Private equity firms their role in the formation of strategic alliances

Preface This study analyzes the role of private equity firms in the formation of strategic alliances within the French private equity market.. The study addresses the questions of how an

Private Equity Firms

Their Role in the Formation

of Strategic Alliances

Kirsten Burkhardt

First published 2018 in Great Britain and the United States by ISTE Ltd and John Wiley & Sons, Inc

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ISBN 978-1-78630-312-7

Contents

Acknowledgments vii

Preface ix

Introduction xi

Chapter 1 Concepts Underlying the Role of Private Equity Firms in Forming Alliances 1

1.1 Private equity 1

1.1.1 Main characteristics 1

1.1.2 The French PE market 4

1.2 The concept of a strategic alliance 10

1.3 Strategic alliance formation in French PEFs 14

1.3.1 French PE: a favorable environment for the formation of alliances 14

1.3.2 First descriptive data 16

Chapter 2 The Role of Private Equity Firms in Alliance Formation from the Perspective of Value Creation 25

2.1 The role of PEFs from the perspective of contractual theories 26

2.1.1 Some theoretical foundations 26

2.1.2 Review of contractual theories 38

2.1.3 Applying the theory to our research question 40

2.1.4 Review of the role of PEFs from the perspective of contractual theories 59

2.2 The role of PEFs in light of knowledge-based theories 64

2.2.1 Some theoretical foundations 65

2.2.2 Applying the theory to our research question 83

2.2.3 Review of the role of PEFs from the perspective

of knowledge-based theories 95

2.2.4 Where knowledge-based theories stand compared to contractual theories 97

2.2.5 The complementarity of contractual and knowledge-based theories 101

2.3 Sociological network theories: a supplement to the contractual and knowledge-based argumentation 106

2.3.1 Some theoretical foundations 107

2.3.2 Applying the theory to our research question 120

2.3.3 Review of the additional arguments brought forward by the use of the concept of social capital 130

2.4 The role of PEFs: a summary 133

2.4.1 Intraportfolio alliances 134

2.4.2 Extraportfolio alliances 137

Chapter 3 Empirical Analysis with Explanatory Design of the Role of French Private Equity Firms in the Formation of Alliances 145

3.1 Methodology: a multimethod study 146

3.1.1 The overall concept 146

3.1.2 The joint and complementary use of statistical and economic techniques and case studies 147

3.2 Testing the theoretical framework 148

3.2.1 Econometric analysis 148

3.2.2 Multiple case study 183

3.2.3 Reconciliation of the econometric study and the multiple case study and discussion of the results 335

Conclusion 357

Bibliography 367

Index 385

Acknowledgments

I would like to extend my gratitude to a number of people First, those without whom this endeavor would never have achieved its current state These include, on the one hand, the researchers who accompanied me throughout the development of this project On the other hand, there were many professionals in the field of French private equity without whom my empirical study could not have been carried out Second, I would like to thank the people who have been alongside me all these years, both near and far, and who contributed to my wellbeing and to the establishment of very favorable conditions for the completion of this research project In particular, I would like to address:

– Professors Gérard Charreaux and Philippe Desbrières for their follow-up and all the support they provided through their presence, whether it was in the form of listening, reading, advice or words of encouragement Their feedback allowed me to guide the project and present it in its best form, in addition to teaching me a privileged lesson I am deeply grateful to the following people: Professor Mike Wright and Drs Kevin Amess and Louise Scholes for welcoming me and following

me around during my stay in England at the Centre for Management Buy-Out and

Private Equity Research (CMBOR) at Nottingham University; Professors Martine

Girod-Séville and Alain Desreumaux for agreeing to be the examiners of my work and Professors Peter Wirtz and Bernard de Montmorillon for their participation in the jury as voting members;

– the private equity professionals and managers of private equity-backed firms who participated in the study, and the statistics department of Invest France, the

former Association française des investisseurs pour la Croissance (AFIC), for

agreeing to support my econometric study;

– my spell-checkers for their extensive proofreading

Preface

This study analyzes the role of private equity firms in the formation of strategic alliances within the French private equity market We start by providing evidence

of its importance from new survey information, before offering an explanation

of the organizational phenomenon The study addresses the questions of how and why private equity firms act as relational intermediaries to help their portfolio companies form alliances Both questions are investigated in light of private equity firms’ contribution to the value creation process that comes with alliance formation Answers are provided by means of three jointly used theoretical frameworks: (1) mainstream theories (transaction cost theory and the positive theory

of agency); (2) the knowledge-based view; and (3) social network theories to complement the results from joint use of the previous two theories The theoretical construct is then tested empirically by means of a multimethod study with explanatory design based on the pattern of joint evidence from both statistical tests and a multiple case study Results show that French private equity firms do play a role in alliance formation This role can be intentional as well as non-intentional Furthermore, although arguments from the knowledge-based perspective find more support in explaining this behavior than from the mainstream theories, our study highlights the benefits of the joint use of these theories and the complementary nature of them in better explaining the phenomenon as a whole

In France, small and medium-sized enterprises (SMEs) account for nearly 99.9%

of all companies (2010 data) Nationally, they employ 52% of employees and generate 38% of turnover, which is almost half of the value added (49%) [POR 10] The creation of SMEs is on the rise In 2012, France recorded nearly 549,976 new business start-ups [APC 13] According to the latest Eurostat comparison in 2009, France had the highest number of business start-ups in the European Union (Figure I.1)

These figures highlight the importance of economic policies and measures aimed

at SME development [MCC 10] Several policies have been put in place to foster alliances and networking among SMEs [SCH 06] The European cluster policy is an

example of such a policy, as well as its French counterpart, the “Pôles de

compétitivité” policy, which was launched in 2004 In the wake of Silicon Valley1, they aim to encourage interactions between various actors through the creation of appropriate environments for intensive knowledge exchange and synergies between them Within a given territory, they help to bring together private equity firms

1 Silicon Valley is a technology innovation hub located in California, USA

(PEFs, that usually specialize in venture capital), SMEs, large groups, and research institutions such as universities

Figure I.1 Business start-ups in the European Union in 2009

(source: Insee, Eurostat)

Private equity is relevant in this field because it is one the most significant source of financing for SMEs (which are usually unlisted) and therefore innovation

By their very nature, PEFs are active investors In addition to providing capital, they provide managerial assistance to the companies they support McCahery and Vermeulen [MCC 10] highlight the importance of the contribution of these complementary services through the example of the Japanese private equity market, where the performance is lower than in the United States and Europe Unlike in the latter two countries, Japanese PEFs are passive investors and are therefore limited to capital injections The authors also suggest that there are signs that governments are aware of the importance of the non-financial services provided by PEFs for the development of SMEs and innovation After the financial crisis, government policies aimed at promoting private equity or, as mentioned above, networking among stakeholders were strengthened in various countries, including France [GLA 08; MCC 10, pp 13–14]

In this study, we consider the following questions:

– Can PEFs play a role in networking and forming alliances for the companies they support?

– As active investors, do they provide companies with networking services in addition to managerial assistance, thus creating an ideal platform for their development and external growth?

