Family share Revenue Head Firm of ownership Family share of PE Share €m Count Age after PE management of equity investment

Year of Entry

Year of Exit

2.328

9.555

90

80%

50%

20%

1992

2003

1.000

2.000

82

65%

0%*

35%

2010

-

320

2.045

54

75%

25%

25%

1996

2002

CEO

247

1.150

100

56%

0%*

44%

2011

-

PE Manager

160

700

13

85%

100%

15%

2006

2010

Installation Services Company PE Manager

125

1.200

87

51%

50%

49%

2012

-

PE Manager

65

235

77

55%

50%

45%

2003

-

G

Motor Services Company

H

Saw Manufacturer

PE Manager

42

300

107

65%

100%

35%

2012

-

I

Metalworking Company

CEO/ Owner; PE Manager

30

66

14

55%

100%

37%

2007

-

J

Baby Food Supplier

PE Manager

30

150

58

60%**

100%

40%

2008

2012

* Family owner is head of the supervisory board **Further 20% was sold to CEO.

Table 3: Case study characteristics

Private Equity Investor

Alpha

Beta

Gamma

Delta

Epsilon

Zeta

Eta

Teta

Iota

Case Study

A ,J

B

C

D

E

F

G

H

I

Fund Structure

Evergreen

Limited-life fund

Evergreen*

Limited-life fund

Evergreen

Limited-life fund

Evergreen

Limited-life fund

Evergreen

Shareholders/ Investors

Banks, insurance companies, building societies

Institutional investors

Bank subsidiary*

Institutional investors

Banks, insurance companies, associations

Institutional investors

Management, insurance companies

Banks, institutional Bank subsidiary investors

Investment Focus

Strong focus on minorities; 2/3 minorities, 1/3 buyouts.

Share of buyouts and minorities is 50/50.

Strong focus on Two funds of nearly same size, minorities, 50% one for minorities direct investments and 50% and one for mezzanine. buyouts.

Investment Horizon

Long-term oriented, 10 years on average.

7 years

6 years

5 years

5-7 years

3-5 years

Long-term oriented, 7-10 years

4-6 years

4-6 years

Regional Focus

Regional

International

National

International

Regional

Germany, Austria, Switzerland

National

National

National

Strong focus on Until 1990s, only Strong buyout Buyouts are core minorities, esp. growth Buyouts are core minority focus; up to now, business; but business; but capital (70%), thereof, 20investments; today only two larger 30% minorities with minorities are not minorities are not 1/4 minorities, 3/4 minority remainder in mezzanine uncommon. uncommon. buyouts. investments. and silent participations.

*At time of investment; today mainly limited life funds for institutional investors.

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Table 4: Description of private equity investors

The goal of this thesis is to contribute to the theory of private equity minority investments by drawing conclusions from the observation of different case studies. In order to prevent the results from being biased, care is taken to ensure that the family firms chosen as case studies for this research project vary in terms of their industry background, firm age, sales figures, head count and family influence. The revenue of the family firms analysed ranges from € 30m (I, J) to over € 2bn (A). On average, the family firms generate an annual revenue of € 435m. The significant differences in the size of the family firms also becomes obvious when looking at the head count that ranges from 66 (J) to 9,555 (A) employees. In selecting family firms of different sizes, the variations in terms of internationalisation and professionalisation are also

Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

39

taken into account. Thhis approacch is considdered to deliiver a broad der spectrum m of deman nd for non-financcial benefitss provided by b private eequity. The following figures f provvide an overrview of the firm m size.

Figure 3: Firm size by b revenue

Figure F 4: Firm m size by headd count

The ownerr families’ influence i on n the busineess is consiidered as an nother distinnguishing factor. fa Basically, the owners of family firms f have tthree channeels available to exert innfluence on n their company: Their equitty ownership, their shhare of the managemen nt board annd their seaats on advisory bboard (Astraachan, Klein n & Smyrniios, 2002, p. p 48). The families’ eequity stake after the privatee equity enttered the co ompany rannges from 51% 5 (F) to 85% (E) w while the av verage equity ownnership of the family is 65%. R Regarding the t familiess’ share off managemeent, a relationshipp between firm size and a numberr of family external maanagers couuld be obseerved. The top maanagement of four out of the six sm mallest fam mily firms (E E, H, I, J) m measured in terms t of annual rrevenue connsists solely y of family m members. Two T family firms f (B, D D) have no family fa member innvolved in the t top man nagement teeam. Howev ver, in thesee two cases,, the family y firm entrepreneuur holds thee position of Chairmann of the Supeervisory Bo oard.

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The time pperiod elapssed between n the startinng point of the private equity minnority investtment and the intterview is also a considered as a ddifferentiatio on factor in n the case sstudies anallysed. The most recent minnority invesstment exam mined had been conducted in 20012 (F) an nd the earliest had taken plaace in 1992 2 (A). Four out of the ten minority investmeents had alrready been exitedd (A, C, E, J). J Within these, familyy firm A dissplays the lo ongest inveestment duraation.

Figure 5: Tiime elapsed since minority y investment

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Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

4 Empirical Part The results of the empirical part are presented in this chapter. First in Section 4.1, the investment background behind the ten minority investments examined is introduced. Section 4.2 then covers the comprehensive analysis of the case studies. Here, the major results derived from the empirical study are summarised and grouped according to the research questions posed in the beginning of this thesis.

4.1 Individual case study analysis This section deals with the individual analysis of the case studies. In this context, the emphasis is placed on the financing needs of the family firms that result in a demand for private equity minority investments. Extracts from the interview protocols serve as empirical evidence.

4.1.1 Case A: Capital injection in times of crisis This case study covers the minority investment of the regional and midcap-oriented private equity investor Alpha in the Machine Tool Company between 1992 and 2003. The description of this case study is based on an in-depth interview with the present CFO of the family firm. At the time of the participation, the interviewee was head of the controlling department and concurrently served as CFO of a subsidiary of the Machine Tool Company that had also received financing from private equity investor Alpha.

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The Machine Tool Company was founded as a mechanical engineering company in southern Germany in 1923. The current family patriarch (L) joined the company in 1961 and then took over the company step by step and together with his partner from the company’s original founder and namesake who had no successor. Today, the company generates an annual revenue of € 2.3bn and employs more than 9,500 people all over the world. The Machine Tool Company is globally known for its high-tech tool machines and maintains a position as a global market leader in its main product lines that enjoy a broad scope of application in various industry sectors. At the beginning of the 1990s, the company suffered from a serious crisis in the German mechanical engineering sector resulting in a 20% drop in revenues and two consecutive years of losses that also negatively affected the company’s equity buffer. This caused serious problems for the family firm since prior to the crisis, it had issued a bond with a volume of around € 125m containing an equity covenant. As a result of the mechanical engineering crisis, the company had difficulties in maintaining the equity quota that was required by the covenant. At that time, the company was owned by the two shareholders L and S. Family firm entrepreneur L, holding a 75% ownership stake, also served as CEO of the company. His partner S, holding 25% of the shares, had already withdrawn from the operational business to

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take a seat on the advisory board. Facing a breach of the equity covenant, the shareholders were not able to inject more capital since they had reinvested most of the capital gains to foster the growth of the company and the family wealth was not sufficient to restore the required equity quota.

“The equity covenant was breached as a result of the crisis. There, we thought about how this could work. Of course, the owners did not have the financial means at all because both had kept the money in the company and invested it for growth purposes. Therefore, we had to think about where to get the money from. At that time, the private equity investor was interested in acquiring participations in mid-sized companies and retaining them in the longterm.” (CFO Machine Tool Company, Case Study A)

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As a result, they began to search for a private equity investor who was willing to acquire a minority stake in the company and provide the necessary liquidity to survive the crisis. The company did not mandate an investment bank to search for a private equity investor. Instead, the lawyer of the family and a member of the advisory board who had previously served as a member of the managing board of the company’s relationship bank played a key role in the selection process of the private equity investor. Eventually the Machine Tool Company decided on private equity investor Alpha which was a shareholder of their relationship bank and had already invested in a subsidiary of the family firm. Alpha acquired 20% of the company’s shares from shareholder S who was already seventy years old at the time of investment and had no successors available. The owner family L was granted a right to repurchase the minority stake from the private equity investor after four years. In 1996, family L repurchased 8.6% of the shares reducing the stake of the private equity investor to 11.4%. Although the family aspired to regain the full control over the company from the outset of the transaction, the private equity investor did not exit the investment until 2003. The starting point for the idea to replace the private equity investor was the resignation of the responsible investment manager since the good relationship between the shareholders was rather individually related. In addition, the private equity investor searched for a way to realise their book profits since the annual revenue of the company had more than quadrupled since 1992 when the annual revenue was about € 350m.

4.1.2 Case B: Paving the way toward an IPO This case study covers the acquisition of a 35% minority stake in a German Food Ingredients Producer by the US-American private equity investor Beta conducted in 2010. The analysis is based on in-depth interviews with the CFO and the responsible private equity investment manager.

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The Food Ingredients Producer, which was founded over eighty years ago by the father of the current majority shareholder, belongs to the group of global market leaders in natural ingredients for the food and beverage industry. Before the private equity investor entered the family firm in 2010, the Food Ingredients Producer consisted of four organisationally independent business units including both business-to-business and business-to-customer segments. The annual revenue of the company at that time was estimated to lie at around € 1.2 bn with the largest business unit, Flavours, contributing half of it. In 2010, the Flavour unit was separated and brought into existence as a new company, of which the Anglo-Saxon private equity Investor Beta purchased 35% of the shares, leaving the majority stake of 65% in the hands of the family. The ownership of the other three business units remained entirely in the hands of the family. With the entry of the private equity investor, the corporate structure of the Flavour business was completely re-organised. For this purpose, a new holding company was incorporated in Switzerland and a global top management team was introduced. The challenges underlying this process particularly lay in the shared services within the different business segments that had to be clearly separated for the acquisition process. The family firms demand for private financing resulted from a combination of reasons: (1) the family firm reached a size that requires external capital and expertise for further international expansion, (2) the family patriarch facing a succession problem since he is already over seventy years old and has no family-internal successor available and (3) the family firm owners plan an IPO in the long-term. The private equity is sought to support this transition process.

“The firm owner knew that the company had to be developed further, especially regarding the fragmented financing structure and the planning of the international expansion. My feeling is that although the firm owner had the confidence that he was capable of implementing the necessary changes on his own, he searched for a private equity investor that would serve as a catalyst and accelerator, consequently pushing the required changes.” (CFO Food Ingredients Producer, Case Study B)

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Referring to the statements of the family firm CFO, the participation of the private equity investor had a positive impact on the transparency and professionalisation of the family firm resulting in a positive perception of the company by investors.

“The transaction with the private equity investor, the improved transparency associated with it and the announcement of an IPO put the firm on the radar screen of investors for the first time.” (CFO Food Ingredients Producer, Case Study B)

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4.1.3 Case C: Solving family issues This case study covers the minority investment in the Hydraulic Components Company held by the German private equity investor Gamma between 1996 and 2002. The following description is based on in-depth interviews with the family firm entrepreneur who is also the present CEO of the company and a representative of the private equity firm who was responsible for the investment controlling at that time. With 2,045 employees and annual revenues of € 320m, the Hydraulic Components Company belongs among the leading manufacturers of technologically advanced hydraulic components that have a broad scope of applications, particularly in the automobile industry. The family firm that was founded over sixty years ago in southern Germany by the engineer H and the businessman W. Until 1996, when the descendants of W decided to sell their stake, the family firm was in possession of the two founder families H and W, each holding 50% of the shares. In order to preserve the Hydraulic Components Company as a family firm, the present CEO of the company and their father, who were both descendants of H, agreed to take over the stake of W. Realising that they could not replace the other family using of their own resources and were not able to obtain acquisition financing from their banks for the whole equity stake, family H searched for a private equity investor to provide the necessary capital. The German private equity investor Gamma that is specialised on mid-sized companies in the mechanical engineering sector then acquired 25% of the shares, giving family H the possibility to purchase the remaining 25% by obtaining debt financing. From the beginning of the investment, family H wanted to regain the full ownership of the company. Therefore, they made use of a contractually agreed buy-back right in 2002 and gained full ownership of the company.

“When the other shareholder family wished – relatively unexpected for us at that time – to withdraw from the company and to sell their shares, the idea was that we acquire their 50% stake. But, this was not financially feasible for us. Then, we had to realise quickly that debt financing for the acquisition of the 50% stake was also not available to us. The last resort was then the equity financing.” (Family firm entrepreneur Hydraulic Components Company, Case Study C)

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4.1.4 Case D: Sharing risk and diversifying family wealth The following case study covers the minority investment of the Anglo-Saxon private equity investor Delta in the German Optical Industry Company conducted in 2011. The description is based on an interview with the current CEO of the family firm who joined the company in 2010. The Optical Industry Company produces high-quality optical products for demanding private customers. The family firm currently generates a sales volume of € 250m and employs 1,150 people. As a successor company of a family firm already founded 1849, the Optical Industry Company had been in private ownership for nearly 150 years when the company went public 44

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in 1996. In 2006, the current owner-family of the Optical Industry Company obtained majority ownership by purchasing a block of shares from a strategic investor that had been invested in the company since 2000. The family had increased their ownership stake to 96.5% by 2007. In October 2011, the owner family sold 44% of the company’s shares to the US-American private equity investor Delta. In the framework of a squeeze-out process, the other minority shareholders were paid indemnities and the company was taken private. After the squeezeout, the family now holds 55% of the shares and the private equity investor holds the remaining 45%. The essential motive for the family firm entrepreneur to demand private equity financing was to diversify the family wealth and share the risk of the planned international expansion with a family-external investor. With the private equity investor, the family firm also gained a sparring partner for its ambitious international expansion plans, particularly in Asia. In this regard, the family firm expected to particularly benefit from the strong global presence and international network of the private equity investor.

