Abstract

How does adding effort create value in later-stage buyouts? In all lifecycle stages of a portfolio company (from startups to firms in decline), private equity financiers (PEFs) may facilitate buyouts. In order to let PEFs maximize the value of their investments, they need to carefully consider how much effort should be invested in portfolio companies (PFCs) in addition to the capital investment. The early stage finance literature describes well how PE may add value at all (Meier, 2006; Busenitz et al. 2004; Baum & Silverman 2004; Kaplan & Strömberg 2004; Barney et al. 1996; Sapienza et al. 1996; Gorman and Sahlman 1989).

Buyouts typically occur in a later stage of a company’s lifecycle. Contrasting with the early-stage venture capital literature little is known about any potential boundaries to adding PE effort in later stage buyouts. Therefore our paper examines the optimal provision of effort by the PE, and the way effort should be addressed in order to increase the value of the PFC.

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