French PEFs, which are the subject of our study, are involved in several ways in the formation of strategic alliances for the companies they support For example, Axa

AXA Private Equity have entered into a partnership to better support Québec- and European-based businesses with international development prospects [ ] This partnership is fully in keeping with the Axa Private Equity tradition to help the businesses we invest in to develop both industrially and geographically [ ] The partnership hopes to address global distribution, supplier search, research and development joint ventures, strategic alliances and international takeovers” Since its creation over 40 years ago, one of the pioneering PEFs on the French market, Siparex Group, distinguished itself by setting up Club Siparex in 1982 This club’s mission is to: “Contribute to the creation of value in the companies the Group is investing in

written on its website: “Since 2007, the Demeter Club regularly brings together the CEOs of DEMETER and DEMETER 2 portfolios, with the following objectives: [ ]

to develop industrial and commercial synergies amongst the companies of the DEMETER and DEMETER 2 portfolios; to let the companies benefit from our

most French PEFs indicate that they make their network of contacts available to supported companies in order to help them create value for their projects

At first glance, however, any information on such practices ends there There are

no concrete examples of alliance formation where one or more French PEFs are

involved Neither France Invest (formerly Afic, Association française des

investisseurs pour la croissance), which brings together most French PEFs, nor its

European counterpart, Invest Europe (formerly EVCA, European Venture Capital and Private Equity Association), nor INSEE, nor on a European scale, Eurostat, have gathered any further information on these practices Thus, we shall take a look at the existing literature

2 expanding-abroad

www.privateequitywire.co.uk/2009/10/27/caisse-and-axa-private-equity-support-businesses-3 www.siparex.com/le-club-siparex/

4 www.demeter-partners.com/fr/club_entrepreneurs-en_bref-52_53.html

I.2 Lessons from the literature

A quick review of the literature suggests that the phenomenon is not new in itself The formation of alliances for start-ups supported by private equity was mainly seen in the field of biotechnology in the 1980s and 1990s, when private equity was booming in the United States In general, alliances between biotech start-ups and large pharmaceutical companies have already been studied (for example [STU 99] However, such studies do not analyze the direct role of PEFs in forming alliances Overall, the existing analyzes focus on the impact of the presence of an alliance and, in particular, the reputation of the alliance partner on the success of the start-up Success as such is usually measured by the rapidity of exit of PEFs and the type of exit A quick exit through an initial public offering (corresponding to an IPO

of the supported company) is considered to be an indicator of success More recently however (in the 2000s), an emerging literature has been seeking to analyze more concretely the particular role of PEFs in forming alliances

Existing studies can be subdivided into two categories: those that attempt to directly address the question of the role of PEFs in forming alliances for supported companies, and those that question whether PEFs, or alliances, can be complementary or alternative mechanisms to the development of start-ups and their access to finance Most studies cover the field of venture capital, which is a specific component of the private equity spectrum (ranging from support for generally unlisted companies, from start-up, to turnaround) In addition, studies on venture capitalists and alliances as alternative or complementary mechanisms are usually focused on the study of venture capitalists that are subsidiaries of an industrial group All the studies borrow arguments from theories that fall within the efficiency paradigm Mostly, contractual theories are used Some studies use arguments from knowledge-based theories

Studies in the first category focus on two points:

– the role of venture capitalists in forming alliances for the companies they support; – the impact of the alliances created on the success of the start-ups that form them

Hsu [HSU 06] analyzed the extent to which venture-capital-supported start-ups form interfirm alliances, compared to a sample of start-ups with similar characteristics (at the stage of development and the environment in which they operate) but which are not supported by venture capital He found that both the presence of a venture capitalist and its reputation had a positive effect on the formation of alliances for supported companies and allowed for more frequent IPOs

Colombo et al [COL 06] focused on the determinants of high-tech start-up

alliances In particular, they showed that the presence of sponsors such as venture

capitalists and their reputation have a positive effect on the formation of alliances Lindsey [LIN 02, LIN 08] argued that the likelihood of forming alliances for venture capital backed companies is higher when the alliance partners share a single venture capitalist These are alliances formed within the investment portfolio of a venture capitalist (an “intraportfolio” alliance, as we will call it in this book) Like Gompers and Xuan [GOM 09], Lindsey argued that venture capitalists can reduce the intensity of informational asymmetry problems and uncooperative behavior among

future alliance partners Wang et al [WAN 12] were interested in the views of

venture capitalists For these authors, forming alliances enables venture capitalists to reduce the risks associated with a hostile environment for their equity interests They also found that the firms use alliance formation as a substitute for capital contribution and that the diversity of syndication partners has a positive impact on the number of alliances formed

The second category includes studies by Ozmel et al [OZM 13], Hoehn-Weiss

and LiPuma [HOE 08], as well as Dushnitsky and Lavie [DUS 10] These authors examined the extent to which venture capitalists and alliance partners are complementary or alternative mechanisms in company IPO decisions Generally, their studies involved venture capitalists that were subsidiaries of an industrial

group Ozmel et al [OZM 13] explicitly addressed the trade-offs made by start-ups

in the biotechnology sector with regard to the choice of raising funds either through venture capital or through alliance partners In the latter case, this was usually the affiliation of a start-up with a large pharmaceutical group The alliance allows the start-up to obtain funds from the industrial group which, in turn, has an interest in investing in the start-up for R&D reasons The results of the study show that the more the start-ups develop such alliances, the more likely they are to form a new alliance and simultaneously reduce the likelihood of venture capital support On the other hand, the more the start-ups raise venture capital, the more likely it is that they will form an alliance and raise venture capital again

In terms of IPO success, the formation of alliances has a higher impact than

venture capital support Thus, Nicholson et al [NIC 05] showed that the formation of

alliances for a biotech start-up can be seen as a sign of quality by other market players,

which may be an explanation for the result found by Ozmel et al [OZM 13]

Hoen-Weiss and LiPuma [HOE 08] analyzed how venture capital financing from

an industrial group’s subsidiary, as well as alliance building and the interaction between the two can influence the internationalization of start-ups The only fact that has a significant connection with the internationalization of start-ups would be the affiliation within an alliance of a large industrial group that is established and reputable on the market

Dushnitsky and Lavie [DUS 10] showed that, on a sample of early stage technology start-ups, both venture capitalists and alliance partners can provide access to complementary resources In their sample, venture capital investments increased initially with the formation of alliances, followed by a decrease

Chang [CHA 04] analyzed the effect of the presence of a venture capitalist (via its reputation and the amount of capital it injects into the companies it supports) and the network of alliances (via the number of alliances formed and reputation of alliance partners) on the performance of new technologies (digital start-ups),

measured by the time it takes to go public This has a positive effect Stuart et al

[STU 99] also found a positive link between the affiliation of start-ups in the biotechnology sector with reputable partners (reputable venture capitalists or partners with reputable alliances) and the rapidity of exit and market capitalization

of start-ups at the time of the IPO

On a more macroeconomic level, McCahery and Vermeulen [MCC 10] showed that there was a structural change from the involvement of large industrial groups in financing innovation following the financial crisis Although large industrial groups used to set up their own private equity subsidiaries, they began to form more alliances either with PEFs or directly with start-ups [MCC 10, p 27 sq.] This resulted in more active involvement of industrial groups in the start-up selection processes and in other decisions relating to start-ups According to the authors, this may be accompanied by problems for start-ups that are related to the potential opportunism of these large groups In particular, the authors raised the question of whether government policies aimed at creating environments that are conducive to innovation should be revised, in order to avoid these potential problems by strengthening protections for start-ups, which are in theory more vulnerable than large industrial groups Like Silicon Valley, lawyers and other professionals may also be involved, particularly in considering contractual solutions to protect start-ups The authors concluded by proposing recommendations for government intervention in order to preserve a level of trust between the stakeholders