“The owner wanted to diversify his cluster risk – as he used to call it – because a large portion of the family wealth was bound in the company. The sense and purpose of the transaction was therefore mainly to reduce the risk of their investment. […] The owner sees himself as an anchor investor in the long-term who ensures the continuity of the firm comparable with the role that the Quandt family plays for BMW.” (CEO Optical Industry Company, Case Study D)

4.1.5 Case E: Accelerating growth

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The following case study covers the minority investment in the Clean Tech Company held by the private equity investor Epsilon between 2006 and 2010. Epsilon is a regional private equity investor that is specialised in growth capital for medium-sized enterprises. The Clean Tech Company is a supply firm for the photovoltaic and semi-conductor industry and considered as the global market leader for its products. The case study is based on an in-depth interview with the CEO of the private equity firm. The Clean Tech Company is a family firm and was founded by two brothers in the year 2000 with one brother who also serves as CEO of the company holding 70% of the shares and the other brother possessing the remaining 30% of the shares. At the time of the investment, the family firm belonged to a group of high-growth companies in the clean tech sector. The two brothers, who themselves had set very ambitious growth targets, realised quickly that they could not provide the necessary capital for such growth plans and therefore searched for a private equity investor to support their future expansion. At that time, the Clean Tech Company generated annual revenues of around € 30m and aimed for a medium-term revenue target of € 200m. In 2006, the private equity investor Epsilon held a 15% minority stake in the company. As it had been clear from day one of the investment that Epsilon could not provide the total capital required for such ambitious growth plans itself, an IPO was planned on the medium-term. Since the IPO could not be realised and more capital was needed to cope with

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the strong growth of the company two years after the investment of Epsilon, a second financing round was initiated in which two private equity investors supplied another € 30m, still leaving the family a slim majority. At this point, the company’s sales volume had already exceeded € 50m. After four years, the company had reached its target revenue of € 200m and Epsilon sold their minority stake to another private equity firm.

“In principal, the company planned to go from A to B on the growth trajectory with our minority investment and afterwards strived for an eventual IPO. Because already back then, the initial situation was to target a revenue of € 200m and it was clear in the end that the company needed more capital than what we had provided in the first step. ” (Private equity manager Epsilon, Case Study E)

4.1.6 Case F: Increasing company value This case study covers the minority investment in the Installation Services Company by the German private equity investor Zeta conducted in 2012. An in-depth interview with the responsible private equity manager provides the basis for this case study. The Installation Services Company can look back on a long tradition as a family firm and was founded in 1956 by the namesake of the company. After the death of their father, one of the two founder’s sons sold their shares to the current CEO of the family firm who had already joined the company in 2004. Aspiring to preserve the family business spirit, the two shareholders acted as a single entity when they sold 49% of the shares to the private equity investor Zeta in 2012.

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“The company is a long-standing family firm. […] From the beginning, the structure of the deal was that both shareholders spoke as one entity owning 100% of the company’s shares, not as two shareholders holding 50% each.” (Private equity manager Zeta, Case Study F)

The need for private equity financing primarily arose from the growth strategy of the family firm. Having developed the family firm from a regional supplier to a global player, the two major shareholders realised that they needed an external partner to take the next step in development. The growth objective was to increase revenues from € 125m at that time to € 200-250m within five years. Therefore, the family firm searched for a partner to strengthen the capital base for future acquisitions.

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“The two owners said to themselves that their company belongs along with two or three others as the German top dogs in their industry. […] But both shareholders asked themselves what they could achieve alone and what price they would receive when they sell the whole company in five years. They compared this to what they could achieve if they sell 49% of the shares now and realise an interim profit based on a valuation x, and what their 51% would be worth in five years if they worked together with a private equity investor. Then, they decided to take the next step in the development, i.e., to go from a sales volume of € 100m to € 180m, together with a professional investor because they would probably get lost in the complexity on their own .” (Private equity manager Zeta, Case Study F)

4.1.7 Case G: Replacement of a departing shareholder This case study covers the 45% minority investment of the German private equity investor Eta in the in the Motor Services Company conducted in 2003. The following description is based on an in-depth interview with a member of the management board of the private equity firm who is responsible for the minority investment in the Motor Services Company.

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Founded over seventy-five years ago, the Motor Services Company is a family firm with a long-standing tradition. The current major shareholder and CEO joined the company within the context of a MBI when a Dutch private equity investor acquired 60% of the shares and he took over the remaining 40%. In 2003, the Dutch private equity investor was acquired itself and the new owner wanted to sell the participation in the Motor Services Company. At this point, the current CEO asked the German private equity investor Eta if it could support him in replacing the existing shareholder. The family firm entrepreneur signalled from the beginning of the transaction that he wished to obtain the majority ownership in the company himself. Therefore, he searched for a private equity investor that would be satisfied with only acquiring a minority stake and be willing to provide him with the additional capital for replacing the old private equity investor. In this context, Eta acquired a 49% minority stake in the company and provided further capital in the form of a silent participation thereby enabling the CEO to increase his ownership stake to 51%. The silent participation was intended as a kind of bridge financing to finance the cash out of the exiting private equity firm until the company’s cash flows were sufficient to purchase its shares. Due to an equity kicker that incentivised the early termination of the silent participation, the CEO could increase his ownership stake to 55% after three years.

“We made a kind of owner buy-in. [...] Our investment was a beautiful scenario for him [the company owner] because he obtained majority ownership of the company, did not have to take additional money out of pocket and assuming good performance, had the possibility to increase his shares in the company. [...] The advantage for us was the low pricing of the transaction. The advantage for the entrepreneur was the solid financing structure enabling him to acquire the control over the company without taking additional money out of pocket.” (Private equity manager Eta, Case Study G)

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4.1.8 Case H: Strengthening the capital base The following case study examines the minority investment in the Saw Manufacturer conducted by the German private equity investor Theta in 2012. This case study is based on an interview with the responsible private equity manager. The Saw Manufacturer that is a typical German mid-sized company in the mechanical engineering sector that generated an annual revenue of € 42m last year and employed about 300 people. Focussing on a niche market, the family firm is a global market leader in its product category. In addition to its German factory, the family firm also has production facilities in Brazil and China. With over 100 years’ tradition as a family firm, the Saw Manufacturer is managed in the fourth generation by a member of the owner family. In 2012, the private equity investor Theta acquired a minority stake of 35% in the company in the context of a capital increase. With the entry of the private equity investor, the capital base was strengthened and the groundwork for future growth was laid. In particular This case study highlights the challenges arising from the overlapping of the family and business spheres.

“Family firms have a familial and not always a professional touch. For family firms, prestige, reputation and literally the family is at stake. Therefore in family firms, a completely different commitment to the company can be observed than in an enterprise where the managers are only employees.”(Private equity manager Theta, Case Study H)

4.1.9 Case I: Redeeming silent participations and expanding business

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This next case study covers the minority investment in the Metalworking Company by the private equity investor Iota conducted in 2007. The description is based on both an interview with the company founder and the responsible private equity manager. The Metalworking Company was founded in 1999 by the current CEO of the company who had previously worked for a large German steel group. Having started as a supplier for the automotive industry, the scope of application for the products of the Metalworking Company has broadened. Focussing on niche markets, the family firm generates annual revenues of about € 30m with 66 employees. The family firm’s demand for private equity financing primarily arose from two channels: (1) The redemption of silent participations and (2) international expansion plans. The entrepreneur had founded the company with the help of three good friends who provided capital in the form of silent participations. In 2007, two out of the three silent partners wanted to terminate their silent participation in consideration of their retirement plans. The exit of the silent partners coincided with the expansion of the company into the USA.

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“We needed capital that I could not mount all on my own. Therefore, three partners – friends and acquaintances– invested capital in the form of silent partnerships. The ownership structure was that I held 65% and the silent partners 35%. [...] That was in 1999 and then in 2007, we wanted to expand and invest in the US market. Then two of the partners wanted to terminate their silent participation. They did not want to accompany the expansion into the USA. Also, they were at retirement age and wanted to withdraw. Then we thought about how to replace the silent partners and concurrently expand into the USA. So we mandated an M&A advisor. [...] The private equity investor then acquired a minority stake. Only a minority stake – that was particularly important to me because I wanted to keep the control over the company.” (Family firm entrepreneur Metalworking Company, Case Study I)

Being highly dependent on the automotive industry at that time, the Metalworking Company was hit hard by the economic crisis in 2009. During that time, the private equity investor Iota supported the family firm to sustain the drop in sales and revenues. In addition, by participating in a capital increase, the private equity investor provided the entrepreneur with restructuring expertise and accompanied the transition process of the company from a purely automotive supplier toward being a supplier for a broad range of industries including the clean tech industry.

“The equity scenario for our private equity firm was the transition of the company from a purely automotive supplier to a clean tech company. We as a private equity firm want to contribute ideas in the way that the entrepreneur ultimately thinks that they were their own ideas. The principle of partnership is of significant importance to minority investments, i.e., it is important that the entrepreneur is convinced of the idea. The equity scenario is an ongoing process that has to be constantly refined by the private equity investor and the entrepreneur.” (Private equity manager Iota, Case Study I)

4.1.10 Case J: Solving succession problems

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The following case study illustrates how a private equity investor can contribute to solving succession problems in the context of an MBI. The description of the investment process is based on an interview with the responsible private equity manager. The Baby Food Supplier can look back on over fifty years of tradition as a family firm. With annual revenues of € 30m and 150 employees, the company belongs among the leading producers of organic baby food in Germany. In 2008, the family firm faced a succession problem because the family patriarch was already over sixty years old and had no internal successor available. Therefore, the family firm entrepreneur demanded private equity financing in order to resolve the succession problem. In the context of a MBI, the regional private equity investor Alpha acquired a 40% minority stake in the company that was turned into a

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majority stake at a later stage. In a second step, a successor for the family firm patriarch was found in the form of a new CEO who also received a 20% stake in the company, leaving the family with the remaining 40% of the shares. In the context of a capital increase that should enable future growth of the company, the private equity investor increased its ownership stake to 80% one year later. With the fresh capital, two competitors were acquired and the annual revenue of the company was increased from € 12m to € 30m. In 2012, the private equity firm exited the investment selling the Baby Food Supplier to a strategic investor.

“Before the minority investment, the company was owned by one family holding 100% of the shares. We entered the company in the context of succession planning. The family patriarch was around sixty years old and had no internal successor available. Therefore, he decided to surrender 40% of the shares in the first step to a professional investor who is familiar with succession issues.” (Private equity manager Alpha, Case Study J)

4.2 Comprehensive case study analysis Based on the research questions of this thesis, the following section is divided into three subsections that analyse the following fields of interest: (1) Reasons for family firms to demand private equity minority investments. In this regard, the analysis particularly focusses on the distinction between financing needs that result from the economic situation of the company and reasons arising on the shareholder level that are usually induced by family issues (Section 4.2.1), (2) the role that non-financial benefits play in the family firms’ decision process to admit a private equity minority shareholder. Thereby, the family firms’ expectations of non-financial benefit from private equity are compared with their actual demand. (Section 4.2.2) and (3) the cooperation mechanisms between the shareholders are examined in this last section (Section 4.2.3).

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4.2.1 Reasons for demanding private equity minority investments While the individual case study analysis (Section 4.1) has already described the family firms’ financing needs and their rationales in demanding private equity financing in detail, this section focuses on summarising the results. In the context of the empirical analysis of this thesis, the interviewees are asked to name the financing need that has been the main driver of motivation for the family firms to demand private equity financing. Furthermore, the interview partners are asked to allocate the mentioned financing needs to the challenges either resulting from the economic situation of the company or from issues at the shareholder level. The financing need of family firm basically results from two different channels: (1) The economic situation of the company that can mainly be classified into the fields of growth and crisis and (2) the challenges arising at the shareholder level that can be grouped into the fields of exit of a shareholder, succession problems, wealth diversification and family issues

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(see also Tappeiner et al., 2012, p. 43). Table 5 provides an overview of the responses from the interviewees and clusters them in subgroups. Due to the fact that private equity financing was chosen in most cases for a combination of reasons, establishing a hierarchy among the mentioned financing needs is attempted by assigning the main rationales for the minority investments with an “X” and the accompanying factors with a “(X)”.

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Case Economic Situation Growth

Empricial Evidence Family Issues

Interview Protocol Crisis in the German mechanical engineering sector; need for equity capital due to risk of covenant breach; retirement plans of minority shareholder; family wants to keep control over the company.

x

Family patriarch faces succession problem; IPO as a long-term perspective; ambitious growth plans; search for sparring partner.

(x)

x

C

x

Two family shareholders each owning half of the company; one family wants to exit; other family wants to obtain full control, but cannot obtain enough debt financing. Family firm entrepreneur has a large portion of his private wealth bound in the family firm and wants to diversify risk; seeks strong partner for ambitious growth projects; demand for international expertise.

D

(x)

E

x

Clean tech sector company with enormous growth potential; strong need for capital.

x

Family firm has come to a point were it needs an external partner to grow further; in the long-term, family can imagine selling the company or going public; retirement plans of major shareholder.

