The Impact of Private Equity Investments on Funded Firm Revenue Growth, Number of Employees and Profitability in Finland
Reis, Laura Anniina (2019)
Reis, Laura Anniina
2019
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi-fe2019100831957
https://urn.fi/URN:NBN:fi-fe2019100831957
Tiivistelmä
According to the Finnish Venture Capital Association, the importance of venture capital as a part of private equity has increased in Finland recently (FVCA 2017). Due to this, the purpose of this study is to use recent data to see how the private equity industry creates value to its target companies in light of these recent developments, in particular in terms of sales and employment growth as well as profitability. Furthermore, the topic of whether private equity brings value has been studied from various perspectives and it is often discussed as controversial. Thus, the aim is to determine how findings compare with other studies conducted. In this study, multiple regression analysis is used and private equity is split into its two types, buyouts and venture capital. Data of investments conducted between 2011 and 2014 is used and the impact is studied three years after the investment. The contribution of this study is twofold; taking into account both venture capital and private equity investments in comparison to peer companies and using a more recent dataset in the Finnish context.
Based on previous research, the main hypothesis is that the impact of private equity funding is positive on sales growth and the growth in number of employees. The impact on profitability is an empirical question due to diverse findings on the matter. The main conclusions derived from the study relate to the statistically significant impacts of venture capital funded firms on sales growth, the number of employees and mean EBITDA profitability. The former two impacts are positive, and thus according to the main hypothesis of the study. The latter impact is statistically significantly negative and thus presents evidence to the empirical question of whether venture capital funded firms demonstrate significantly different profitability rates. These conclusions hold even after removal of extreme outliers. Moreover, the results for venture capital are in line with some previous research suggesting that the strategic focus of venture capital is primarily growth, with the expense of profitability, especially within the first years after the investment. The buyout variable is not statistically significant for any of the dependent variables, suggesting that in this sample, buyouts do not generate significantly higher sales or employee growth or different mean profitability in comparison to their peer companies.
Central limitations of the topic are data availability and survivorship bias and thus results should be interpreted with caution in this specific context. Moreover, this study looks at the matter in aggregate, and thus interesting avenues for further research would be to look into different characteristics of funded firms and private equity investors, as well as what characteristics make firms particularly attractive as investment targets in Finland.
Based on previous research, the main hypothesis is that the impact of private equity funding is positive on sales growth and the growth in number of employees. The impact on profitability is an empirical question due to diverse findings on the matter. The main conclusions derived from the study relate to the statistically significant impacts of venture capital funded firms on sales growth, the number of employees and mean EBITDA profitability. The former two impacts are positive, and thus according to the main hypothesis of the study. The latter impact is statistically significantly negative and thus presents evidence to the empirical question of whether venture capital funded firms demonstrate significantly different profitability rates. These conclusions hold even after removal of extreme outliers. Moreover, the results for venture capital are in line with some previous research suggesting that the strategic focus of venture capital is primarily growth, with the expense of profitability, especially within the first years after the investment. The buyout variable is not statistically significant for any of the dependent variables, suggesting that in this sample, buyouts do not generate significantly higher sales or employee growth or different mean profitability in comparison to their peer companies.
Central limitations of the topic are data availability and survivorship bias and thus results should be interpreted with caution in this specific context. Moreover, this study looks at the matter in aggregate, and thus interesting avenues for further research would be to look into different characteristics of funded firms and private equity investors, as well as what characteristics make firms particularly attractive as investment targets in Finland.