This brief review of the literature already allows us to draw up some theoretical and empirical observations From a theoretical point of view, the current literature is mainly based on contractual theories, though some works borrow arguments from knowledge-based theories In general, the literature focuses on the additional services (beyond financial inputs) provided by PEFs to the companies they finance and their impact on value creation (for example [LER 95, SAP 96, HEL 02, BAU 04]

There are two main inaccuracies in the models observed First, with the exception

of the Lindsey study [LIN 08, LIN 02], the authors of studies do not specify whether

the observed alliances are formed between companies that share the same venture capitalist, or if they are formed between companies supported by different venture capitalists, or if only some of the companies in the alliance are supported by venture capital Thus, it can be assumed that the role of a venture capitalist in forming alliances differs if the alliance is formed within its own investment portfolio or with external alliance partners This lack of distinction makes it difficult, or at least limits our ability, to compare results from the existing literature

Second, it is not always obvious if a study is on private equity or whether it is merely limited to the venture capital spectrum Although the respective terms appear within the studies, they are not always used appropriately In order to truly identify whether a study is about private equity in general or one of its components, we recommend taking a closer look at the study sample Unfortunately, even when considering the sample in detail, studies are not always clear enough, for example, they might not provide information on this subject Sometimes “venture capital” may be referred to but the sample actually involves PEFs, which are not restricted to supporting companies at an early stage (venture backed-firms)

At the empirical level, most models are tested within the biotechnology or new technology sectors, and are done in an American context Some rare works (usually

by Colombo) apply their research to Italy Ultimately, most studies seem to focus on venture capital and some restrict their analysis to venture capitalists that are subsidiaries of an industrial group or a company (corporate venture capital)

I.3 General questions considered in the study

In this study, we measure the extent of this phenomenon in France More specifically, the study aims to explain the role of French private equity firms in forming alliances and their impact on value creation It is therefore in line with the presented work but focuses on the French private equity market as a whole It is not limited to venture capital The problem is the following

Based on the assumption that French PEFs are involved in forming alliances,

we seek to answer two major questions:

– How are French PEFs involved in forming alliances for the companies they

support?

– Why do they intervene? Why are they involved in forming alliances for the

companies they support?

These questions can be considered from two points of view: that of the SMEs that form an alliance in the presence of a PEF and that of the PEF In addition, we distinguish between two types of alliances: “intra” and “extra” alliances The first concerns any type of alliance between companies that are supported by the same PEF Alliances are therefore formed within – “intra” – the investment portfolio of a PEF The second concerns alliances formed between at least one company supported

by a PEF and another company that is not supported by the same PEF Although an alliance may be formed between more than two companies, our explanations will be limited to alliances formed between two companies However, our terms can obviously be applied to other alliances

The problem is considered under the angle of shareholder value creation In theory, the aim of this book is to answer the aforementioned general questions from a value creation point of view This raises a third question that we seek to answer through the first two questions: what levers do PEFs use to create value through the creation of alliances for the companies they support?

Generally speaking, value creation can be achieved through two strategic levers: the reduction of losses linked to the presence of (long-term) strategic costs, and the creation of value through generating long-term strategic gains, which are the source

of organizational rents Contract theories allow us to consider the problem in terms

of presence or absence of costs (transaction and agency costs) These theories are mostly mentioned in the aforementioned literature They highlight the “passive” roles of PEFs in forming alliances The term “passive”, which may seem extreme, is used to illustrate an action on value through cost reduction levers (transaction and agency), as opposed to a more “positive” intervention on value through the creation

of growth opportunities, with which we associate the term “active” based theories, on the other hand, allow the problem to be analyzed from the point of view of long-term value creation itself, in other words a truly “active” role They are adapted to the analysis of the second lever and remain relatively little used and exploited in the literature that is relevant to our problem They highlight active, intentional roles – in the sense that there is a genuine intention to “actively” create value – of PEFs in forming alliances Ultimately, using sociological network theories, we complement the argumentation that results from analyzing the problem from the angle of contractual and knowledge-based theories Figure I.2 gives a schematic overview of the problem, its theoretical process and the nature of the role

Knowledge-of PEFs in forming strategic alliances for the companies they support, which this theoretical process highlights

Figure I.2 Schematic overview of the problem, its processing

and the nature of PEF roles that are thus highlighted

Considering our research question through both contractual and knowledge-based approaches leads us to adopt a rather broad definition of strategic alliances (defined in section 1.2), which allows for both contractual and knowledge-based analyzes

As such, our analysis is similar to studies that propose a synthetic or dual approach [COH 05] to alliances and cooperation between companies [KOG 88, COM 99, OER 01, CLA 02, HEI 02, CHE 03]

The use of multiple theoretical frameworks allows us to refine the general questioning of how and why French PEFs are involved in forming strategic alliances for the companies they support As we will see in the section on the theoretical analysis of the question (Chapter 2), using contractual theories that are adapted to analyzing the first lever leads to more concrete questions:

– Do companies that are supported by PEFs face costs when forming alliances? – If so, does the presence of a PEF reduce these?

– The next question is then whether PEFs are the only mechanism that can potentially reduce costs, or are there other ways?

The second lever raises questions about corporate intervention of PEFs in the creation of value itself through the formation of alliances As we will see in our theoretical analysis, this looks at whether they are involved in creating growth

opportunities or new skills and knowledge that will ensure a long-term competitive advantage for the companies they support

From the point of view of PEFs, how do they benefit from forming alliances? Can they attempt to extract rents from alliance formation? Do PEFs provide this service in order to differentiate themselves from the market, or do they do this in search of social legitimacy?

The empirical challenge of our study is threefold:

– first and foremost, we test our research hypotheses that result from the use of contractual and knowledge-based theories, which are supplemented by sociological network theories, and we compare the relative weight of variables from the different theoretical frameworks within a same study;

– as we will apply our research to the field of private equity in France, our empirical study also allows us to see whether the main conclusions proposed in the current literature, which are essentially based on contractual arguments, are true and valid in the French context;

– finally, we seek to empirically test not only the generality of our hypotheses to see if they apply to all French PEFs, but also to check the plausibility of the mechanisms underlying the causal links that are put forward

The methodology we use is based on a multimethod study, combining a multiple case study and an econometric study

Our study reveals that French PEFs are involved in forming alliances via two levers: contractual and knowledge On a managerial level, this makes it possible to enhance the value of the relational service that French PEFs declare they provide Beyond this, the study provides an explanation for the phenomenon observed after testing the causal mechanisms underlying these explanations The results show that French PEFs play both an active and passive role in forming alliances for their investments Thus, on the one hand, they are the basis for value creation that results from the transaction On the other hand, they play a role in reducing value losses that are associated with cost-incurring inefficiencies as suggested by the current literature