F

H

I

J

x

(x)

Family firm entrepreneur joint company in context of MBI; minority investment is a type of secondary sale; entrepreneur acquires majority stake with help of private equity.

x

G

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Wealth Diversification

x

A

B

Crisis

Shareholder Level Exit of Succession Shareholder Problem

Family firm wanted to strengthen capital base with PE investment enabling future growth; PE manager highlighted challenges arising from overlapping of family and business spheres within company.

x

(x)

(x)

Entrepreneur founded the firm with friends as silent partners; after 8 years, they want to terminate their silent participations; company founder needs capital to repay them and to finance expansion in USA.

x

x

Family firm faces sucession problem; in the context of a MBI, private equity investor aquires minority share.

Table 5: Reasons for family firms to seek private equity financing

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4.2.1.1 Economic challenges The need for growth capital to finance future expansion plans is the most frequently mentioned decision driver for private equity minority investments in the empirical study of this thesis (B, D, E, F, H, I, J). However, only four family firms (B, E, F, H) have chosen private equity financing predominantly due to a need for growth capital. In these cases, the family firms indicate that they view the private equity investor as a partner in bringing the company to the next step in development. For example, the owners of the Installation Services Company (F) searched for an external investor that enabled the company’s transition from German market leader to a global player. This situation is comparable to the Food Ingredients Producer’s (B) point of departure. Triggered by a succession issue, the family firm aims to explore new growth avenues with the support of the private equity firm. In the light of a potential IPO as the long-term solution to the succession problem, the minority investment is conducted with the objective to appear on the radar of investors. Therefore, the family firms chose to cooperate with a private equity investor to create the necessary conditions for a stock market launch, e.g., transparency, separation of shared services, professionalisation of corporate governance and harmonisation of both the financial and the corporate structure. In the case of the other three family firms (D, I, J), mainly challenges arising at the shareholder level triggered the private equity minority investment while growth issues served more as an accompanying factor that encouraged the financing decision. Those family firms obtained private equity financing primarily for reasons of wealth diversification (D), the exit of a shareholder (I) or succession issues (J). In particular, the financing needs for wealth diversification and the exit of a shareholder seem to be closely tied with growth issues. For example, in the case of the Metalworking Company (I), the withdrawal of two silent partners coincided with the expansion plans into the USA. Crisis or turnaround situations seem to be a rather unusual application of private equity minority investments. Of the case studies analysed, only the Machine Tool Company demanded private equity financing to solve a crisis situation. In this case, private equity has literally been the financing of last resort since the own resources of the owner family were not sufficient to remedy an equity covenant breach.

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4.2.1.2 Shareholder issues In seven (B, C, D, F, G, I, J) out of the ten case studies, the family firms’ need for private equity minority investments is at least partially attributable to shareholder issues. Regarding challenges at the shareholder level, the exit of a shareholder is the most frequently mentioned reason for demanding private equity minority investments. In three family firms (C, G, I), private equity capital has been demanded to replace a departing shareholder because neither the family wealth has been sufficient nor could enough debt financing be obtained to buy back their shares. Shareholder exits are often the result of family issues. For example, in the case of the Hydraulic Components Manufacturer (C), one shareholder family has planned to withdraw and sell their 50% stake in the company. The other shareholder family had neither the financial resources available to purchase the shares nor were they able to obtain debt financing for the complete 50%. Eventually, the private equity minority investment enabled

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the family to preserve the independent ownership of the company. This minority investment has been structured right from the outset in such a way that the family firm entrepreneur is able gain the full ownership of the company at a certain point in time. The special distinction about this transaction is that not only the point in time, but also the purchase price at which the family can buy back the minority stake had already been contractually agreed prior to the investment. Another example of application for private equity minority investments as a solution for shareholder issues is wealth diversification. Family firm entrepreneurs usually keep a great part of their private wealth in their company for growth purposes. For example, in the case of the Optical Industry Company (D), the family firm entrepreneur has realised that a major part of his family wealth is bound in the company thereby exposing him to cluster risk, especially in light of the family firm’s ambitious growth plans in Asia. Therefore, he has sought out a professional financial investor that enabled him to diversify family wealth and thereby also his investment risk. Finally, the empirical evidence collected in the context of the in-depth interviews indicates that private equity minority investments are usually only applied by family firm entrepreneurs for complex challenges that require the expertise of a professional financial investor (B, D, F, G, I, J) or in cases where family resources and debt financing are not sufficient to cover the financing need and private equity is considered as the financing of last resort (A, C).

4.2.2 The role of non-financial benefits

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Previous studies have indicated that family firms value potential non-financial benefits provided by private equity (Tappeiner et al., 2012, p. 50). The purpose of the following sections is to demonstrate which role the non-financial benefits have played in the family firms’ decision process for private equity financing and in which fields the family firms could benefit most from the support of the investor.

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Case

Corporate ProfessionGovernance alisation

x

A

B

C

x

x

F

x

(x)

x

x

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I

J

x

x

x

(x)

x

x

Network of Portfolio Companies

Empirical Evidence Non-financial benefits are individual-related; PE manager serves as sparring partner; CFO has learned a great deal about corporate finance and financial management; professionalisation through higher transparency requirements; investment of PE serves as indication of firm´s quality in bank negotiations; advisory board was already established in 1970s.

x

(x)

x

(x)

x

x

Global top management team established; an advisory board has been introduced and "heavy-hitters" have been appointed as members; corporate governance structures improved; transparency is increased through involvement of PE; family firm is put on investors´ (planned IPO) and investment banks´ radar; two M&A transactions with PE; exchange with other portfolio companies to realise synergies; corporate development projects.

x

Supervisory board has been established and decision-making process has been professionalised; PE acts as sparring partner and family must justify decisions; financial network is not really extended by PE, but investment serves as indication of firm´s quality in bank negotiations; new clients from network of PE can be attracted.

(x)

PE investor has a global network; family firm particularly benefits from PE´s know-how in the Asian market in the context of international expansion; CEO sees PE as sparring partner in strategic decision-making, which results in increased professionalisation; company was listed before minority investment, therefore not much improvement in corporate governance; no demand for M&A support due to organic expansion.

x

PE investor has implemented clear corporate structures; advisory board had already existed, but members were mainly family and friends; professionalisation through a refined decision making process and hiring of family-external managers; company benefitted from PE´s contacts to banks.

x

Advisory board established by PE and industry experts were appointed as members; joint project for optimisation of capital structure; PE provided contact to banks that a normal family firm does not have; joint development of add-on strategy and support in negotiations for M&A transactions; round-table of portfolio companies´ CFOs.

x

x

Internationalisation

(x)

(x)

G

H

M&A Expertise

x

D

E

x

Financial Network

x

(x)

x

x

Advisory board established by PE; reporting and controlling have been improved; in this context, transparency has been increased; M&A expertise for add-on and divestment project is seen as major non-financial benefit provided by PE; father of family firm CEO had previously worked together with another PE as a minority investor.

x

x

x

x

x

Previous PE investor has already established advisory board and taken measures to improve corporate governance and professionalisation ; entrepreneur has also previous experience as management consultant; new PE acts as sparring partner and helps to develop add-on strategy; strong M&A expertise of PE is seen as major non-finanical benefit.

(x)

x

Entrepreneur confirms positive impact of PE on corporate governance and professionalisation; advisory board established and industry experts have been appointed as members; PE serves as sparring partner; for internationalisation (USA, China), family firm benefits from access to PE´s network of portfolio companies; in crisis, PE has assisted entrepreneur in bank negotiations.

(x)

PE sees itself as corporate development for mid-sized companies; PE acts as a sparring partner in strategy and M&A topics; advisory board has been installed; financial management and reporting have been professionalised; access to PE´s network of portfolio companies, but only with PE as interface; two M&A transactions; regionally oriented PE and reached its limits with internationalisation.

Table 6: The role of non-financial benefits

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The questions asked regarding non-financial benefits are based on the expectations derived from the theoretical part of this thesis (Chapter 2). As optimisation of governance structure is considered to be one of the key levers for private equity to create value in family firms, interviewees are explicitly asked to provide information about measurements taken in this field, e.g., the establishment of an advisory board, the formalisation of decision making processes or the harmonisation of corporate structure. Furthermore, the impact of private equity financing on the financial network of family firms is examined, e.g., the extension of the banking circle, improved access to capital markets or support in bank negotiations. M&A expertise being regarded as one of their core competencies, the support that private equity firms provide to their portfolio companies with regard to acquisitions and divestures is examined. Finally, the impact of private equity on the internationalisation of family firms and the benefits connected therein that family firms derive from the access to the private equity investors’ network of portfolio companies is evaluated. The interviews with family firm representatives and private equity managers showed that there is a discrepancy between the expected and actual demand of family firms for non-financial benefits. Particularly in the case of the smaller-sized companies (H, I, J), the private equity investor provided more non-financial benefits than the family firm expected from them.

“With the demand for non-financial benefits - here you have to distinguish between the demand the firm actually has and the one that the owners see and therefore expect from the private equity investor. The company has a demand for professionalisation of corporate governance and management. But, the company neither expressed their needs nor requested assistance from the private equity investor.” (Private equity manager Theta, Case Study H)

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4.2.2.1 Corporate Governance The empirical evidence that is collected in the context of the case study analysis suggests that the improvement of the family firms’ corporate governance structures is the major nonfinancial benefit provided by private equity minority investors. In seven (B, C, E, F, H, I, J) out of the ten case studies, the participation of a private equity investor led to a professionalisation of corporate governance. The most common measure taken has been the implementation of an advisory board (B, C, F, H, I, J) since the private equity investors view this as a relatively simple, but effective measure to improve corporate governance structures in their portfolio firms.

“The relatively simple implementation of an advisory board creates added value. This provides a tremendous progress in professionalisation if somebody has to answer questions and has to report to another party in a structured form and in previously defined time horizons.” (Private equity manager Gamma, Case Study C) 56

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If the company had already been equipped with an advisory board, the private equity investor had taken measures for its continued professionalisation, especially by admitting external industry experts to the board. For example, in Case Study E, the family firm had already established a supervisory board due to the form of the corporation, which is German a jointstock company. But before the entry of the private equity investor, the advisory board primarily consisted of family and friends. Furthermore, the decision procedure had not been clearly structured. With the entry of the private equity investor, rules of procedure for the supervisory board have been introduced. Moreover, with the investment manager obtaining a seat on the board external, expertise has been added. In the cases where the private equity investor has introduced an advisory board for the first time, two different roles of the advisory board can be distinguished: (1) family firms where the advisory board has a purely advisory role and the company is still directed by the shareholders’ meeting (F, I) and (2) family firms where the competence of the shareholders’ meeting has been transferred to the advisory board (B, C, J). Regarding the cases where the advisory board takes a purely advisory role (I, F), the private equity investors had primarily brought in external experts to support the further development of the company. In these cases, the private equity investor has particularly placed value on the forward-looking composition of the advisory board. To this end, the new advisory board members have been selected according to the future strategic plans. Although the advisory board is not primarily seen as a corporate governance instrument in these cases, it still takes on a control function because the proposals of the family firm managers are challenged from an industry point of view.

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“In this case, we have an advisory board and no supervisory board taking an executional function, which means that the company is directed by the private equity investor through the shareholders’ meeting. The advisory board is therefore composed of industry experts. The idea here was to transform a purely automotive company into a clean tech company. [...]Nevertheless, we also view the advisory board as a control instrument to evaluate whether the management is making the right decisions from an operational viewpoint.” (Private equity manager Iota, Case Study I)

“The advisory board is not predominantly a corporate governance instrument for us. But, which role members of the advisory board can play in the expansion of the business is important to us. That is the reason why the advisory board is always appointed from an industry viewpoint. In this case, an expert for plant engineering and a former executive of a large German car manufacturer, who is an expert for the all issues dealing with customers, were appointed.” (Private equity manager Zeta, Case Study F)

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Considering the cases where the competencies of the shareholders’ meeting have been transferred to the advisory board, the composition of the advisory board with external industry experts is perceived to have an even greater impact on the professionalisation of the family firms’ corporate governance structures since it provides an objective view from a neutral third party and thereby improves the decision-making quality. Moreover, by admitting external industry experts onto the advisory board, private equity investors are able to compensate for their inferior industry experience and know-how. In this regard, the interviewees emphasise that the new external members of the advisory board could engage with the family firm management on eye level due to their seniority and former experience as executives in the same industry. This is seen as especially helpful for the private equity investor to gain credibility when trying to convince a family firm patriarch with decades of experience to implement strategic changes. Without the consultation of an independent third party, the family firm owners could understand the critics of private equity investors as a means to an end to promote their own goals. At the same time, having family-external industry experts on the advisory board creates a basis for discussion and reduces the risk that the advisory board is only composed of loyal family members who are not sufficiently challenging the decisions of the management.

