January 15, 2013

Private Equity Backing Can Boost Firms’ Performance

From Business Finance: “Venture Capital and Private Equity Backing Can Boost Firms’ Performance”

by Karen M. Kroll

Small- and mid-size businesses that receive financing from venture capital or private equity firms tend to benefit in several ways. Most obviously, of course, they’ve captured outside funding they can use to operate and grow their businesses – rarely a slam dunk these days. In addition, many can tap into the expertise and connections of their VC or PE partners.

As a result, these businesses tend to grow both their revenues and employee bases more quickly than companies that don’t receive such funding, according to a new study from John Paglia and Maretno Harjoto, finance professors with the Graziadio School of Business and Management at Pepperdine University. Paglia also directs the Pepperdine Private Capital Markets Projects.

To be sure, the fact that businesses that receive funding tend to grow more quickly than those that don’t shouldn’t come as any surprise. However, the degree to which they grow more quickly is eye-opening. Paglia observes, “[W]hen capital is deployed in this segment, it’s focused on value creation rather than financial engineering, which is often seen in larger buyout transactions.”

Consider this: After studying the performance of more than 6,800 small- and mid-sized businesses between 1995 and 2009, the study authors found that five years in, revenue growth at firms backed by private equity was 129% greater than the growth at control firms. Employment grew by 257% more, with the employee rosters at PE firms jumping by 50 more employees, while those in the control group increased by 14 employees.

To read the full article, please click here.