From the point of view of PEFs, their contribution in alliance formation appears to be motivated by a desire to differentiate themselves within the private equity market by providing an additional service to supported firms, beyond managerial assistance and provision of capital In the specific case where a PEF takes the legal form of a joint-stock company and has a region or the State in its capital, this type of investor may also encourage the formation of alliances in order to generate commercial synergies between

actors within a region From the point of view of the SMEs that form the alliances, the presence of a PEF allows them to, on the one hand, detect growth opportunities that can

be implemented through the formation of alliances On the other hand, PEFs can help overcome the difficulties these firms face in forming alliances This study will make it possible to identify the methods of intervention of PEFs

The results of this study also support the joint use of contractual and based theories to explain the phenomenon, although knowledge-based argumentation

knowledge-is more frequently confirmed on the whole than contractual argumentation Finally, this study shows that certain arguments put forward by the literature do not hold in the French context

I.4 General study outline

As is the usual way for studies, this study will include an initial introductory part, a second part on the theoretical analysis of the research question, a third part that empirically tests the theoretical concept, followed by a general conclusion Before detailing the various points, Figure I.3 shows the plan

In Chapter 1, we present the problem We clarify the concepts of private equity (section 1.1) and strategic alliance (section 1.2) The part about private equity includes a section on its main characteristics (section 1.1.1) This is followed by an introduction to the French market (section 1.1.2), which will enable us to position it

in the world market (section 1.1.2.1) and present the different forms of PEFs (section 1.1.2.2), as well as the different players that are involved (section 1.1.2.3) After introducing the concept of a strategic alliance (section 1.2), we will then present the strategic alliance formation activity of French PEFs (section 1.3) This will make it possible to identify the importance of the phenomenon being studied

We will discuss the favorable environmental conditions for alliances to be formed

on the French market (section 1.3.1) and present the first descriptive data on the phenomenon from our own survey (section 1.3.2)

In Chapter 2, we tackle the theoretical analysis of our research question from a value creation perspective The roles of French PEFs in alliance formation are thus studied within the efficiency paradigm, respectively, in light of contractual theories (section 2.1), knowledge-based theories (section 2.2) and sociological network theories in order to complete the argumentation of the first two theoretical frameworks used (section 2.3) These three parts are built on the same principle In a first point, we begin by presenting the bases that are necessary for understanding the theories used (sections 2.1.1., 2.2.1 and 2.3.1) After summarizing this introduction,

we then apply the theory to our problem (sections 2.1.3, 2.2.2 and 2.3.2)

Figure I.3 Schematic overview of the general study outline

We successively apply contractual theories (transaction cost theory, positive agency theory) to our research question (section 2.1) according to the views of SMEs and PEFs On the one hand, this allows us to understand the difficulties faced by private equity backed companies in forming alliances On the other hand, this highlights the role of French PEFs in solving the encountered problems, from the perspective of reduction of value losses because of costs (transaction and agency) The

roles of PEFs in building ex ante confidence in alliance formation and a disciplinary

(or advisory) role once the alliance is formed can thus be brought forward From the point of view of PEFs, the question then arises on their own interests in forming alliances for the companies they invest in

However, the roles of French PEFs as highlighted by the contractual analysis remain passive in terms of alliance formation By their very nature, PEFs are active investors, not passive investors In a second part (section 2.2), knowledge-based theories allow us to focus on the intentional roles of French PEFs in forming strategic alliances for their investments We begin by presenting the theoretical bases that are required to understand the arguments that can be adopted from these theories (section 2.2.1) We once again apply the theory to our research question from the perspectives of the alliance SMEs and PEFs (section 2.2.2) The analysis highlights the roles of PEFs in building growth opportunities and creating new knowledge for supported companies through alliance formation They can also play

a role in facilitating initial exchanges between future alliance partners From the PEF’s perspective, alliance formation can be seen primarily as a strategic positioning of PEFs, enabling them to differentiate themselves in the private equity market After a summary of the analysis (section 2.2.3), we pitch the contractual theories against the knowledge-based theories (section 2.2.4) and discuss the complementary of these theoretical frameworks within our study (section 2.2.5)

In a third point, sociological network theories are then used to supplement the contractual and knowledge-based argumentation (section 2.3) Primarily, we apply the concept of social capital This theoretical analysis ends with a proposal of a theoretical explanatory model of the studied phenomenon (section 2.4)

Chapter 3 then tests this theoretical framework We begin by explaining our methodology, which consists of a multimethod study, comprising both an econometric study and a multiple case study (section 3.1) The theoretical framework (section 3.2)

is then tested The econometric study, which is based on our own survey, tests the adequacy of our research hypotheses on the French private equity market (section 3.2.1) The main purpose of the multiple case study is to test the plausibility

of advanced causalities (section 3.2.2) The results of the two studies can then be compared in order to draw conclusions about the proposed theoretical model (section 3.2.3)

This book will end with a general conclusion where we discuss the possible limitations and extensions of the work

Concepts Underlying the Role of Private

Equity Firms in Forming Alliances

In this chapter, we explain the notions and concepts that are required to understand our problem We begin by introducing the concept of private equity (PE) in section 1.1

In section 1.2, we consider the concept of a strategic alliance, as used in this book In section 1.3, we present French private equity firms (PEFs) more specifically and the formation of strategic alliances

1.1 Private equity

Let us begin with an introduction to the main characteristics of PE (section 1.1.1), followed by a presentation of the features that are specific to the French market (section 1.1.2)

Private Equity Firms: Their Role in the Formation of Strategic Alliances,

First Edition Kirsten Burkhardt

© ISTE Ltd 2018 Published by ISTE Ltd and John Wiley & Sons, Inc

– growth capital and leveraged buy-outs (LBOs), which finance the transfer or acquisition of unlisted companies;

– turnaround capital, which concerns firms that are experiencing temporary

difficulties [BAN 07, p 115];

– more recently, intervention in companies wishing to unlist [GLA 08, p 7]

Venture capital and turnaround capital operations are risky transactions and are characterized by an equity contribution Growth capital and buy-out capital operations, which occur during the lifecycle of a company, involve a combined contribution of

equity and debt (leverage effect) [BAN 07, p 115] LBO is defined as when a

company is bought out by equity investors associated with the company’s management The transaction is financed by equity capital as well as by a significant portion of debt that will have to be repaid in the years after the acquisition of the company The source of repayments is cash flows that are generated either by the company’s operating cycle or through the sale of assets Several LBO variants are possible

Management buy-out (MBO) is the term used to describe a LBO transaction in which the management team that is already in place buys the company, with all or some of its employees and equity investors When a company is acquired by an external management team and equity investors, the transaction is called a management buy-in A combination of the last two variants is also possible and is known as BIMBO, a buy-in management buyout An owner buy-out is defined as when a company is acquired by the owner-manager of that company in combination with equity investors Finally, leveraged build-up is also possible This is when an equity investor takes over several companies to form a larger entity from them In general, these companies would be from the same sector The build-up transaction is then referred to as “sector consolidation” Buy-outs are also financed by a combination of equity and debt, usually with a very large debt component

The above definition includes several particularities that characterize the field of

PE To highlight these, let us turn to Desbrières’ study [DES 01a, DES 01b]

Intervention in unlisted companies: The most distinctive feature is intervention

in unlisted companies First, these companies are not subject to the same disclosure requirements as listed companies As a result, they tend to be less transparent