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“Corporate governance plays a key role for us. The advisory board acts as a disciplining factor. Moreover, decisions are adequately evidenced by an advisory board. Therefore, we want to have input from outside. Of course, we do not always want to be the bogeyman. Besides, we do not want to have people on the board who only have their positions due to their loyalty to the family. Management speaks completely differently to people who have industry experience and know-how or have even been executives themselves. Only a competent advisory board can convince the management.” (Private equity manager Gamma, Case Study C)

“Before the entry of the private equity investor, the company had no advisory board. That [advisory board]) is, of course, an advantage. We now also have independent directors on the advisory board who bring industry expertise to the company. In the past, this know-how was perhaps contributed by contacts of the company owner, but, not in this formal manner. Now, the advisory board meets four times a year to discuss the business performance and strategic projects. This is a very structured exchange that was not provided before.” (CFO Food Ingredients Producer, Case Study B)

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4.2.2.2 Professionalisation Related to the improvement of governance structures, eight (A, B, C, D, E, H, I, J) out of the ten family firms analysed show a higher degree of professionalisation after the private equity investor has come on board. The five family firm managers (A, B, C, D, I) interviewed indicate that the decision making process of the company is professionalised due to the private equity investor’s role as an external shareholder and sparring partner. The foremost reason mentioned for this development is that private equity investors as external shareholders show higher information needs compared to regular shareholders who are usually family members. The family firm representatives indicate that the improvement of corporate governance is not only attributable to the contractually agreed information obligations the family firm has toward the minority shareholder, but also to the change in the culture of decisionmaking. By obtaining the role of a family-external shareholder, the private equity investor challenges the ideas of the family firm management and demands them to justify their decisions. Eventually, this results in a professionalisation of the decision-making process and its preparation. This chain of thought is confirmed by empirical evidence that can be found in Case Studies A, D and E.

“The involvement of the private equity investor created a certain amount of commitment to communicate more professionally. A family firm, which has an advisory board that is very close to the respective company family, does not have very formal reporting obligations because the information needs are lower. But, when you have an external shareholder in your company, you have to proceed more formally and you have to be prepared for someone to question you.” (CFO Tool Machine Company, Case Study A)

“When I can answer all the questions the private equity investor asks, then I can be sure that I have done everything humanly possible.” (CEO Optical Industry Company, Case Study D)

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“Professionalisation resulted from a much more distinctive culture of preparing and discussing decisions.” (Private equity manager Epsilon, Case Study E)

Regarding the family firms with annual revenues below € 50m (H, I, J), the higher degree of professionalisation is attributed to a large extent to the implementation of state-of-the-art reporting and controlling systems that these companies lacked before the minority investment. This development is not only viewed as favourable for the family firms own management control, but is also appreciated by the banks because it better satisfies their information needs.

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“A completely structured planning process with working capital and cash flow forecasts was implemented. In addition, monthly reporting was introduced. This upgrade of the reporting system was not only required by the private equity investor, but also by the banks, because new subsidiaries were added due to the expansion in USA and China.” (Family firm entrepreneur Metalworking Company, Case Study I)

4.2.2.3 Financial expertise Financial structuring and M&A expertise belong among the essential competencies of private equity investors. For the empirical study of this thesis, interviewees are asked to provide information about the impact of the private equity investment on the financial network of the family firm, capital structure decisions, the level of financing costs and the success of M&A transactions. In nine (A, B, C, E, F, G, H, I, J) out of the ten case studies analysed, the interviewee confirms either a positive impact of the private equity investors’ involvement on the financial network of the company or on the accomplishment of M&A transactions. In the case studies where the private equity investor is involved in M&A transactions of the portfolio company (B, F, G, H, J), the support ranged from due diligence responsibilities (J), through to deal structuring (G) and up to defining a detailed add-on strategy together with the family firm entrepreneurs in a joint approach (F).

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“There is an overall strategy that should be acquired. In this case, we have a detailed matrix of which technological competencies we want to acquire because we do not have them yet and in which regions we want to develop further because we do not cover them yet. [...] We have a detailed target list that we work on in a joint approach. [...] When it comes to the actual acquisition process, then we are, of course, the family firm’s extended workbench - because we know quite well how to acquire companies.” (Private equity manager Zeta, Case Study F)

In Case Study B, the involvement of the private equity investor had even promoted the M&A activity of the company. The Food Ingredients Producer (B) that made no acquisitions to speak of for more than ten years has acquired two major international competitors in the first two years of the private equity minority investment thereby expanding its business globally and increasing its total revenues by more than € 300m. Alongside the contribution of pure M&A expertise, the private equity investor has assisted the company in this case in attracting financing for the acquisitions through a syndicated loan and a promissory note loan. Here, the better financing conditions, the broader banking circle and the access to capital markets are viewed as a co-product of the announcement that a leading global private equity firm has acquired a minority stake in the family firm.

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“On the one side, it was the announcement of the private equity investor coming on board and on the other side, the announcement of an IPO. At this point, all investment banks became sensitive, approached us and asked what was going to happen and how could they help us. That has, of course, helped us a lot with the financing because we said: If you want to accompany us in the IPO process, then you must first support us with the financing of the expansion. Without the hype about the minority investments, this would not have been that possible in that way.” (CFO Food Ingredients Producer, Case Study B)

Eight (A, B, C, E, F, G, I, J) out of ten case studies indicate that the involvement of a private equity investor is connected with an improvement of the financial network of the family firms in terms of the entire spectrum of measures taken to extend the existing banking circle, giving family firms access to capital markets and reducing the level of financing costs. Regarding the extension of the financial network as a result of the private equity investment, the analysis of the interviewees shows an uneven picture. Only in three cases (B, E, F), is the private equity investor considered to have had a direct influence in the extension of the financial network by supporting the family firms with its contacts. The reasoning for this observation is that family firms mostly have strong relationships with their banks that have grown over decades. Furthermore, the banking market in Germany is considered to be highly competitive and midsized companies in particular are strongly targeted by the banks. Therefore, private equity investors are not able to create a sizeable added value by supplying the family firms with their contacts to merchant banks.

“Everybody knows the banks in the market. A private equity investor cannot make much of an additional contribution here because every bank approaches the companies of the corresponding dimensions itself.” (Private equity manager Gamma, Case Study C)

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On the other side, interviewees confirm that through the private equity investors’ involvement, the family firm has gained access to high-profile investment banks in the context of acquisition financing (B, F).

“We are available to the board of directors as discussion partners. Of course, we help here. [...] We take part in banking negotiations. We open doors, provide contacts to banks to which a mid-sized company normally would not have access.” (Private equity manager Zeta, Case Study F)

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A direct connection between the credit rating of a family firm and the private equity investment cannot be observed the case studies examined. However, three family firms (A, C, J) confirm that the private equity investment has an indirect influence on the loan decisions of their banks since the minority investment alone serves as an indication of the firms’ quality in banking negations. In these cases, private equity is seen as a stabilising element on the shareholder level that has the advantage of being able to contribute fresh capital in times of crisis.

“Of course, private equity has an effect. Possibly not on the credit rating itself, but rather on the perception of the family firm through their banks. The private equity investor has a name in the industry and enjoys the corresponding recognition.” (Private equity manager, Gamma, Case Study C)

In two case studies (B, F), the private equity investment led to great changes in the liability structure of the family firm. In the case of the Installation Services Company (F), the private equity investor runs a joint project together with the family firm’s management to restructure the entire liabilities side resulting in a significant reduction of financing costs. A similar situation can be observed in the Food Ingredients Producer where the global financial activities have been harmonised. Before the minority investment, the international subsidiaries of the family firm obtained debt financing from local banks in their respective countries with different types of collateral. With the support of the private equity investor, not only the borrowing process, but also the collateralization of the company is harmonized leading to significant lower financing costs.

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“With the entry of the private equity investor, the decentralised financing of the subsidiaries was discontinued. Previously, all foreign subsidiaries received financing from local banks resulting in credits with small volumes, different collateralisations and inefficiencies. Together with the private equity investor, the financing was centralised and shifted to unsecured loans, i.e., instead of collateral, only financial covenants were used. As a result, the financing costs could be halved. Without the private equity investor, this would not have been possible in this quality and speed.” (CFO Food Ingredients Producer, Case Study B)

4.2.2.4 Internationalisation Five (B, C, D, I, J) out of the ten family firms have received support from their private equity investors in the context of their international expansion plans. Particularly in Case Studies B and D where the minority shareholders are leading global private equity investors with a strong international network, the family firms confirmed the great impact of the minority investment has on their international expansion plans. If the family firm’s expansion plans are focussed on a specific country, the international background of the private equity investor can 62

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even play a key role in the firm’s decision for the minority investment. The international expansion plans of the Optical Industry Company (D) are clearly focussed on China. In this regard, the family firm CEO highlighted the strong China expertise of the investment company in particular in the in-depth interview.

The private equity investors’ contribution to the family firms’ internationalisation seems to be limited by its own international reach. In contrast to Anglo-Saxon private equity firms that invest globally (B, D), the international reach of the German private equity firms has, in most cases, been limited to their network of internationally active portfolio companies that have already established subsidiaries in the country the family firm wants to expand in.

“We are positioned globally with business and portfolio companies spanning every continent.” (Private equity manager Beta, Case Study B)

“When starting to expand into China, we could benefit from the access to the network of the private equity investor’s portfolio companies and benefit from their experience.” (Family firm entrepreneur Metalworking Company, Case Study I)

Finally, the regionally-oriented private equity investors assist their portfolio companies in their first steps of the international expansion plans, but must realise quickly that they have reached their limits, particularly in regard to acquisitions of international competitors. As in case of the Baby Food Supplier (J), this can serve as a trigger for the exit of the private equity investor.

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“Then as a next step, the internationalisation of the company had to be started. We prepared the internationalisation and started to talk with companies from Spain, Italy, France and Eastern Europe. But, we have seen that our mission has been fulfilled and that a strategic investor with a global network can better accompany the next growth period of the company.” (Private equity manager Iota, Case Study J)

4.2.2.5 Network of portfolio companies As is already indicated, in the majority of the case studies analysed, internationalisation is connected with the access to the network of portfolio companies (B, C, D, F, G, I, J). The access to this network provides the family firms not only with benefits for their international expansion plan, but also allows them to realise synergies by exchanging in regard to opera-

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tional issues, (B), e.g., purchasing and procurement, sustainability and insurances and strategic issues regarding the specific business sector they are active in. The majority of interview partners confirm that the exchange between different portfolio companies works with the private equity investor as an interface or facilitator (B, C, D, F, G, I, J). In two cases, the private equity investors have even institutionalised the exchange with other portfolio companies by establishing a round-table event for the portfolio companies’ CFOs (I) and workshops on strategic issues, e.g., M&A (F).

“We have established a round-table event for our portfolio companies’ CFOs. That is a rather informal event. We invite them to a weekend with good wine and good food. Then they simply start to talk. That means, for example, company A has had a good experience with factoring and company B now has the same problem. There is no formalised process then. But, when the company thinks twice about the issue, then I just tell them to call the CFO they had already met at the last round-table event. We practically sit in the spider web and coordinate everything.” (Private equity manager Zeta, Case Study F)

“We are in exchange with other portfolio companies of the private equity investor. We are in conversation with them about insurance, procurement and sustainability issues. However, we also exchange views with other portfolio companies from the food sector. [...] In some cases, demand is bundled and scale effects are realised. The private equity investor acts here as a facilitator. That is, in any case, a big advantage. A lot of knowledge is available within the portfolio companies and this is helpful to us.” (CFO Food Ingredients Producer Case Study B)

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In the majority of the case studies, the access to the network of portfolio companies primarily encourages knowledge transfer among the family firms. However, one family firm, (C), has even been able to attract new customers from the network of the private equity investor’s portfolio companies. In this case, the family firm benefited from the private equity firm’s strong track record in the mechanical engineering and automotive industry resulting in a good reputation and a corresponding network.

4.2.3 Cooperation mechanisms Following up the third research question of this thesis, the following section gives an overview of the cooperation mechanisms between private equity investors and family firms in the course of minority investments. In contrast to buyout situations where the private equity investor acquires a majority interest in the company, which gives them the power to take decisions on their own, in minority investments, cooperation between the shareholders is considered as a precondition for the ability of the private equity investor to exert influence on 64

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strategic decisions. Only by convincing the majority stakeholder of their ideas and establishing cooperation with the family firm management can the private equity investor eventually implement its value creation program. The results of the in-depth interviews conducted in the context of the empirical part of this thesis reveal four cooperation mechanisms: (1) The personal relationship between the family firm entrepreneur and the private equity investment manager serving as a prerequisite for cooperation, (2) the tool set that enables the private equity investor to exert influence on strategic decisions encompassing the private equity investors’ rights to say, its rights of information and its veto power in strategic issues, (3) the private equity investor acting as a sparring partner for the family firm entrepreneur and (4) pre-agreed exit strategies that depend on the company’s performance that therefore incentivises the cooperation between the shareholders.

4.2.3.1 Good personal relationship as a prerequisite for cooperation

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In the context of the in-depth interviews, the family firm representatives are asked to provide information about the selection process of the minority investor. They indicated that a crucial decision criterion is the good personal relationship between the family firm entrepreneur and the private equity manager since this is viewed as the basis for the success of the minority investment. For example, the CEO of the Optical Industry Company (D) views mutual trust and consistency as the basis for cooperation between the shareholders. Furthermore, the family firm entrepreneur of the Metalworking Company (I) indicates that their gut feeling and the good chemistry between him and the investment managers had been the decisive factor during the decision process for the private equity investor rather than the final purchase price. Moreover, a connection between the good personal relationship and the concept of the private equity investors had been discovered by the Hydraulic Components Company (C) and has eventually led to the exclusion of a group of Anglo-Saxon private equity investors.

“Eventually two to three private equity investors were in the running. A good personal relationship was present with these private equity investors’. We had already dismissed the ones where the chemistry was not right. Usually there was a connection between the acting persons and the concepts of the investors. We had realised quickly that we do not want to work with the group of Anglo-Saxon private equity investors. Both from the feel good factor as well as from the type of people, we knew that this did not fit.” (CEO Optical Industry Company, Case Study C)

In the cases (B, D) where the minority stake is held by US-American private equity firms, the good personal relationship is especially attributed to the fact that the private equity firm has chosen German personnel to take over the responsibility for the transaction.

