Journal of Family Business Management

Does the private equity financing improve performance in family SMEs?

Dario Salerno,
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Journal of Family Business Management, Vol. 9 Issue: 1, pp.110-124, https://doi.org/10.1108/
JFBM-12-2017-0046
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JFBM
9,1
110
Received 27 December 2017
Accepted 6 March 2018
Downloaded by UNIVERSITY OF ZAGREB At 12:54 09 April 2019 (PT)
Journal of Family Business
Management
Vol. 9 No. 1, 2019
pp. 110-124
© Emerald Publishing Limited
2043-6238
DOI 10.1108/JFBM-12-2017-0046
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2043-6238.htm
Does the private equity financing
improve performance in
family SMEs?
Dario Salerno
Universita degli Studi di Roma Tor Vergata, Roma, Italy
Abstract
Purpose – The purpose of this paper is to explore the relation between family involvement in ownership and
the performance of private equity (PE)-backed SMEs.
Design/methodology/approach – Using a sample of 533 European PE-backed SMEs (i.e. 107 PE-backed
family SMEs and 426 PE backed non-family SMEs), the author estimate the OLS model where a firms
operating performance is a function of the presence or not of family shareholders, various other firm-specific
characteristics, the experience of PE investor and a dummy for the financial crisis. To control the robustness
of results, the author restrict the analysis to those firms that are incorporated in one of the 15 old member
states of the European Union and the author include among the independent variables the one-year lagged
values of the dependent variable.
Findings – The results show that PE-backed family SMEs outperform non-family PE-backed SMEs over the
post-investment period.
Originality/value – This paper aims to extend literature about the link between PE backing and the
involvement of family in ownership, considering European countries.
Keywords Performance, SMEs, Family firms, Private equity
Paper type Research paper
1. Introduction
Family firms are the engine that drives private economy development throughout the world.
Not surprisingly, they play an important role for economies’ growth (e.g. Anderson and
Reeb, 2003; Chrisman et al., 2005).
In the same way, it has been well-documented that family firms may experience better
performance compared to their peers. The main reasons behind this result is that they are
less exposed to agency problems, have a long-term strategic outlook, are better at
recognizing entrepreneurial opportunity and exhibit a strong corporate culture (e.g. Barney
et al., 2001). Nonetheless, many family firms may be unable to find the resources required for
fostering both business strategy and growth and suffer from the lack of professionalism and
the rigidity in adapting to new challenges (e.g. Sirmon and Hitt, 2003; Dawson, 2011).
A useful instrument for family firms to overcome these issues is to open up their equity
to private equity (PE) investors. Specifically, from a family firm perspective, PE investment
may represent an opportunity to improve its access to both financial and managerial
resources and get help in defining strategic planning, recruiting managers, accessing a new
network of contacts (i.e. financial intermediaries, suppliers and customers) and high
expertise in operational planning (e.g. Hellmann and Puri, 2002; Sørensen, 2007; Croce et al.,
2013). Generally speaking, such value-adding services can impact positivity on firms
outcomes, but the question becomes even more important if we focus on family firms given
their specific characteristics. Commonly, family firms are known for their vulnerability to
managerial entrenchment problems and fear of losing control of the firm (e.g. Morck and
Yeung, 2003; Dawson, 2011). In this view, PE investment could give an opportunity to
family shareholders to remain as owners or employees/managers and to maintain the
control of the firm’s decision making. Equivalently, family firms deserve a special interest
JEL Classification — G24, G32, G34
 for PE investors since working in a well-established organizational firm ( family firm) makes Private equity
easier to provide value-added and monitoring services. At the same time, PE investors financing
should be confident to have the necessary tools to strengthen the best side of a family firm
while offsetting their weaknesses.
However, despite analyzing the link between PE backing and the involvement of family
in ownership is of great interest for both PE investors and entrepreneurs, few studies paid
attention to this question (i.e. Martí et al., 2013; Croce and Martí, 2016). In addition, to our 111
knowledge, past literature has investigated solely the Spanish market, by leaving some
issues open related to the generalizability of the results. We contribute to previous literature
by analyzing a sample of 533 European PE-backed SMEs which have received a PE
financing over the period 2007-2012. Following the family business definition used by
various papers (e.g. Cucculelli and Storai, 2015), we split our sample in 107 PE-backed family
SMEs and 426 PE backed non-family SMEs.
We find that PE-backed family SMEs outperform their peers over the post-investment
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period. Despite this results being interesting itself, we are not able to control for screening
effects and, as such, we do need to adopt two different interpretive views.
First, family businesses may be better than other PE-backed firms because they exhibit
quick decision-making abilities, have a more long-term strategic outlook and are deemed
financially prudent (e.g. Romano et al., 2000; Sirmon and Hitt, 2003).
Second, the impact of PE involvement on the investee firm may be better in the case of
family businesses given the lower agency costs which, in turn, determine less difficulty in
implementing the firm’s strategic plan and because of the attitude of PE investors to solving
their shortcomings, like the lack of professionalism, the financial constraints and the rigidity
in adapting to new challenges.
The rest of this paper is organized as follows. The next section reviews prior literature
and discusses research hypotheses. Section 3 contains a description of the data and
variables, and Section 4 describes the empirical strategy and empirical results. Section 5
presents the limitations and conclusion.