In addition, information that is disclosed is generally not standardized or certified, making it more difficult to assess There tends to be a more pronounced information asymmetry between these companies and their investors [NOO 99] Second, as unlisted companies, their shareholding is often thinly spread The liquidity of securities

is therefore lower than that of listed companies As a result, the PE market is inefficient and the transfer of securities takes place over the counter

Figure 1.1 Private equity and business lifecycle (source: France Invest)

For a color version of this figure, see www.iste.co.uk/burkhardt/equity.zip

Large amounts invested: The amounts invested by PEFs are often large, which limits

the number of companies that can be financed and therefore the means of diversification

Greater uncertainty regarding the profitability of investments: The profitability

of investments undertaken by PEFs is more uncertain, in particular because of the nature of the activities of companies in which the PEFs intervene They often operate in innovative sectors such as high technology This uncertainty increases if

PEFs intervene in companies that are in particularly vulnerable phases

Information asymmetry, the lack of historic information (depending on the phase

of the companies being financed), and uncertainty about future cash flows, all make standard valuation methods difficult to apply (such as NPV), which makes the valuation of companies to be financed more costly In order to reduce the information asymmetry, the selection of projects to be financed is done through careful analysis because of diligence and the implementation of an often active and interventionist monitoring/control level in company management As this is more in-depth and more expensive than with standardized and certified information, the number of files that can be examined by a PEF is limited This inevitable focus on certain companies limits the diversification possibilities of the PEF portfolio In return for such risk taking, PEFs generally hold significant control blocks and sit on the board of directors of the selected companies [SAH 90] As a result, PEFs are able to constrain the discretionary space of managers and influence the nature of the strategy being pursued This links the research question to the field of governance, which according to Charreaux [CHA 97] covers “all the mechanisms that have the effect of delimiting the powers and influencing the decisions of the top management, in other words, that ‘govern’

their conduct and define their discretionary space or freedom of action” The contribution of PEFs is therefore not only financial but can also have a strategic nature [PEN 07, p 6] They are therefore active capital providers and thus contribute to the value creation process Consequently, they seek to be involved in the distribution

of the created value [DES 01b] As a result, PEFs develop specific skills in the evaluation, selection and management of the companies they finance

PEFs may remain on the board of directors after companies have entered capital markets Their exit is made through the sale of shares to third parties or through the listing of companies financed on the stock exchange (initial public offering)

1.1.2 The French PE market

Let us begin by presenting the role of the French PE market in the global PE market (section 1.1.2.1) Then, let us examine (section 1.1.2.2) the different types of PEFs in France In section 1.1.2.3, we will consider the main players on the French PE market

1.1.2.1 The role of the French market in the global market

France’s share of the PE market puts it in second place in Europe It is preceded

by the United Kingdom [BAN 07, p 116] and is followed by Germany (latest

figures, source: France Invest) Looking at the development of the French PE market from 2006 to 2011, we see a continuous increase in the number of companies supported by PE (from 1,376 companies to 1,694 companies in 2011) The amounts invested increased continuously from 2006 to 2008 (from 10,164 million euros in

2006 to 10,009 million euros in 2008) In 2009, PE was hit by the financial crisis and there was a sharp drop in the amounts invested (4,100 million euros in 2009) However, the market has been recovering rapidly since 2010 In 2011, the figures were close to those in 2006 (9,738 million euros in 2011)

In 2012, however, PE was struck by an economic slowdown Thus, there was a decrease in the number of supported companies (from 1,694 supported companies in

2011 to 1,548 in 2012) and a fall in the amounts invested of nearly –38% compared

to 2011 (from 9,738 million euros invested in 2011 to 6,072 million euros in 2012) This decrease in investment hit all sectors of PE Venture capital (innovation capital

in Table 1.1) was at its lowest at 443 million euros compared to 536 million euros in

2006 Growth capital also fell; however, it maintained a higher level of investment than in 2009 (1,946 million euros in 2012 compared to 1,798 million euros in 2009) Buy-out capital, which is predominant in Europe, reached an all-time low at 3,568 million euros invested in 2012 compared to 6,015 million euros in 2011 and 8,075 million euros in 2006 According to France Invest, this can be explained by fiscal uncertainties (France Invest, 2012 study on the activity of PE, p 17)

This general economic slowdown in PE was not an exception in France Invest Europe published similar figures for the PE market as a whole in Europe Compared

to 2011, the total amounts invested in 2012 fell by almost –43% in general on the European PE market (in France, the drop was –38%)

Nevertheless, despite the general economic downturn in 2012, PE played a major role in restructuring the productive fabric of major developed economies This was particularly true for the French economy PE was reviving SME and innovation financing after the financial market crisis [GLA 08, pp 10–11] Table 1.1 summarizes the main data

1.1.2.2 The different types of PEF

In this section, we present the different types of PEF in France An initial classification consists of differentiating between the types of PEF according to the source of their funds This is detailed in section 1.1.2.2.1 A second classification is based on their legal structures In section 1.1.2.2.2, we look at the main French investment vehicles

1.1.2.2.1 Types of PEF according to the source of funds

According to the France Invest classification, there are three main types of PEF

on the French PE market:

the majority of the capital In France, for example, this is the case for Auriga Partners,

Siparex Groupe, Demeter Partners, Industries et Finances Partenaires, LBO France,

and Unigrains PEFs are said to be captive if they constitute a subsidiary of either a group or a company (French examples of this type of PEF are FTTI in France

Télécom, TCV in Thalès, SEV in Schneider Electric, and Side in Michelin) [BEN 02],

or of a bank or other financial institution (for example Unexo, a subsidiary of Crédit

Agricole de l’Ouest’s nine regional banks, and Xange PE, a subsidiary of Banque Postale) A PEF is said to be semicaptive when there is a majority contributor of funds

(for example ALV from Air Liquide, Innovacom from France Télécom, Aster from

Schneider Electric) [ZOR 10] For public PEFs, all or a large part of the funds come

from public bodies (for example CDC-Entreprises, Oséo, FSI)

Hirsch and Walz [HIR 06] distinguished between independent, affiliated and public PEFs

Independent persons can also be directly involved in the financing of high potential innovative SMEs They are called business angels They are often former business leaders, senior executives and/or young retirees or family members who come together to invest in a common project

1.1.2.2.2 The main investment vehicles

In France, PEFs mainly take the shape of venture capitalists (VCs) or investment

investment vehicles : to the left of the image is an investment fund and to the right is

a VC

Figure 1.2 Legal structure of VCMFs (left) versus JSC/VC (right)

The VC structure was created by the French State in 1984 and is the oldest structure of French PE [GLA 08, p 23] It is a joint-stock corporation (JSC), which can take the legal structure of a public limited company (PLC), a limited liability company or partnership limited by shares The VC statute favors investment in PEs through tax advantages in return for investment of a certain quota in unlisted SMEs and a minimum holding period of 5 years

1 FCPR: fonds communs de placements à risque in French.

Subsequently, VCMFs were created They belong to the UCITS family (undertakings for collective investment in transferable securities) They also offer tax advantages that are subject to a certain quota being invested in unlisted companies and a certain holding period [AFI 05] VCMFs are more flexible investment vehicles than VCs and allow a wider public to invest in PE A VCMF consists of an investment fund, on the one hand, and a management company, on the other The fund issues units that investors can subscribe to Their liability is limited

to their contribution of funds The fund has no moral responsibility The latter is taken on by the management company In this structure, investors are passive capital providers The management company manages the funds and makes the investment decisions