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“The private equity firm is from the USA and has a global presence. But, German personnel were deployed for our transaction. Both the managing director and the investment manager are German. I believe that the same cultural background is an advantage for the realisation of the investment.” (CFO Food Ingredients Producer, Case Study B)

Likewise, the private equity managers are questioned in the context of the in-depth interviews regarding the critical success factors for minority investments. They also indicate that a good personal relationship builds the basis for cooperation with the family firm entrepreneur that they depend on to implement strategic changes since they only hold a minority position in the company.

“The interpersonal chemistry must be right between the private equity investor and the entrepreneur because the private equity investor is in the weaker position.” (Private equity manager Alpha, Case Study J)

4.2.3.2 Private equity investor’s tool set for exerting influence

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According to Bünau and Bassewitz (2013, pp. 48–49), a private equity investor can protect its minority position by installing an advisory board and implementing by-laws that govern the rights and duties, the composition and the resolution of this advisory board. Furthermore, they can secure their influence on business decisions through the formation of a catalogue of transactions requiring approval either from the advisory board or from the shareholders’ meeting, special veto rights for the minority shareholder or performance-related rights that are oriented around the financial covenant concept. In the context of the empirical part of this thesis, the influence of the private equity investor on business decisions for the ten case studies are therefore evaluated according to the following channels: (1) The minority shareholders’ influence on the advisory board, (2) the existence of a catalogue of transactions requiring approval by the advisory board, (3) special veto rights and (4) information rights of the minority shareholder. In the context of the in-depth interviews, both the family firm representatives and the private equity managers are asked to give information about the private equity investors’ rights of say, the information rights and potential veto rights that are contractually assured or that are inherent to the form of cooperation. When evaluating the private equity investors influence on the advisory boards, two types of cases can be distinguished: (1) Family firms that had already established an advisory board before the minority investment and (2) family firms where the private equity investor requires the installation of an advisory board and therefore has influence on the composition of the board. When the family firms had already been equipped with an advisory board prior to the minority investment (A, D, E, G), the private equity investor is, in principle, simply allocated one seat on this board. Considering the cases 66

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(B, C, F, H, I, J) where the advisory board is installed in the context of the minority investment, a typical model for the composition of the advisory board could be observed. In these cases, the typical advisory board consists of three members including one family member or representative of the family, one private equity manager and one industry expert who is perceived to play a neutral role on the board (F, G, H, I, J). As a result, both the family firm managers and the private equity managers are required to convince an external third person with proven industry expertise before making decisions. In this model, no party can enforce decisions or implement strategic changes without the approval of one of the other parties. Therefore, the described composition of the advisory board can be considered as another indicator for cooperation. All minority investments examined feature a catalogue of transactions that require approval by the advisory board. In seven of the ten case studies (C, D, E, F, G, H, I), the interviewees indicate that the private equity investors have veto rights on strategic decisions and in one of these cases, (I), the veto rights even cover important operational decisions. These contractually agreed rights protect the minority position of the private equity investor rather than compensate for the missing majority voting rights. The reasoning behind this consideration is that both veto rights and rights to reserve approval do not typically contain rights of initiative that would give the private equity investor the capability to initiate or enforce a desired action on their own (Bünau & Bassewitz, 2013, p. 48). Therefore, these rights can be viewed as the last alternative for private equity investors to prevent actions taken by the majority shareholder with whom it disagrees. In order to implement its own ideas for value creation or initiate strategic changes, the private equity investor still depends on the cooperativeness of the majority shareholder. This is underscored by empirical evidence from the in-depth interviews.

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“The private equity investor as a minority shareholder has to work together with the majority shareholders on a basis of mutual trust. The majority shareholder must not view the private equity investor as a necessary evil. Shareholders’ meetings must not be in place only to express conflicts of interest.” (Private equity manager Epsilon, Case Study E)

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Case

A

B

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C

PE´s Influence on the Advisory Board

Catalogue of Transactions Requiring Approval

Veto Rights

Advisory board has existed since mid Yes. But only the standard catalogue of No.The private equity investor wanted to stay informed and not run the 1980s; the PE firm received 1 seat on transactions requiring approval by the business. advisory board. the advisory board. Supervisory board (Switzerland) with equal representation of PE and family had been established; voting rights are attached to shares 65% (Family) and 35% (PE); but with distinction between shareholder resolution and board resolution; board meets 4 times a year. PE required implementation of an advisory board with members not related to the family; family appointed 2 members and PE appointed 1 member of the board; rights of the shareholders´meeting were transferred to supervisory board.

Information Rights

Monthly reporting obligations.

Extensive information rights; monthly reporting; but, CFO says that Operating issues only need simple information process is rather informal; majority and strategic decisions always Contractually agreed minority protection PE is a shareholder and therefore has rights. need qualified majority of the the right to stay informed; regular supervisory board. exchange between PE and management. PE has veto right for various Yes. Catalogue of transactions requiring transactions that require approval of the advisory board, i.e., foundation of approval; competence has been shifted from shareholders´meeting to advisory subsidiaries abroad, huge investments and decisions that were out of the board. ordinary.

Monthly reporting obligation; annual report and forecasts.

D

Domination ("Beherrschungsvertrag") and Profit and Loss Transfer As a joint stock company (German Agreement ("ErgebnisStandard. PE has no influence on Monthly reporting and review call with AG), the family firm had already abführungsvetrag") with holding operational decisions, e.g., pricing, only PE; no excessive reporting. established a supervisory board; PE has company; 2 managing directors, 1 from strategic decisions. 1 seat on board (six in total). PE and 1 from family, decisions must be made jointly.

E

PE had 1 of 6 seats on the supervisory board (German AG); after second financing round, the PEs had 3 seats and the family had 3.

Yes

Veto rights for strategic decisions, e.g., investments, entry into new businesses, hiring of managers.

Monthly reporting obligations; annual report and forecasts.

F

Limted liability company (German GmbH) was converted into a joint stock company (German AG); supervisory board controls company; 6 members, thereof 2 family, 2 PE and 2 industry experts (neutral).

Yes

Yes. PE has veto rights for all important strategic decisions

Monthly reporting obligations.

G

Advisory board with 3 members; 1 family, 1 PE and 1 joint agent.

H

Advsiory board with 3 members; 1 family member, 1 PE and 1 external member appointed by the family.

Yes

I

Advisory board; company is controlled by shareholders´meeting; quarterly meetings; decisions must be made jointly.

Yes. Strategic and important operational decisions are governed by catalogue of transactions that require approval.

J

By-law for advisory board was Rights of shareholders´meeting were introduced; management needs board transferred to advisory board; 3 approval for important decisions, e.g., members, thereof 1 PE, 1 family and 1 sale of property, hiring of managers; external member with industry amount limit for decisions only taken by experience. management.

Yes. Extensive catalogue of Yes. PE has veto rights for all important Extensive information rights; monthly transactions that need board approval. strategic decisions. reporting. Yes. PE has veto rights for all strategic decisions that influence the risk Monthly reporting; but joint review only exposure of the PE, e.g., acquisitions, when the numbers are poor. divestments, raising of credit, huge investments. Yes. PE has veto right or right to reserve approval for important decisions.

PE receives monthly reporting, annual report and forecast; in crisis, even weekly reports on cash positions; PE´s objective is to stay informed.

Balancing of interests due to third neutral member on advisory board.

Monthly reporting and monthly review of numbers.

Table 7: Private equity investor’s tool set for exerting influence

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Information rights are considered as another cooperation mechanism because only a private equity investor that is informed about the current developments in the company can exert influence on strategic decisions. The private equity investors’ contractually agreed information rights are relatively homogenous in the ten minority investments examined since all private equity investors receive monthly reporting from the family firms. Three family firms (D, H, J) even hold monthly review meetings or calls with the management of their portfolio company to evaluate the current business performance. Regarding a more informal information exchange between the shareholders, the CFO of the Food Ingredients Producer (B) indicates that he keeps in contact with the private equity investor and that the investment managers can call him anytime they have questions. The private equity manager responsible for the minority investment in the Metalworking Company (I) indicates that the implementation of information obligations primarily results from the objective to be as close as possible to the business of the family firm. The continuous exchange of information and the cooperation between shareholders ultimately leads to a shorter implementation process, thereby compensating for the typically longer decision process in minority investments when compared to buyouts.

“The decision process in minority investments takes longer compared to majority participations. However, the implementation process is therefore shorter because everyone is in the same boat and have made the decisions jointly.” (Private equity manager Iota, Case Study I)

4.2.3.3 The sparring partner role of the private equity investor In the context of the in-depth interviews, the family firm representatives (A, B, C, D, I) are asked to assign the role of the private equity investor either to that of a sparring partner or a supervisor. In two minority investments, the private equity managers are clearly seen in the role of sparring partners. Three family firm representatives (B, C, D) indicate that the private equity managers’ role as a sparring partner is accompanied by a control element. Nevertheless, they confirm that the sparring partner role outweighs the supervisor role.

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“The investment manager obtained the role of a sparring partner and was possibly even a sort of coach for the top management team.” (CEO Machine Tool Company, Case Study A)

“The role of the private equity investor is a combination of sparring partner and supervisor. Of course, the private equity investor looked carefully at the figures. This was new for us because previously, no external party except the auditors checked the figures. Indeed, this was a sort of control. [...] Except for my father, we were a group of young people within the management. Here, the transition from supervisor to sparring partner was a smooth one. The

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investment manager would give us a hint that we were making a mistake, but at the same time, he gave us advice on how to solve the problem.”(Family firm entrepreneur Hydraulic Components Company, Case Study C)

Based on this empirical evidence, the sparring partner role of the private equity managers is viewed as another cooperation mechanism. In practise, this cooperation element becomes especially apparent in the context of joint corporate development projects where the private equity firm offers targeted consultancy services to their portfolio companies. For example, the investment manager responsible for the Baby Food Supplier (I) sees himself and his colleagues in the role of a corporate development unit for mid-sized companies that particularly provides assistance in strategic issues and M&A topics. Likewise, the CFO of the Food Ingredients Producer (B) confirms the private equity investor’s interest in the further operational development of the family firm. The responsible private equity investor has even affirmed their interest with their own consulting unit focussing on corporate development projects within its portfolio companies. In this specific case, the consulting unit has supported the Food Ingredients Producer in a joint project for the optimisation of the supply and chain management. In connection with the question regarding the private equity investor’s role as a sparring partner, the family firm entrepreneurs and managers are also asked about possible negative experiences they encounter with the minority shareholder. In three cases (B, D, I), the family firm representatives indicate that the control function of the private equity investor had provoked minor conflicts. But, they concurrently emphasise that these conflicts are constructive and promote the future development of the company.

“Of course, there were controversial discussions when we failed to agree. But I view this process, which in the end leads to an agreement, as healthy for the company. For the first time since the death of his father, the firm owner somebody with whom he could talk about the future strategy of the company at eye level.” (CFO Food Ingredients Producer, Case Study B)

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4.2.3.4 Exit scenarios as incentives for cooperation The empirical evidence collected within the in-depth interviews shows that pre-agreed exit strategies that are usually tied to the fulfilment of certain conditions can serve as an incentive mechanism for family firms to cooperate with the private equity investor. The interviewees are asked if pre-defined exit strategies are contractually agreed and if an expected investment duration is discussed prior to the minority investment. The existence of drag-along rights, put and call options for the private equity investor and buy-back rights for the family are examined in particular. Because minority investments are not as marketable as majority stakes, private equity investors often require a drag-along right, i.e., the right to be able to sell its ownership stake together with the one of the majority stakeholders to a third party (Bünau & Bassewitz, 2013, p. 50). Buy-back rights are interesting for the owner family in order to 70

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regain full control over the company and give them the right to intervene if the private equity investor wants to sell its stake to a third party that does not meet the expectations of the family. Another alternative for the private equity investor is to agree on a put option, i.e., the right to sell back the minority investment to the owner family. The counterpart is a call option that gives the private equity investor the right to increase its share in the company if certain, usually performance-related, conditions are not fulfilled.

Rights and Options* Buy-back Right Drag-along Right Put Option Call Option

A x

B x

C x

E x x

F

G

x

I x x

x x

*For case studies D, H and J, the interviewees did not provide information about contractually agreed options or rights.

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Table 8: Exit Strategies

In five (A, B, C, E, I) of the ten minority investments, the owner family has a buy-back right for the minority stake of the private equity investor. Likewise in three minority investments (E, F, I), a drag-along right for the private equity investor is agreed upon with the majority stakeholder and in one case, (C), the private equity investor has a call option available to increase its share in the company if it performs below plan. Only one private equity investor Eta, (G), has implemented a put option that gives them the right to sell back its shares to the family firm entrepreneur. Of the minority investments that have already been exited (A, C, E, J), two family firm entrepreneurs have made use of their buy-back rights (A, C). The case of the Hydraulic Components Company (C) demonstrates how contractually agreed exit strategies can act as an incentive for the family firm entrepreneur to cooperate with the private equity managers. In this case study, from the beginning of the transaction, the owner family has clarified their objective to regain the full control over the company at some point in time. Therefore, they had agreed upon a fixed exit strategy after seven years with the private equity investor that contains two potential exit scenarios: (1) The re-purchase of the minority share by the family at a fixed price in the context of a buy-back right or (2) the increase of the private equity investor’s stake within the utilisation of a call option that becomes effective if the company performs below plan.

