research@hec - Issue #22 - (Page IV)

Private Equity Investors As Boosters of Corporate Performance Raul Barroso research BIOGRAPHY Private equity has grown exponentially in the past Raul Barroso is Assistant Professor of Accounting and Management Control at HEC, where he conducts research on corporate governance. He holds a BA in Business Administration from the Universidad Complutense of Madrid (2000), and earned his MSc in International Management (2005) and his PhD in Economics (2009) at HEC Lausanne. Before joining HEC, he was a visiting scholar at IESE in Barcelona and Columbia University in New York. decade, in the wake of the dot-com bubble, but there has been very little literature on the subject outside of the United States. Yet private equity is more than a source of financing for enterprises, its presence in the capital of a firm can also be viewed as a mechanism of corporate governance. Indeed, it seems that private equity firms tend to be more involved than other shareholders in the way companies are run, defining and monitoring strategy, and working closely with management teams. This hands-on shareholder relationship supposedly reduces agency costs, which arise from the fact of having an agent (a manager) acting on behalf of a principal (a shareholder). These are mainly the cost of mechanisms destined to limit divergence of interests between agents and principals, such as internal audits, but also opportunity costs if, say, a CEO buys a jet as a company vehicle rather than redistributing the money as dividends. The issue of controlling agency problems is particularly relevant in the light of the financial scandals that rocked European companies such as Parmalat or Vivendi in the early 2000's, as Raul Barroso points out. “When Swissair went bankrupt in 2002, it was especially painful because the airline was a flagship for Switzerland,” he says. As company financing via private equity has increased dramatically in the past involved in corporate governance than some family or large corporate objectives, private equity firms increase company valuation. shareholders. By keeping a tighter control on management and setting clear decade in Europe, it is interesting to note that these investors become much more hec PRIVATE EQUITY FIRMS POSITIVELY IMPACT VALUE In line with expectations, the main result of the study conducted by Raul Barroso and his colleagues at IESE and HEC Lausanne is that the presence of private equity has a significant and positive impact on firm valuation. Quite simply, this type of investor has substantial economic incentives to follow its agents more carefully, thus monitoring and controlling the firm more closely. “The manager of a private equity firm invests a chunk of his own wealth; on top of that, he will have pressure from his partners to oversee the investment, a lot more so than the manager of a pension fund who simply receives his salary for managing other people's money,” says Raul Barroso. In other terms, a private equity investor will reduce agency costs and improve performance by strongly involving himself in the governance of the company, by sitting on the board of directors, or even by appointing the managers himself, depending on how much executive power he has negotiated for himself when bringing capital. Evidently, as Raul Barroso points out, the company will benefit from the private equity investor's skills, for such a sophisticated investor will have expertise, the experience of managing a diverse portfolio of investments, and better access to funds than other types of shareholders. IV research@hec • August-September 2011 http://www.hec.edu/Faculty-and-Research/Faculty/BARROSO

Table of Contents for the Digital Edition of research@hec - Issue #22

Cover & Contents
Cost of Debt for Companies: The Influence of the Competitive Environment
Private Equity Investors: As Boosters of Corporate Performance
Managing International Sales Teams: Impact of Cultural Performance Orientation
HEC PARIS nEWS

research@hec - Issue #22