Today, these VCMFs often take the form of innovation-focused mutual funds (FCPIs) or local investment funds (LIFs), respectively created in 1997 and 2003, which attract even more physical investors to PE by again offering certain tax advantages

Aside from slight differences in taxes and development methods, as well as a shorter investment period in supported companies for VCMFs (generally limited to between 10 and 12 years for VCMFs and usually unlimited for VCs), the two types

of investment vehicles entail a different allocation of decision-making rights, in particular when it comes to investments For VCMFs, investment decisions can be made by the management company independent of the fund’s subscribers VCMFs with an investment committee (IC) are an exception to the rule (PE in Figure 1.2) if the committee consists of the main fund subscribers The independence of investment decisions that are undertaken by the management company may then be called into question For VCs, shareholders can influence a company’s investment decisions through their seats on the board of directors or the supervisory board (respectively, BD and SB in Figure 1.2)

For this study, let us clarify certain terms We use the term “private equity firm”

or “PEF” to describe all investment vehicles, so both VC and VCMF In addition, the term represents the full spectrum of PE, in other words it includes specialized investment vehicles from start-up to turnaround When we use the term “VC”, we will specify whether we are referring to an investment vehicle that is specialized in venture capital or whether we are referring to the legal status of a PEF that has opted for the (legal) status of a VC

1.1.2.3 The main actors

In this section, we discuss the presence of the State in French PE and the main

PE companies in France The French State indirectly plays a significant role in the financing possibilities of French SMEs and the organization of the French PE

market A major player in French PE is CDC-Entreprises, a management company

subsidiary of Caisse des Dépôts et Consignations

Created in 1816, the Caisse des Dépôts et Consignations (in English, Deposits

and Consignments Fund) serves the general interest and economic development of France It is also known as the “financial sword arm of the State”, and it manages

the pension funds of civil servants and all savings funds, such as the French livrets

A, livrets bleus and Codevi It ensures their security and liquidity, while investing

these funds in the public interest When it was created, the funds were invested in government bonds, but nowadays they are allocated, among other things, to financing business development (mainly SMEs and territories) and PE

In 1994, the Caisse des Dépôts et Consignations created the management company CDC-Entreprises, which is a subsidiary CDC-Entreprises manages all funds that are intended for minority shares in SMEs CDC-Entreprises in turn owns two subsidiaries: FSI Régions and Consolidation et Développement Gestion CDC-Entreprises funds are jointly subscribed by the State, the European Investment Bank, the Caisse des Dépôts, banks, insurance companies and various private industrial funds (source: CDC-Entreprises website) CDC-Entreprises also owns a significant portion (over 25%) of Oséo, a PLC in which the State holds a majority share of over 60% Oséo is therefore a public company Its vocation is to contribute to making

facilitates access to financing where the market does not allow this in a satisfactory manner This therefore mainly concerns innovative SMEs Part of its mission is to guarantee bank financing and the intervention of own funding bodies, such as PEFs This guarantee of Oséo’s access to bank and equity financing was increased after the financial crisis in 2008 and the implementation of a recovery plan by the French State in 2009 In this way, the State has endowed Oséo with two new exceptional funds to guarantee access to financing [OSÉ 10, p 215]

In 2008, the commitment from CDC-Entreprises and private investors was taken

over by the Fonds stratégique d’investissement (FSI) France Investissement The

managed funds were invested in over 190 national and regional PE vehicles (source: FSI website) From July 2013 onward, the Public Investment Bank, which was intended to finance the French economy, brought together CDC-Entreprises, the FSI, FSI Régions and Oséo The first three became “BPI-Investissement” and Oséo became

“BPI-Financement” The Public Investment Bank (Banque Publique d’Investissement [BPI]) was created on an equal footing by the French State and the Caisse des Dépôts

et Consignations in order to strengthen the financial support provided to companies

2 www.oseo.fr

In 2012, France Invest’s annual study on the activity of PE in France indicated that the funds raised by PE mainly came from public entities and that the latter were

on the rise For its part, CDC-Entreprises reported that in 2012, one in two companies that were supported and financed by PE was, directly or indirectly, funded by CDC-Entreprises through the FSI

At the national level, France Invest is the only French professional association that is specialized in PE, which has the mission of deontology, control and

profession in France and ensures it is promoted and developed In 2012, it had nearly 270 active members and included all the PE structures set up in France

Finally, Unicer (Union nationale des investisseurs en capital pour les entreprises

régionales) specifically brought together some of France’s regional capital investors

Having stated the main concepts of PE and its French specificities, which are useful to understand our research problem, let us now discuss the concept of a strategic alliance

1.2 The concept of a strategic alliance

Strategic alliances are the core topic of numerous studies, mainly in the literature

on strategy [TEE 86, KOG 88, GOM 01, ING 03, JAO 06, HOF 07, LAV 07, WAN 07] According to Barney [BAR 02] and Barney and Hersterley [BAR 06], a strategic alliance exists “whenever two or more independent organizations cooperate

to develop, produce or sell products or services” Gulati [GUL 95, pp 620–621] agreed with the previous definition by characterizing an alliance as any voluntary form of interfirm cooperation, involving the exchange or joint development and including the contribution of partners in the form of specific capital, technology or assets

In the French literature, more restrictively, some authors specify that alliances can only be between competing or potentially competing firms [ING 03, p 4, KOE 04, MAY 07, p 126] as opposed to partnerships that involve agreements between non-competing firms, in other words, firms in different sectors Lehmann-

Ortega et al [LEH 13, p 470], however, specified that this condition (whether

companies are competitors or potential competitors) is “not necessary but is frequently seen” The same authors pointed out that alliances are often formalized They may give rise, for example, to cross-shareholdings, commercial agreements (which is often the case in client–supplier relationships), licensing agreements, the

3 http://www.franceinvest eu/fr/Accueil-association.html

creation of a joint entity for the companies taking part in the alliance (referred to as joint ventures), or alliance contracts (contracts freely drawn up between the parties that define the terms of the alliance) Although it is less common in the literature, however, a strategic alliance does not exclude a non-formalized cooperation [LEW 90, HEL 92, ELM 01, p 205], which is more common when the purpose of the alliance is to exchange organizational practices

Our research question leads to a focus on specific strategic alliances, namely those for which the formation involves at least one company that is supported by PE Therefore, these are typically alliances comprising at least one young SME that is not listed on the stock exchange, is active in an innovative or high-tech sector and is supported by PE This raises a question on the specificities of this context Young unlisted and innovative companies are usually characterized by [NOO 93]:

– specific investments in human capital;

– a lack of resources;

– managerial omnipresence;

– personalized relationships with the environment;

– a network of companies that is comparable to that of the manager;

– tacit knowledge and non-formal information;

– uncertainty due to the innovative context and the precarious stage of development in which these companies find themselves