“We had agreed on a definite investment duration. The investment duration was fixed at seven years. Then, the family had the possibility to buy back the shares. [...] By means of an EBIT multiple, we could already calculate the price the family has to pay if the business performance had gone according to plan. [...] The crux of the matter is that the family does not have the money to buy back the shares if the company does not develop according to plan.

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Therefore, we agreed on the provision that the private equity investor has the possibility to acquire the majority ownership of the company if it performs below plan. That was the Sword of Damocles over the investment. We entered into a match with the private equity investor. If we perform according to plan, we will manage to buy back the shares. If we do not perform according to plan, the private equity investor will take over majority ownership and will sooner or later sell the company.” (Family firm entrepreneur Hydraulic Components Company, Case Study C)

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5 Conclusion The purpose of this thesis is to determine the main decision drivers for family firms to demand private equity minority investments and to concurrently examine the specific features of this type of financing. Following up the research questions posed at the beginning of this thesis, the case study method is applied in the context of a qualitative research approach to examine the financing needs of family firms, the role of non-financial benefits provided by private equity and the cooperation mechanisms inherent to minority investments. The study at hand confirms previous findings on the demand for private equity minority investments by demonstrating that family firms primarily seek private equity financing for a combination of financing needs that arise from both the economic situation of the company and issues at the shareholder level. The study at hand also further contributes to the existing knowledge by providing additional evidence for the important role of non-financial benefits in the family firm’s decision process for private equity financing. Furthermore, additional insights are gained in the investment process suggesting that cooperation between family firms and private equity investors serves as a precondition for the successful development of minority investments. In this final chapter, the major findings of this thesis are summarised and the lessons learned herein are drawn for practitioners. Finally, the limitations of this study are elaborated and an outlook on areas of further research is provided.

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5.1 Major findings This thesis finds that family firms primarily demand private equity minority financing for a combination of reasons that arise both from the economic situation of the company and from challenges at the shareholder level. In the majority of the case studies, the financing of future growth and international expansion in particular serves as a motivating factor for family firms to obtain private equity financing. Nevertheless, the need for growth capital is, in most cases, accompanied by challenges arising at the shareholder level. The exit of a shareholder, succession issues and family wealth diversification particularly serve as triggers for family firm entrepreneurs to admit private equity investors as minority shareholders. One of the key findings of this study is that private equity financing is only applied by family firms if they are confronted with complex challenges that cannot be solved with debt financing alone, but rather require the provision of equity capital in combination with the expertise of a professional financial investor and the neutrality of an external shareholder. The study at hand provides additional evidence that non-financial benefits play a key role during the decision process of family firms for private equity. Above all, having private equity investors as minority shareholders on board is associated with improved corporate governance and increased professionalisation in the respective family firms. Alongside the implementation of an advisory board, the improvement of corporate governance structures is mainly attributable to the change of the decision-making culture caused in the course of the minority investment. The majority of family firms report that the private equity investor has

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implemented a new culture of discussing and challenging decisions that leads to an increase in decision-making quality as a result. Family firms consider financial expertise and M&A know-how in particular as the core competencies of private equity investors and confirm that they belong to the major non-financial benefits that they have enjoyed during the minority investment. Nevertheless, a connection between the extension of the family firms’ financial network and the involvement of the private equity investor could not be generalised. Moreover, the study at hand indicates that the enhancement of the family firms’ level of internationalisation is limited by the international reach of the private equity firm. However, regionallyoriented private equity investors can compensate for their limited international reach by giving family firms access to their network of internationally operating portfolio companies. This thesis also makes noteworthy contributions to the identification of potential cooperation mechanisms between family firm entrepreneurs and private equity investors in the course of a minority investment. The results of the in-depth interviews demonstrate that family firm entrepreneurs and managers view the private equity investor as a sparring partner rather than a supervisor. In practise, this element of cooperation becomes particularly apparent in the form of corporate development projects that are set up in a joint approach to foster the professionalisation of the family firm. The inferior decision power of a private equity firm in a minority investment compared to buyout situations is considered as another cooperation mechanism. The results of the case study interviews show that the private equity investor is granted certain rights of say encompassing its influence on the advisory board, a catalogue of transactions requiring approval and contractually agreed veto rights. Nevertheless, these rights usually do not enable the private equity investor to initiate strategic changes without the consent of the family firm entrepreneur. Due to its role as a minority shareholder, the private equity investor is therefore not able to implement its value creation strategy against the will of the family firm entrepreneur and must rely on the cooperativeness of the majority shareholder. Moreover, preagreed exit scenarios encompassing buy-back rights for the owner family and drag-along rights for the private equity investor have the potential to incentivise cooperation between the shareholders in the course of the minority investment. Particularly referring to the private equity investors’ role as a sparring partner, a good personal relationship between the investment managers and the family firm representatives is considered as a prerequisite for successful cooperation between the shareholders.

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5.2 Lessons learned The results of this thesis support the idea that private equity minority investments are an attractive financing alternative for family firms that have financing needs arising from complex challenges. Private equity minority investments have the potential to enable the future growth of a family firm. At some point in the development of a family firm, the family’s resources might not be sufficient to exhaust the entire growth potential of the company. In this case, private equity investors can promote the transition of a family firm to the next step in development. In particular, private equity investors can support family firms that are striving for internationalisation, preparing to enter the capital market or intend to enhance their market 74

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position with strategic add-on acquisitions. Private equity minority investments can also support family firms in solving challenges arising at the shareholder level, e.g., the exit of a shareholder, termination of silent participations or family conflicts. The advantage of private equity minority investments is that family firm entrepreneurs can solve those challenges without losing the ownership of the company. Furthermore, private equity investors are temporary partners that allow the owner family to regain full control over the firm after the problems have been solved. In comparison to a bank loan that is merely a source of capital for the company, private equity financing can provide additional value by making non-financial benefits available to the company such as the enhancement of corporate governance structures, financial expertise or access to its international network. The study at hand provides empirical evidence suggesting that the private equity investor’s involvement has a positive impact on the decision–making culture and ultimately on the professionalisation of the family firm. In this regard, family firm representatives confirm that the participation of the private equity investor caused them to justify and discuss their decisions with an external third party for the first time. In obtaining the role of a sparring partner for the family firm entrepreneur, the private equity investor can provide substantial added value for the further development of the company.

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Finally, before engaging in a private equity minority investment, family firm entrepreneurs must clearly identify the major challenges that their firm is confronted with and formulate a requirements catalogue for the selection process of the private equity investor. Characteristics such as the investments focus, investment horizon, international reach and industry track record serve as indications of whether the selected private equity investor is suitable for the financing needs of the family firm. Since cooperation is considered as a prerequisite for the successful development of a minority investment, a good personal relationship between the family firm’s representatives and the private equity investor’s management is of essential importance. Before entering into a minority investment, the family firm entrepreneur must be aware that the private equity investor is only a temporary partner. Therefore, the expected investment duration and exit scenarios must be discussed prior to the share purchase. Regarding potential exit strategies, the family firm entrepreneur must decide whether they are willing to grant the private equity investor a drag-along right that enables them to resell the complete family firm to a third party. If the entrepreneur has the objective to preserve the continuous family ownership of the company, they should consider contractually agreeing on a buy-back right for the minority stake of the private equity investor.

5.3 Limitations and implications for future research A number of caveats must be considered regarding the study at hand. The first limitation of this thesis lies in the fact that primarily successful private equity minority investments, i.e., minority investments that have fulfilled both the expectations of the family firm entrepreneurs and of the private equity investors, are considered as case studies for the empirical part. This resulted from the positive scope of the present thesis to examine the cooperation between

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family firms and private equity investors in the context of a minority investment. In order to identify obstacles that may impede the success of private equity minority investments, further research should therefore also examine negative examples for minority investments. The geographic scope of this thesis is another important limitation to consider. The study at hand focusses on family firms in Germany. As stated in the introduction of this thesis, family firms are the predominant business form in Germany and are approached intensively by financial investors, which is connected with a certain market power. Further research should therefore conduct similar studies following the framework used for other countries with different business cultures. First, whether the propositions made for Germany are also valid for the rest of Europe should be tested. In a second step, the characteristics of private equity minority investments in the USA should be examined since the capital market in that country is more easily accessible to small and medium-sized enterprises than the German capital market, which may influence the demand for private equity financing. Moreover, the present thesis makes an initial approach in establishing the distinctions between private equity investors with different cultural backgrounds and regional scope. Further research should follow up these efforts and collect additional evidence on how the different cultural backgrounds of private equity investors affect the characteristics of minority investments. As a third measure in further research, the long-term effects of private equity minority investments on the development of family firms should be evaluated. The changes in family influence and corporate governance several years after the exit of the private equity minority shareholder should be examined in particular. Within this framework, a distinction between family firms that obtained private equity financing for the first time and family firms that demanded private equity in a second round of financing would be of interest.

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Finally, this thesis approaches private equity minority investments from the viewpoint of family firm entrepreneurs or managers. By analysing the driving factors of the demand, the supply side for private equity minority investments is left out. Further research could transfer the conceptual framework of this thesis to the viewpoint of the private equity investors in order to analyse which factors drive the supply side. In this regard, further research should particularly examine the differences in return expectations and purchase price between minority investments and buyouts.

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References 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. Achleitner, A.-K., Schraml, S.C. & Tappeiner, F. (2008). Private Equity in Familienunternehmen: Erfahrungen mit Minderheitsbeteiligungen. München, Stiftung Familienunternehmen. Astrachan, J.H., Klein, S.B. & Smyrnios, K.X. (2002). The F-PEC Scale of Family Influence : A Proposal for Solving the Family Business Definition Problem. 15 (1), 45–58. Astrachan, J.H. & Shanker, M.C. (2003). Family Businesses’ Contribution to the U.S. Economy : A Closer Look. Family Business Review. 16 (3), 211–219. Ball, R., Burrows, A., Howorth, C., Kloeckner, O., Scholes, L., Westhead, P. & Wright, M. (2008). Private Equity in Family Firms A report on private equity investments in family firms across Europe from The Centre for Management Buyout Research. Barney, J. (1991). Firm Resources and Sustained Competitive Advantage. Journal of Management. 17 (1), 99–120. Bertrand, M. & Schoar, A. (2006). The Role of Family in Family Firms. The Journal of Economic Perspectives. 20 (2), 73–96. Brenes, E.R., Madrigal, K. & Requena, B. (2011) Corporate governance and family business performance. Journal of Business Research. 64 (3), 280–285. Bünau, D.H. von & Bassewitz, G. (2013) Minderheitsbeteiligungen im Mittelstand - Zum Interessenausgleich zwischen Unternehmern und Finanzinvestoren. CORPORATE FINANCE biz. 4 (1), 42–52.

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Cabrera-Suárez, K., Saá-Pérez, P. De & García-Almeida, D. (2001) The Sucession Process from a Resource- and Knowledge Based View of the Family Firm. Family Business Review. 14 (1), 37–46. Chrisman, J.J., Chua, J.H. & Sharma, P. (2005). Trends and Directions in the Development of a Strategic Management Theory of the Family Firm. Entrepreneurship Theory and Practice. 29 (5), 555–576. Chrisman, J.J., Chua, J.H. & Steier, L.P. (2003). An introduction to theories of family business. Journal of Business Venturing. 18 (4), 441–448.

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Cornelli, F. & Karakas, Ö. (2008). Private equity and corporate governance: do LBOs have more effective boards?. The Globalization of Alternative Investments, Working Papers Volume 1, The Global Impact of Private Equity Report. World Economic Forum. 65-84. Cumming, D., Siegel, D.S. & Wright, M. (2007). Private equity, leveraged buyouts and governance. Journal of Corporate Finance. 13 (4), 439–460. Dawson, A. (2011). Private equity investment decisions in family firms: The role of human resources and agency costs. Journal of Business Venturing. 26 (2), 189–199. Dul, J. & Hak, T. (2012). Case Study Methodology in Business Research. Oxford, Elsevier. Dyer, W.G. (2006). Examining the “Family Effect” on Firm Performance. Family Business Review. 19 (4), 253–273. Dyer, W.G. (2003). The Family: The Missing Variable in Organizational Research. Entrepreneurship Theory and Practice. 27 (4), 401–416. Feltham, T.S., Feltham, G. & Barnett, J.J. (2005). The Dependence of Family Businesses on a Single Decision-Maker. Journal of Small Business Management. 43 (1), 1–15. Fraser-Sampson, G. (2010). Private Equity as an Asset Class. 2nd Edition. Chichester, Wiley. Gomez-Mejía, L.R., Nickel, M.N. & Gutierrez, I. (2001). The Role of Family Ties in Agency Contracts. The Academy of Management Journal. 44 (1), 81–95. Gomez-Mejía,L.R., Haynes, K.T., Nickel, M.N., Jacobson, K.J. & Moyano-Fuentes, J. (2007). Socio-emotional Wealth and Business Risks in Family controlled Firms : Evidence from Spanish Olive Oil Mills. Administrative Science Quarterly. 52 (1), 106137. Hennsen, P. J. (2011). Entwicklung von Private-Equity- Portfoliounternehmen in Deutschland : Performance und Einflussfaktoren aus Sicht der Portfoliounternehmen. Europäische Hochschulschriften: Peter Lang. Frankfurt am Main.

