This work analyzes the role of private equity firms (SCIs) in forming strategic alliances in the French private equity market. The subject is important because the formation of alliances and, more generally, the networking of SMEs, could be an alternative to the lack of medium-sized companies in France. For French SCIs, which are increasingly in a competitive situation, assistance in forming alliances for their holdings may represent a new activity and be a source of competitive advantage. The work is positioned transversally, touching the areas of corporate governance, entrepreneurial finance and strategy.
Burkhardt, Kirsten, University of Bourgogne, IAE Dijon.
I.1. Interfirm alliances as a source of innovation and the role of private equity
Cooperative approaches in the shape of strategic alliances between companies are a source of innovation and a factor for economic growth in developing economies. Alliances are particularly important for the development of SMEs, which are predominant in Europe, and for which internal resources are often limited [SCH 06].
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 (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 PE, from a press release in 20092: "The Caisse de dépôt et placement du Québec and 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 through exchanges and targeted networking"3. In a similar vein, Demeter Partners has 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 network of experts and institutional relations"4. In addition to these targeted examples, 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.
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...