Due to limited resources and high specialization, these companies usually build networks that allow them to source what they need externally Cooperation in the form of alliances would therefore appear to be useful to them The literature on alliances between SMEs declares that the formalization of alliances remains rare and non-formalized modes of communication are often preferred [JAO 06, p 2] Alliances are therefore more informal in nature and are often and primarily justified

by a lack of internal resources [PUT 95, JAO 06, p 5] The condition of competition –

or potential competition – between alliance partners, although often verified, does not seem to systematically occur in alliances between SMEs Thus, Puthod [PUT 96,

p 1] defined an alliance between SMEs as “a means of sharing resources that is necessary for the development of the SME” without alluding to the condition of competition Jaouen [JAO 06, p 1] specified that an alliance differs from a simple intercompany cooperation because of its strategic nature It therefore seems that, particularly for SMEs, competition is not a requirement for an interfirm cooperation

to be qualified as a strategic alliance In other words, the notion of strategic alliance

is separable from the notion of “coopetition”

Thus, closer to our topic of alliances between SMEs [PUT 96, JAO 06], if we refer to the definitions laid down by Gulati [GUL 95], Barney [BAR 02], Barney and Hersterley [BAR 06] as well as the French literature that is closer to our topic [JAO 06, PUT 96], we consider that within this study, an alliance is a cooperation agreement concluded between at least two independent companies, which has the objective of creating mutual benefit It enables joint asset management and the pursuit of common objectives [YIN 08, p 473] while allowing companies to maintain their autonomy outside the alliance relationship An alliance is said to be strategic if it stands to gain competitive advantage and create long-term value [KOE 96] Thus, in alliance relationships, companies combine their resources and knowledge base to achieve objectives that would have been beyond their reach had they gone it alone The most cited objectives include:

– access to additional resources;

– the creation of synergies;

– the achievement of economies of scale or of scope (for areas such as R&D); – knowledge transfer or learning, risk sharing;

– conquering new markets (geographical or sectoral);

– obtaining a critical size

An alliance thus allows risks and costs to be shared, but also gains, in the case of

a joint creation of new skills

Common examples of strategic alliances are relationships between companies that enable the joint development of new products or services, or the development of customer–supplier relationships, international development, cost reduction and exchange of organizational practice, for example at the internal control system, the use of management tools, the way information is disclosed [STI 65, p 149], methods of supply and delivery, production methods, etc

Depending on the theoretical framework, a strategic alliance is defined in light of the specific properties of the theory As a result, the content of our explanatory variable “PEFs” differs depending on the chosen theoretical framework [PEN 95,

p 10] In our study, we refer to contractual theories, knowledge-based theories or sociological network theories The former consists of the transaction cost theory and the positive agency theory The transaction cost theory presents alliances as a hybrid mode of governance, placing itself between the hierarchy and the market and reducing transaction costs [WIL 91b, p 271] The agency theory emphasizes conflicts of interest and presents an alliance as a node of contracts that allow a

balance of interests between contracting parties to be maintained at a given time [ALC 72, p 779, JEN 76, pp 310–311) Knowledge-based theories also encompass different theoretical frameworks and focus on key, inimitable resources and skills that provide a competitive advantage An alliance is thus defined as a cooperation between companies that remain autonomous but pool their resources and skills in order to develop an activity, generate synergies or enable growth that would not have been possible without such cooperation (for example, [PER 01, p 12; MEN 03,

p 4; HOF 07, p 829]) The concept of social capital makes it possible to take into account the structure of the social environment in which companies find themselves

A company’s relationship with its partner(s) in an alliance then represents part of its social capital [HOF 07, p 829] On the one hand, this relationship constitutes an opportunity to give access to resources beyond the company’s borders [UZZ 96,

p 675] while simultaneously enabling it to attain a certain legitimacy vis-à-vis its external environment On the other hand, it can also act as a brake on the development of the company [UZZ 97, p 35; HOF 07, p 830]

So what role can a PEF play in forming alliances? Is this a widespread phenomenon in the world of PE or does it only concern a minority of companies supported by PE? Before we look into answering these questions, it is worth noting that the specific context of PE in alliance formation allows us to distinguish between certain types of alliances

First, we distinguish between intra- and extraportfolio alliances Second, there is

another differentiation between the types of alliances in PE, which is a priori specific

to the French context: as we presented in section 1.1.2.2.2, there are two main legal forms of investment vehicle in the French PE domain, VCMFs and JSC/VCs If the investment vehicle takes the form of a UCITS, investors holding the units are in principle independent of the management company, which makes the investment decisions On the other hand, if the investment vehicle takes the form of a corporation, shareholders can influence decision-making An alliance can thus be more easily formed between a company that collaborates with a PEF and a shareholder of the PEF The alliance can then be described as “vertical” as opposed to “horizontal”, which is formed between companies that collaborate with the PEF (intraportfolio alliances) or with a company that is external to the PEF (extraportfolio alliances) In our empirical study, one PEF (Anonymous PEF) presents such alliance possibilities

Finally, let us clarify a term used in this book Given that we are looking at the role of a PEF in forming alliances for the companies it supports, we are particularly interested in the person within the PEF who is in close contact with the management

of the supported companies We expect this person to be the investment manager or the portfolio manager In practice, it can also be an associate or a partner As we

discovered from our survey and the verbal feedback we received during telephone conversations with investment or equity managers, partners or associates, these terms are not used uniformly within the various PEFs In this book, we use the terms

“investment manager” and “portfolio manager” equally These terms refer to any person within a PEF who directly supports the management of the portfolio companies It may therefore be an associate or a partner

1.3 Strategic alliance formation in French PEFs

In this section, we describe strategic alliance formation in French PEFs First, we shed some light on the environment of alliance formation for companies supported

by French PEFs (section 1.3.1) Then we present some preliminary descriptive data (section 1.3.2)

1.3.1 French PE: a favorable environment for the formation of alliances

French policies for strengthening the competitiveness of the French economy not only provide SMEs with access to finance but also increase interaction, develop joint projects and create synergies between various players This requires creating an environment that is conducive to the formation of alliances As already mentioned, one

of these policies from 2004 involves launching Competitiveness Clusters These clusters are part of the European cluster policy Today, there are 73 in France They are organized around a defined topic, a specific geographical territory and bring together

various players: companies, research laboratories, universities, grandes écoles or other

educational institutions, local authorities, financial institutions and PEFs Oséo Innovation, the Caisse des Dépôts et Consignations and the Agence nationale de la recherche are also among the participants Private PEFs may also be involved The aim is

to create synergies from joint collaborations in order to set up strategic projects and partnerships between these actors Collaborative strategic R&D projects done in this way

Apart from French government policies for strengthening partnerships between economic players in the field of innovation, French PEFs also favor the formation of alliances for their portfolio companies Looking at the websites of French PEFs, an initial observation becomes clear: some French PEFs have set up networking clubs for supported company managers and other PEFs have made their networks of contacts available for the development of their portfolio companies The aim of the networking clubs is, in particular, to develop commercial and industrial synergies

4 source: www.competitiveness.gouv.fr

between the portfolio companies This includes, for example, the Siparex Club of

the PEF Groupe Siparex (Siparex Group) or the Demeter Entrepreneurs Club of the

PEF Demeter Partners However, no information is available on examples of companies that have formed alliances in the presence of a French PEF, so one might

be led to wonder: what is the real significance of the phenomenon?