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Hesse-Biber, S.N. & Leavy, P. (2011). The Practice of Qualitative Research. 2nd Edition. Thousand Oaks, CA, SAGE Publications. Hitt, M.A. & Sirmon, D.G. (2003). Managing Resources: Linking Unique Resources, Management, and Wealth Creation in Family Firms. Entrepreneurship Theory and Practice. 27 (4), 339–358. Holthausen, R.W. & Larcker, D.F. (1996). The financial performance of reverse leveraged buyouts. Journal of Financial Economics. 42 (3), 293–332. Howorth, C., Westhead, P. & Wright, M. (2004). Buyouts, information asymmetry and the family management dyad. Journal of Business Venturing. 19 (4), 509–534.

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Jensen, M.C. (1989). Eclipse of the Public Corporation. Harvard Business Review. 67 (5), 61–74. Kaplan, S. (1989). The effects of management buyouts on operating performance and value. Journal of Financial Economics. 24 (2), 217–254. Kaplan, S.N. & Strömberg, P. (2009). Leveraged Buyouts and Private Equity. Journal of Economic Perspectives. 23 (1), 121–146. Kellermanns, F. & Eddleston, K.A. (2004). Feuding Families : When Conflict Does a Family Firm Good. Entrepreneurship Theory and Practice. 28 (3), 209–228. Klöckner, O. (2009). Buyouts in Family Businesses: Changes in Corporate Governance, Instruments of Managerial Control, and Financial Practices. Wiesbaden, Gabler Verlag. López-Gracia, J. & Sánchez-Andújar, S. (2007). Financial Structure of the Family Business: Evidence From a Group of Small Spanish Firms. Family Business Review. 20 (4), 269– 287. Miller, D. & Le Breton-Miller, I. (2006). Family Governance and Firm Performance : Agency, Stewardship, and Capabilities. Family Business Review. 19 (1), 73–87. Myers, S.C. (1984). The Capital Structure Puzzle. The Journal of Finance. 39 (3), 575–592. Phan, P. H. & Hill, C.W. (1995). Organizational Restructuring and Economic Performance in Leveraged Buyouts: an Ex Post Study. Academy of Management Journal. 38 (3), 704– 739. Poutziouris, P. Z. (2001). The Views of Family Companies on Venture Capital : Empirical Evidence from the UK Small to Medium Size Enterprising Economy. Family Business Review. 14 (3), 277–291. Prym, C. (2011). Private Equizy in Familienunternehmen - Eine empirische Fallstudienuntersuchung. Schriften. Wittener Institut für Familienunternehmen (ed.). EUL Verlag: Lohmar.

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Scholes, L., Wright, M., Westhead, P. , Bruining, H. & Kloeckner, O. (2009). Family-Firm Buyouts, Private Equity, and Strategic Change. The Journal of Private Equity. 12 (2), 7– 18. Sharma, P. (2004). An Overview of the Field of Family Business Studies: Current Status and Directions for the Future. Family Business Review. XVII (1), 1–36. Singh, H. (1990). Management buyouts : Distinguishing characteristics and operating changes prior to public offering. Strategic Management Journal. 11 (4), 111–129.

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Stiftung Familienunternehmen. (2013). Definition Familienunternehmen. http://www.familienunternehmen.de/media/public/pdf/definitionfamilienunternehmen/definition-of-the-family-businesses.pdf [accessed: 15 July 2013] Tagiuri, R. & Davis, J.A. (1992). On the Goals of Successful Family Companies. Family Business Review. 5 (1), 43–62. Talmor, E. & Vasvari, F. (2011). International Private Equity. Chichester, John Wiley & Sons. Tappeiner, F., Howorth, C., Achleitner, A.-K. & Schraml, S. (2012). Demand for private equity minority investments: A study of large family firms. Journal of Family Business Strategy. 3 (1), 38–51. Tutino, M. & Paoloni, M. (2012). Effect of private equity minority stake deals on financial network of SMEs Evidence from Italy. The GSTF Journal on Business Review. 2 (1). Upton, N. & Petty, W. (2000). Venture capital investment and US family business. Venture Capital. 2 (1), 27–39. Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal. 5 (2), 171–180. Westhead, P. & Cowling, M. (1998). Family Firm Research: The Need for a Methodological Rethink. Entrepreneurship Theory and Practice. 23 (1), 31–56. Woods, J., Dalziel, T. & Barton, S.L. (2012). Escalation of commitment in private family businesses: The influence of outside board members. Journal of Family Business Strategy. 3 (1), 18–27. Wright, M. & Kellermanns, F.W. (2011). Family firms: A research agenda and publication guide. Journal of Family Business Strategy. 2 (4), 187–198. Wulf, T., Stubner, S., Gietl, R. & Landau, C. (2010). Private Equity and Family Business – Can Private Equity Investors Add to the Success of Formerly Owned Family Firms? (87).

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Yin, R.K. (2009). Case Study Research: Design and Methods. 4th Edition. Thousand Oaks, SAGE Publications. Zahra, S. & Sharma, P. (2004). Family Business Research: A Strategic Reflection. Family Business Review. 17 (4), 331–346.

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Appendix A: Cover Letters Cover letter to family firms Muster GmbH z.H. Herrn Muster Musterstrasse 1 98765 Musterstadt

Sehr geehrter Herr Muster,

am Frankfurt Institute for Private Equity and M&A der Frankfurt School of Finance and Management wird derzeit unter der Leitung von Prof. Dr. Christoph Schalast eine Forschungsarbeit zum Thema: „Minderheitsbeteiligungen als Form der Kooperation zwischen Familienunternehmen und Private Equity Investoren“ durchgeführt.

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Ziel dieser Arbeit ist es anhand einer empirischen Studie die treibenden Faktoren hinter diesen Minderheitsbeteiligungen aus Sicht der Familienunternehmer zu identifizieren. Hierzu wird Herr Alexander Franke im Rahmen seiner Masterthesis die erforderlichen Informationen erheben und auswerten. Dies geschieht durch im Vorfeld vorbereite Interviews mit Vertretern ausgewählter Unternehmen. Ihr Unternehmen, die Muster GmbH ist eine der Schlüsselfirmen der Untersuchung. Speziell interessieren wir uns für die Aufnahme des Investors XY in ihren Gesellschafterkreis. Wir wären ihnen sehr dankbar, wenn sie oder einer ihrer Mitarbeiter sich die Zeit für ein max. einstündiges Interview nehmen würden. Da die Anzahl der in Frage kommenden Unternehmen sehr eingeschränkt ist, kommt den Informationen ihres Unternehmens eine hohe Bedeutung zu. Wir bitten sie daher für ein Interview zur Verfügung zu stehen und würden uns sehr freuen, wenn sie sich Zeit für die Beantwortung unserer Fragen nehmen. Selbstverständlich werden die erhobenen Informationen vertraulich behandelt und auf Wunsch anonymisiert. Über eine kurze Rückmeldung, ob sie für ein Interview zur Verfügung stehen, würden wir uns sehr freuen. Sie erreichen uns per Mail: [email protected] oder Telefon XXXX/ XXX XXXX. Gerne wird sich Herr Alexander Franke in den nächsten Tagen zwecks einer Terminvereinbarung mit ihnen in Verbindung setzen.

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Für die freundliche Unterstützung des Forschungsprojektes bedanken wir uns sehr herzlich im Voraus. Für Rückfragen stehen wir ihnen selbstverständlich gerne zur Verfügung.

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Mit freundlichen Grüßen

Prof. Dr. Christoph Schalast

Alexander Franke

Akademischer Leiter Frankfurt Institute for Private Equity and M&A Frankfurt School of Finance and Management

Student Master of Finance

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Cover letter to private equity investors Beteiligungsgesellschaft XY z.H.: Herr Mustermann Musterstrasse 2 98765 Musterstadt

Sehr geehrter Herr Mustermann,

am Frankfurt Institute for Private Equity and M&A der Frankfurt School of Finance and Management wird derzeit unter der Leitung von Prof. Dr. Christoph Schalast eine Forschungsarbeit zum Thema: „Minderheitsbeteiligungen als Form der Kooperation zwischen Familienunternehmen und Private Equity Investoren“ durchgeführt. Die Beteiligungsgesellschaft XY ist aufgrund ihrer langjährigen Expertise als Finanzierungspartner für mittelständische Familienunternehmen einer der Schlüsselinvestoren für unsere Studie. Ziel dieser Arbeit ist es anhand einer empirischen Untersuchung festzustellen, welchen Mehrwert Familienunternehmen aus der Zusammenarbeit mit Private Equity Investoren erwarten. Hierzu wird Herr Alexander Franke im Rahmen seiner Masterthesis die erforderlichen Informationen erheben und auswerten. Dies geschieht durch im Vorfeld vorbereite Interviews mit Vertretern ausgewählter Private Equity Investoren und Familienunternehmen.

Copyright © 2015. Diplomica Verlag. All rights reserved.

Wir wären ihnen sehr dankbar, wenn sie oder einer ihrer Mitarbeiter sich die Zeit für ein max. einstündiges Interview nehmen würden. Da die Anzahl der in Frage kommenden Unternehmen sehr eingeschränkt ist, kommt den Informationen ihres Unternehmens eine hohe Bedeutung zu. Wir bitten sie daher für ein Interview zur Verfügung zu stehen und würden uns sehr freuen, wenn sie sich Zeit für die Beantwortung unserer Fragen nehmen. Selbstverständlich werden die erhobenen Informationen vertraulich behandelt und auf Wunsch anonymisiert. Über eine kurze Rückmeldung, ob sie für ein Interview zur Verfügung stehen, würden wir uns sehr freuen. Sie erreichen uns per Mail: [email protected] oder Telefon XXXX/ XXX XXXX. Gerne wird sich Herr Alexander Franke in den nächsten Tagen zwecks einer Terminvereinbarung mit ihnen in Verbindung setzen.

Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

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Für die freundliche Unterstützung des Forschungsprojektes bedanken wir uns sehr herzlich im Voraus. Für Rückfragen stehen wir ihnen selbstverständlich gerne zur Verfügung.

Copyright © 2015. Diplomica Verlag. All rights reserved.

Mit freundlichen Grüßen

Prof. Dr. Christoph Schalast

Alexander Franke

Akademischer Leiter Frankfurt Institute for Private Equity and M&A Frankfurt School of Finance and Management

Student Master of Finance

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Appendix B: Interview Guidelines Interview guideline for family firms Der folgende Interviewleitfaden soll als Orientierungshilfe für den empirischen Teil meiner Masterthesis zum Thema: „Minderheitsbeteiligungen als Form der Kooperation zwischen Familienunternehmen und Private Equity Investoren“ dienen. Mit Hilfe der Experteninterviews sollen die wesentlichen Treiber von Private Equity Minderheitsbeteiligungen identifiziert werden, u.a Finanzierungsanlass, wirtschaftliche Situation des Unternehmens und ggf. Situation der Eigentümerfamilie. Außerdem sollen neben den Finanzierungsanlässen auch die nicht-finanziellen Vorteile, die Familien-unternehmen aus der Zusammenarbeit mit Private Equity Investoren erwarten, herausgearbeitet werden. Der inhaltliche Aufbau der Experteninterviews gestaltet sich wie folgt:

1. Allgemeine Fragen zum Unternehmen und Erfahrung mit Private Equity 2. Identifikation des Finanzierungsanlasses 3. Struktur der Minderheitsbeteiligung und Zusammenarbeit mit dem Investor 4. Fragen zu nicht-finanziellen Vorteilen aus der Zusammenarbeit mit Private Equity Investoren

1. Allgemeine Fragen zum Unternehmen und Erfahrung mit Private Equity 1.1 Welche Position haben sie im Unternehmen? Seit wann sind sie im Unternehmen tätig? Inwiefern hatten sie Einfluss auf die Auswahl des Private Equity Investors? 1.2 Besteht das Management nur aus Familienmitgliedern oder auch aus familienfremden Managern?

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1.3 Verfügt ihr Unternehmen über einen Beirat? Wann wurde dieser Beirat eingerichtet? 1.4 Welches Vorwissen hatten sie bzw. die Eigentümerfamilie über Private Equity? Bestanden im Vorfeld der Transaktion Bedenken gegenüber dem Einstieg eines Private Equity Investors?

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2. Identifikation des Finanzierungsanlasses 2.1 Wie haben sich die Eigentumsverhältnisse am Unternehmen durch Minderheitsbeteiligung des Private Equity Investors verändert? 2.2 Wie wurde der Kaufpreis der Anteile finanziert? Wurde Leverage in der Finanzierungsstruktur eingesetzt? 2.3 Gab es einen konkreten Finanzierungsanlass für das Unternehmen einen Private Equity Investor in den Gesellschafterkreis aufzunehmen? 2.4 Lag der Grund für die Hereinnahme eines externen Eigenkapitalgebers eher in der wirtschaftlichen Situation des Unternehmens oder in Herausforderungen, die sich im Gesellschafterkreis ergaben? 2.5 Stand für den Eigentümer eine Mehrheitsbeteiligung oder der Verkauf an einen strategischen Investor zur Debatte? 2.6 Ist die Beteiligungsgesellschaft an sie als potenzielles Zielunternehmen herangetreten oder umgekehrt? Wurde der Kontakt direkt oder über Investmentbanken hergestellt? 2.7 Fand eine Auswahl (eine Art „Beauty Contest“) zwischen verschiedenen Private Equity Unternehmen statt oder haben sie sich früh auf ein Beteiligungsunternehmen festgelegt? 2.8 Haben sie sich als Unternehmen eine Ziel-Eigenkapitalquote vorgegeben, welche die Aufnahme weiteren Fremdkapitals verhindert und damit den Einstieg eines Private Equity Investors begünstigt hat?