2. Literature review and research hypothesis

2.1 Theory and evidence of family business’ performance
It is widely recognized that family-owned firms are one of the oldest forms of commercial
organization and make the backbone of most economies (e.g. Anderson and Reeb, 2003).
Indeed, according to the Family Firm Institute[1], family-owned firms account for two-thirds
of all businesses worldwide, generating more than 70 percent of global GDP annually[2]
(EFB-KPMG, 2015). Thus, it should not be surprising that researchers have devoted great
attention on the effects that a family ownership has for firm outcomes (e.g. Maury, 2006;
Villalonga, and Amit, 2006).
On the theoretical side, family involvement in ownership should lead to better
performance due to various reasons.
First, consistently with the agency theory (e.g. Eddleston and Kellermanns, 2007), it may
be advantageous for an organization mainly because family owners have substantial
economic incentives, as well as the necessary decisional power for performing a close
monitoring of managers (e.g. De Massis et al., 2014). Stated differently, family involvement
in ownership may reduce monitoring costs and, in turn, be beneficial for firm performance.
Second, family shareholders play an active role in decision making and thus influence firm
choices. In this regard, several studies have described family owners as long-term-oriented
shareholders (e.g. Le Breton-Miller and Miller, 2013; Lumpkin and Brigham, 2011),
emphasizing their desire to pass a better and stronger business to next generations (e.g.
Ward, 1997; James, 1999) and have associated family ownership to higher parsimony in
caretaking the family’s personal wealth (e.g. Carney, 2005). Third, family-owned firms may
 JFBM make better investment decisions, since families have more firm-specific knowledge, are less
9,1 myopic and have longer investment horizons. Finally, family businesses develop a strong
culture and specific values, such as group, internal, centralized and long-term orientation
(e.g. Zahra et al., 2004), which become an important strategic resource.
Although family ownership may bring benefits to firms performance, the positive effects
above discussed may be undermined by a few potential drawbacks.
112 Schulze et al. (2001) figured out that the absence of external controls like those exercised
by the financial markets may expose family shareholders to lack of self-control, in turn, may
cause them to unconsciously take actions that harm both family and organization itself
(e.g. Lubatkin et al., 2007). This problem can be particularly severe in private firms, where
owners are not exposed to the market for corporate control and it can become more serious
at extreme degrees of family ownership because in this scenario other equity holders, who
can exercise some control on family owners, tend to lose influence (e.g. Schulze et al., 2001;
De Massis et al., 2015). Furthermore, family ownership may negatively influence a firm’s
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performance because of misappropriate public shareholders’ wealth (tunneling decisions),

such as transferring assets or profits to other self-owned firms, excessive family
compensation and advantageous transfer prices (e.g. Johnson, 2000).
Finally, another body of literature focuses on the lack of professionalism and financial
constraints by family firms. Family shareholders sometimes lack management and
financial capability and this could lead to a weakening of business strategies
(e.g. Poutziouris, 2001). If family business’ grow, especially in a complex industry, it is
likely that the family will need managerial talent and professional employees within the
firm. Prior research also suggests that family firms may be averse to raise external
financial resources since an increase of equity could diminish both their stake and weaken
controlling position (e.g. Martí et al., 2013). In this respect, family firms are more exposed
to financing restrictions, which, in turn, may limit the firm’s growth opportunities and
may lead to inefficient investment decisions since family firms would rely only on internal
resources (e.g. Andres, 2011).
As a consequence of contrasting predictions, previous studies empirically analyzing the
impact of family involvement in ownership on firms performance report mixed results
(e.g. Upton and Petty, 2000; Anderson and Reeb, 2003; Chrisman and Patel, 2012).

