Industry specialization of private equity firms: a source of buy-out performance heterogeneity

AbstractThis study sheds new light on the industry specialization of private equity (PE) firms as a source of buy-outs’ performance and on the conditions under which these firms can add value to the buy-outs in which they invest. Advantages to specialization are based on specific resources and capabilities that confer the PE funds advantages both in the pre- and post-transaction phases. We argue that the magnitude of the advantages to industry specialization will depend on the criticality of these specific resources for buy-outs’ performance improvements. Industry specialization will confer advantages when the target company is weakly or strongly performing before the buy-out because, in that context, performance improvements are more difficult to reach. The analysis is based on a sample of 217 PE-backed buy-outs completed in France between 2001 and 2007. The results show that relative specialization in the industry of the buy-out company results in profit increases of 7.5% greater than buy-outs backed by...