3. Struktur und Ablauf der Minderheitsbeteiligung

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3.1 Gibt es eine Ziel-Beteiligungsdauer seitens des Private Equity Investors? Wurde im Vorfeld die erwartete Beteiligungsdauer und ein konkretes Exitszenario besprochen? 3.2 Wurde mit der Eigentümerfamilie ein Rückkaufsrecht für die Anteile des Private Equity Investors vereinbart? Gibt es Pläne seitens der Eigentümer das Unternehmen wieder zu 100% in ihren Besitz zu bringen? 3.3 Welche Mitsprache- und Informationsrechte wurden Private Equity Investor am Unternehmen eingeräumt? Wird die fehlende Kontrollmehrheit des Private Equity Investors durch Sonderrechte kompensiert?

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3.4 Wie sieht die Zusammenarbeit zwischen dem Unternehmen und dem Private Equity Investor konkret aus? 3.5 Haben sie negative Erfahrungen mit dem Private Equity Investor bzw. den Beteiligungsmanagern gemacht? Wenn ja, welche konkret?

4. Fragen zu nicht-finanziellen Vorteilen aus der Zusammenarbeit mit Private Equity Investoren 4.1 Wie würden sie ihr Verhältnis zum Private Equity Investor beschreiben? Verstehen sie die Beteiligungsmanager eher als Sparringspartner oder als Kontrolleure? 4.2 Gibt es konkrete Beispiele für „non-financial benefits“, aus denen sich für ihr Unternehmen ein Mehrwert durch den Einstieg des Private Equity Investors ergeben hat? 4.3 Inwiefern konnten sie der Private Equity Investors bei der Optimierung der Finanzierungsstruktur und des Ausbaus ihres „financial network“ unterstützen? 4.4 Konnte ihr Unternehmen bei Akquisitionen von den Kontakten und der M&A Expertise des Private Equity Investors profitieren?

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4.5 Würden sie der Aussage zustimmen, dass die Professionalisierung in ihrem Unternehmen durch den Einstieg des Private Equity Investors zugenommen hat?

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Interview guideline for private equity investors Der folgende Interviewleitfaden soll als Orientierungshilfe für den empirischen Teil meiner Masterthesis zum Thema: „Minderheitsbeteiligungen als Form der Kooperation zwischen Familienunternehmen und Private Equity Investoren“ dienen. Mit Hilfe der Experteninterviews sollen die wesentlichen Treiber von Private Equity Minderheitsbeteiligungen identifiziert werden, u.a Finanzierungsanlass, wirtschaftliche Situation des Unternehmens und ggf. Situation der Eigentümerfamilie. Außerdem sollen neben den Finanzierungsanlässen auch die nicht-finanziellen Vorteile, die Familienunternehmen aus der Zusammenarbeit mit Private Equity Investoren erwarten, herausgearbeitet werden. Der inhaltliche Aufbau der ExpertenInterviews gestaltet sich wie folgt:

1. Allgemeine Fragen zur Investitionsstrategie und Minderheitsbeteiligungen 2. Identifikation des Finanzierungsanlasses 3. Struktur und Ablauf der Minderheitsbeteiligung 4. Fragen zu nicht-finanziellen Vorteilen aus Zusammenarbeit mit Private Equity Investoren

1. Allgemeine Fragen zur Investitionsstrategie und Minderheitsbeteiligungen 1.1 Welche Bedeutung haben Minderheitsbeteiligungen für sie als Private Equity Investor? Wie groß ist der Anteil von Minderheitsbeteiligungen am Investment volumen ihrer Beteiligungsgesellschaft? 1.2 Welchen Stellenwert messen sie Minderheitsbeteiligungen in der Geschäftsstra tegie ihrer Beteiligungsgesellschaft bei? 1.3 Welche besonderen Herausforderungen ergeben sich bei Minderheitsbeteiligungen? Was sind die entscheidenden Faktoren für den Erfolg einer solchen Transaktion?

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2. Identifikation des Finanzierungsanlasses 2.1 Wie haben sich die Eigentumsverhältnisse am Unternehmen durch Minderheitsbeteiligung des Private Equity Investors verändert? 2.2 Wie wurde der Kaufpreis für den Erwerb der Anteile finanziert? Wurde im Rahmen der Finanzierungsstruktur Leverage eingesetzt? 2.3 Gab es einen konkreten Finanzierungsanlass für das Familienunternehmen einen Private Equity Investor in den Gesellschafterkreis aufzunehmen? 88

Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

2.4 Lag der Grund für die Hereinnahme eines externen Eigenkapitalgebers eher in der wirtschaftlichen Situation des Unternehmens oder in Herausforderungen, die sich im Gesellschafterkreis ergaben? 2.5 Ging die Initiative für die Hereinnahme von Private Equity Kapital vom Unternehmer aus? Wie wurde der Kontakt zum Private Equity Investor hergestellt? 2.6 Stand eine Mehrheitsbeteiligung oder der Verkauf an einen strategischen Investor zur Debatte? Fand eine Auswahl (eine Art „Beauty Contest“) zwischen verschiedenen Private Equity Unternehmen statt? 2.7 Hat sich das Unternehmen selbst eine Ziel-Eigenkapitalquote vorgegeben, welche die Aufnahme weiteren Fremdkapitals verhindert und damit den Einstieg eines Private Equity Investors begünstigt hat? 2.8 Welches Vorwissen hatte der Eigentümer bzw. die Eigentümerfamilie und ggf. die Manager über Private Equity? Bestanden im Vorfeld der Transaktion auf Unternehmerseite Bedenken gegenüber dem Einstieg eines Private Equity Investors? 2.9 Ergaben sich bei der Anbahnung der Beteiligung besondere Herausforderungen, die bei vergleichbaren Transaktionen mit Nicht-Familienunternehmen normalerweise nicht auftreten?

3. Struktur und Ablauf der Minderheitsbeteiligung 3.1 Gibt es eine Ziel-Beteiligungsdauer seitens des Private Equity Investors? Wurde im Vorfeld mit der Familie die Beteiligungsdauer und ein konkretes Exitszenario besprochen? 3.2 Wurde mit der Eigentümerfamilie ein Rückkaufsrecht für die Anteile des Private Equity Investors vereinbart? Gibt es Pläne seitens der Eigentümer das Unternehmen wieder zu 100% in ihren Besitz zu bringen?

Copyright © 2015. Diplomica Verlag. All rights reserved.

3.3 Welche Mitsprache- und Informationsrechte wurden dem Private Equity Investor am Unternehmen eingeräumt? Wird die fehlende Kontrollmehrheit des Private Equity Investors am Unternehmen durch Sonderrechte kompensiert? 3.4 Wie sieht die Zusammenarbeit zwischen Beteiligungsmanagern und Familienunternehmen konkret aus? 3.5 Wurde das Management oder der Eigentümer gesondert intensiviert, z.B. durch Equity Kicker?

Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

89

4. Fragen zu nicht-finanziellen Vorteilen aus der Zusammenarbeit mit Private Equity Investoren 4.1 Hat das Unternehmen einen Beirat? Wurde der Beirat erst aufgrund des Einstiegs des Investors etabliert? Wie sind die Stimmverhältnisse im Beirat verteilt? 4.2 Gibt es konkrete Beispiele für „non-financial benefits“, von denen das Unternehmen durch den Einstieg eines Private Equity Investors profitiert hat? 4.3 Wie konnte der Private Equity Investor das Unternehmen bei der Optimierung der Finanzstruktur unterstützen? Inwieweit hat das Unternehmen von den Kontakten des Private Equity Managers beim Ausbau/ Aufbau seines „financial network“ profitiert? 4.4 Konnte das Unternehmen bei Akquisitionen bzw. Plänen für Akquisitionen von den Kontakten und der M&A Expertise des Private Equity Investors profitieren? 4.5 Inwiefern wurde das Unternehmen bei der internationalen Expansion vom Private Equity Investor unterstützt? Findet ein Erfahrungsaustausch mit anderen Portfoliounternehmen des Investors statt?

Copyright © 2015. Diplomica Verlag. All rights reserved.

4.6 Haben sie als Beteiligungsmanager negative Erfahrungen mit der Eigentümerfamilie gehabt? Wenn ja, welche konkret?

90

Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

Sarah Kumpf Listed Private Equity Investment Strategies and Returns Diplomica 2013 / 92 Seiten / 29,50 Euro ISBN 978-3-8428-8948-4 EAN 9783842889484

Copyright © 2015. Diplomica Verlag. All rights reserved.

Current research in the field of PE and buyout investments addresses the question how PE firms generate value by means of an investment into a portfolio company. Drivers of value generation are typically classified into governance, financial and operational capabilities of PE firms. In addition to these direct drivers of value, investment and portfolio management strategies differ with respect to the ways of acquiring and divesting a portfolio company and these different entry and exit channels can in turn offer distinct potential for value generation. Therefore, this paper first presents the investment and portfolio management strategies of PE firms coherently. The second objective is to establish a link between different investment strategies and the expected returns generated on the investor level. Listed PE allows analyzing the market's reaction to the announcement of investments and divestments within an event study and hypotheses were derived for both of these types of events.

Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

Jan Becker Big Data Investments Effects of Internet Search Queries on German Stocks Diplomica 2015 / 92 Seiten / 29,50 Euro ISBN 978-3-95934-597-2 EAN 9783959345972

Copyright © 2015. Diplomica Verlag. All rights reserved.

In recent years, the internet has developed very quickly and became a major source of information all over the planet. Many scientists have used search engine query data to forecast econometric time series like consumer confidence indicators, unemployment rates, retail sales, house price indices, stock prices, volatility of stocks and even commodity prices. Following the prior research this study analyzes the impact of internet search engine data on capital markets. Many authors already have contributed to index level data and most of them on the US market. This study adds to the existing literature on the German stock market. Two research questions are answered: First, whether an increase in search queries drives individual stock returns and second, whether queries affect the implied volatility of stock options. After controlling for seasonality, autocorrelation and general market risk, in the further analysis also the Price-to-Book valuation, one year performance and historical volatility are examined in interaction with internet search queries.

Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

Elias Hamana Systembasiertes Volatilitätstrading Konzeption eines Handelssystems auf Basis des Mean-Reversion Effektes der Volatilität Diplomica 2015 / 76 Seiten / 29,50 Euro

Copyright © 2015. Diplomica Verlag. All rights reserved.

ISBN 978-3-95934-736-5 EAN 9783959347365

Vor dem Hintergrund politischer, zentralbankgetriebener Börsen und schwindender kurz- bis mittelfristiger Prognosefähigkeit fundamentaler Analysekriterien befasst sich das vorliegende Buch mit der Volatilität als Parameter für vorhandene Marktschwankungen. Die Volatilität wird hierbei zunächst vom Risikoparameter zur synthetischen Assetklasse umgewidmet und dabei in Abgrenzung zu anderen Assetklassen auf Spezifika im Kursverlauf untersucht. Auf der Grundlage der alternativen Darstellung notwendiger Grundlagen technischer Marktanalyse sowie in Anerkenntnis der Überlegenheit quantitativer Handelskonzepte münden die gewonnen Erkenntnisse in ein eigens entwickeltes Handelssystem. Das mit Algorithmen arbeitende automatisierte Handelssystem ist dabei auf das Trading des hergeleiteten Mean-Reversion Effektes der Volatilität ausgelegt. Über die Herleitung des Mean-Reversion Effektes der Volatilität und die hierauf basierende Entwicklung eines Handelssystems hinaus erfolgt ein in mehrfacher Hinsicht differenziertes Backtesting der Handelsergebnisse. Dieses führt zu einer ausgewogenen Validierung der Ergebnisse vorliegender Thesis und ermöglicht schließlich ein differenziertes Fazit.

Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,

Katja Rademacher Managerqualität und Collateralized Loan Obligations Eine empirische Studie über den Einfluss des Investmentmanagers auf die Performance der Kreditverbriefung Diplomica 2015 / 88 Seiten / 29,50 Euro

Copyright © 2015. Diplomica Verlag. All rights reserved.

ISBN 978-3-95934-655-9 EAN 9783959346559

Nach dem Kollaps des Verbriefungsmarktes im Zuge der Finanzkrise lassen sich seit 2012 wieder nennenswerte Volumina erkennen. Die vorliegende Studie analysiert die Verbriefung syndizierter Unternehmenskredite (Collateralized Loan Obligations, CLO) und fokussiert sich hierbei auf die Managerqualität, um Rückschlüsse auf den Erfolg eines CLO ziehen zu können. Sowohl für Investoren als auch Regulierer können diese Erkenntnisse vor dem Hintergrund der Finanzkrise von Bedeutung sein. Mit ihrer Untersuchung füllt die Autorin eine wichtige Forschungslücke, da Managerqualität bzw. deren Einflussfaktoren einen direkten Einfluss auf das Finanzsystem haben können und bisher weitgehend unerforscht sind. Anhand dieser Arbeit lassen sich auch mögliche Schlussfolgerungen hinsichtlich anderer Verbriefungsarten ziehen, welche aktiv gemanagt werden. Im Ergebnis zeigt die Studie, dass es Anzeichen für eine Performancepersistenz einzelner Manager gibt, was auf Managerqualität schließen lässt. Des Weiteren wird gezeigt, dass einige Manager über Selektionsfähigkeiten verfügen, ohne höhere Ausfallraten verkraften zu müssen. Die vorliegende Studie wurde 2014 mit dem renommierten BAIWissenschaftspreis ausgezeichnet.

Private Equity Minority Investments: An Attractive Financing Alternative for Family Firms, Diplomica Verlag, 2015. ProQuest Ebook Central,