In 2004, the statistical office of the European Union, Eurostat, prepared a preliminary study on business linkages (including alliances) in European companies (Eurostat: [SCH 06, NIE 04] The survey was sent to all EU Member States, including France However, it concerned all types of companies, not just those supported by

PE The data collected in France were not always complete For France, it showed that companies formed strategic cooperations such as alliances for three main reasons: access to new markets, access to additional resources and cost reduction If there were barriers to the formation of cooperations for French companies, it would essentially be the fear of loss of independence for managers of companies The alliances formed mainly involved:

– outsourcing;

– creation of joint ventures;

– other (nature not specified in the study);

– networking

The study also showed that in France, alliance formation of SMEs with fewer than 50 employees was only slightly less than that for companies with 50–250 or more employees SMEs therefore seemed to be heavily involved in the formation of alliances

However, the study did not provide any information on the formation of alliances

by companies supported by PE The databases also do not provide this type of information because the companies that form the alliances are usually unlisted By their nature, they disclose little information and are rarely found in databases Finally, if they are, it is nevertheless difficult to obtain information on their alliance-building practices However, this does not mean that they do not form any Indeed,

as we will see in our own study, one explanation may be that the alliances formed often remain non-formalized Studies on the formation of alliances in the presence of companies supported by PE therefore either have access to specialized databases (which do not exist for France) or they are limited to analyzing alliance formation for companies supported by PE for which the exit was done by initial public offering Once a company is listed on the stock exchange, it must disclose a certain amount of information and is thus present in most databases However, if we were

to only study the phenomenon on companies supported by PE for which the exit was done by initial public offering, we would be very restricted and not very representative, because the exits by initial public offering represent no more than 5%

of the exits in France For these reasons, we decided to conduct our own survey The first descriptive results are presented in section 1.3.2

1.3.2 First descriptive data

Before attempting to explain the role of French PEFs in the formation of strategic alliances, let us first look at the extent of the phenomenon In this section, we intend to present the first descriptive data from our survey, which makes it possible for us to quantify the formation of alliances It is part of our multimethod study, which is presented in its entirety in Chapter 3

1.3.2.1 Data collection

The survey was sent to France Invest members with the help of the Surveymonkey web application (surveymonkey.com) Non-French PEFs were excluded When our survey was sent out in 2012, France Invest had 270 active members The survey remained open for nearly eight months The survey was designed to test our theoretical framework and is further explained in Chapter 3 We report here only the statistical elements that allow us, for the time being, to determine the extent of the phenomenon The data collection was done by sending an email to all the investment managers mentioned on the websites of French PEFs that were members of France Invest If there was no email address, we tried standard addresses such as surname.firstname@PEF.com, surname.firstname@PEF.fr, firstname.surname@PEF.com, firstnamesurname@PEF com and initials@PEF.com/fr This work was quite time consuming, and the response rate was minimal (about 10 responses) In parallel, the France Invest Statistics Center agreed to publish the link to our survey in two of its newsletters, which are systematically sent to France Invest’s PEF members

Despite these efforts, the vast majority of responses were obtained by reminding each PEF by phone, one by one, often several times This took over a month The advantage of this process was that the vast majority of surveys were completed over the phone with our assistance We were thus able to gain additional information

on top of the answers provided by respondents The answers we obtained should therefore fairly accurately reflect what the respondents wanted to express

In this section, we present our preliminary statistical results on the activity

of forming alliances for portfolio companies of French PEFs that are members of France Invest

– In total, 83 PEFs responded to our survey However, ultimately only 77 of the

28.51% (77/270) This rate is only approximate for two reasons First, it can be assumed that not all PEFs involved in forming alliances for the companies they support wished to participate in the survey This rate then underestimates the phenomenon In addition, the actual response rate can be assumed to be higher if it

survey Indeed, for an employee of a fund of funds, it can be difficult to know about forming alliances for companies supported by the various funds managed Moreover, if we consider that not all French PEFs necessarily form alliances for their portfolio companies, this response rate can be seen as a first indicator of the minimal importance of the phenomenon Second, we cannot rule out the possibility that several people within a same PEF may have responded to the survey For the answers obtained after sending out the survey by email, it was not possible for us to verify this However, the rate of return was very low (10 responses in total)

As for the responses obtained from telephone calls, we were able to ensure that this potential duplication of responses was avoided, except when it was associated with the operating mode of the PEF Thus, for the large PEFs that participated in the survey, several people within the same PEF responded to the survey when the PEF was generalist and therefore focused on different stages of development In this particular case, investment managers could only respond to the survey for a specific stage of development which, by itself, was not representative for the PEF There were no more than five cases where two people had responded to the survey There may thus be an overrepresentation of one PEF compared to others, but this was accompanied by a more accurate representation of the activity of forming alliances

of companies supported by PEF according to the stage of their development

Of the 77 respondents, 67 provided us with their investment specialization The breakdown is indicated in Figure 1.3

These figures are only an approximation of the distribution of activity types in PEFs that responded to our survey, since this information was only obtained for 67 of the 77 PEFs that participated and provided a usable survey The distribution of numbers between the different stages of financing is nevertheless comparable to that of

5 Six questionnaires were considered unusable because either the majority of responses were missing or the responses were clearly inconsistent (for example the respondent indicated that they did not form alliances but played a role in forming alliances)

6 The fund of funds is a structure for the mutualization of holdings in several private equity funds (http://www.franceinvest.eu/fr/Le-capital-investissement/Glossaire-du-capital-investissement.html

#lettreF)

the parent population (France Invest members)7 with regard to growth capital and out capital In contrast, turnaround capital is underrepresented in our study and venture capital and seed capital are overrepresented The underrepresentation of turnaround capital may be explained by the fact that the formation of alliances may be more significant when the companies being supported are at a more precarious stage of development Conversely, alliance formation may be comparatively less important for companies in turnaround phase An explanation can also be given for the overrepresentation of venture capital and seed capital (26.6% [= 11.5% + 15.1%] in our study compared to only 8.2% for the parent population) It is possible, for example, that PEFs that are specialized in supporting companies in the growth capital

buy-or turnaround capital phase may nevertheless suppbuy-ort some participations in the venture capital or seed phase In our survey, it is possible that these PEFs ticked the boxes “growth capital” or “turnaround capital” and “venture capital” or “seed capital”, whereas with France Invest, they are classified according to their specialization, growth capital or turnaround capital Our numbers compared to those of the France Invest parent population, for the same activities, are presented in Table 1.2

Figure 1.3 The specializations of PEFs participating in the survey

according to the stage of development of supported companies

Respondents (%) France Invest (%)

Table 1.2 Representation of PE activity types as a percentage

of the survey compared to the parent population (France Invest)

1.3.2.2 The significance of the phenomenon being studied

All the PEFs that responded to the survey were involved in the formation of alliances for the companies they support What interests us, on the one hand, is to get an idea of the percentage of companies they support that have formed alliances and what types of alliances these are On the other hand, we would also like to know

to what extent PEFs have played one or more roles in the formation of these alliances and which ones

In the first question, we asked respondents to estimate the percentage of their supported businesses that have formed an intraportfolio alliance, as well as the percentage of supported businesses that have formed an extraportfolio alliance (Figure 1.4)

Figure 1.4 Percentage of companies supported by a French PEF that have

formed an intra- or extraportfolio alliance For a color version of this figure,

see www.iste.co.uk/burkhardt/equity.zip