2.2 The role of PE investor for firms’ performance

There has been continuing debate of finance regards the impact of PE investments on
corporate governance (e.g. Wruck, 1989; Munari et al., 2007; Siegel et al., 2011) and its role for
firms’ performance (e.g. Kaplan, 1989; Smith, 1990; Davis et al., 2008; Guo et al., 2011).
Indeed, a large body of literature suggests that PE investors encourage entrepreneurs to
offer better projects and provide valuable monitoring and screening services (e.g. Berger
and Udell, 1998; Gompers and Lerner, 2001; Chemmanur et al., 2011). In this direction, it
provides an explanation of the positive effect of PE investment on firm performance.
The role of the specific abilities of the PE investors can be seen as taking an enterprise to a
stage where corporate ownership and control are appropriate (e.g. Siegel et al., 2011).
Therefore, the main benefits proposed by PE investments are the financial resources
provided by investors to the target firms which can be used to acquire other value-creating
resources such as economic or labor resources (e.g. Wright and Robbie, 1998). Further,
another key contribution provided by PE investor is to assist their investee firms in
mentoring and recruiting activities (e.g. Hellmann and Puri, 2002). This role can create
access to a business network, by supplying important contacts with stakeholders such as
potential clients, employees and providers.
Furthermore, PE investors can improve the professionalization of the investee firms, by
enhancing corporate governance and monitoring activity that leads to a reduction of agency
 costs (e.g. Jensen, 1993). In sum, selection and value-adding activities by PE investor usually Private equity
improve the capabilities of the target firm, leading to an increased performance of funded financing
firms during the investment period (e.g. Guo et al., 2011; Meles et al., 2014; Megginson et al.,
2016). Indeed, most of the empirical studies confirm a positive relation between PE
investments and firm’s performance (e.g. Davis et al., 2008; Guo et al., 2011; Bernstein et al.,
2016). Jensen (1989) argues that PE investor has the skill and capability to increase value of
investee firms. He finds that firm performance provides incentive for corporate governance 113
to carry out an adequate monitoring activity on managers behavior. Kaplan (1989) and
Smith (1990) highlight the importance played by PE ownership for the governance of
the target firm. In particular, they find that PE transactions create value by improving the
operating performance of target firms. Acharya et al. (2013) find that deal margin
(EBITDA/Sales) increases around 0.4 percent during PE ownership. Typically, PE-backed
firms tend to increase cash flow and market value in three years after the transaction
(e.g. Kaplan, 1989). However, we could argue that PE investors can increase the reputation of
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a firm which is an important feature for source additional resources through shared
economic activity and business growth (e.g. Gulati and Higgins, 2003). In a recent survey
article, Bernstein et al. (2016) examine the relation between PE investor and growth rates of
productivity, employment and capital formation. Using a sample of 8.596 country-industry-year
observation of OECD countries between 1991 and 2007, they show that industries that have the
presence of PE investments grown more quickly. Hence, PE investments should positively
affect the investee firms’ profitability.

2.3 The potential effect of PE on family and non-family firms

While there is substantial research on the impact that both PE investments and family
involvement in ownership have on firms outcomes, there is relatively little research focusing
on the different effects that PE investments have on family and non-family firms
performance. Specifically, to our knowledge, there are few studies in literature that perform
this kind of analysis (i.e. Martí et al., 2013; Croce and Martí, 2016).
Using a sample of Spanish venture capital (VC) financed firms during 1995-2004, Martí
et al. (2013) investigate a firm’s growth in family and non-family VC-backed firms. They find
that VC-backed family firms underperform non-family VC-backed firms when the institutional
investor holds a minority stake. Indeed, in such circumstances, the typical risk aversion
attitudes of family businesses may lead to conflicts between the management cultures of the
existing and new shareholders, which may negatively influence firm’s growth. They also find
non-significant differences when VC firm holds a majority stake in the investee firm.
Croce and Martí (2016) examine the productivity growth in a sample of 257 PE-backed
family firms, comparing them to PE-backed firms and non-family PE-backed firms.
They find that family firms accessing PE funding show lower productivity growth at the
investment time, even if they experience a strong increase of their productivity growth over
the investment period.
On the theoretical side, there are a number of reasons why PE investors can amplify a
family firm’s strengths whilst attenuating their weak points. First, PE investor could work
better in a well-established organizational firms, such as family businesses. In some
circumstances, a good governance structure could come from family firms that show a
strong family control (e.g. Sirmon and Hitt, 2003). This naturally assumes that the
performances of PE-backed firms heavily depend on ability of PE investor to monitor the
investee firm (e.g. Tian, 2012). Second, by providing financial resources and managerial
abilities, PE investors can help family businesses in overcoming their difficulties to access
both the resources and managerial capabilities needed to sustain competitive advantage and
to grow (e.g. Martí et al., 2013). Third, PE investor could solve the rigidity in adapting to new
challenges they typically suffer.
 JFBM Hence, from the above-discussed theoretical perspective, the first hypothesis that we
9,1 formalize is as follows:
H1a. The performance of PE-backed SMEs is positively influenced by family
involvement in ownership.
However, literature also suggests that, in some cases, family shareholders can hinder the
value creation process by PE investor. First, family shareholders may pose the strong
114 family bonds and family business identity, above those of the firm and their stakeholders
(e.g. Upton and Petty, 2000; Croce and Martí, 2016). Second, the typical risk aversion
attitudes in family businesses may lead to conflicts between existing and new shareholders
(e.g. Martí et al., 2013). Furthermore, these conflicts can be exacerbating by the fact that PE
investors may take actions to maximize their wealth, resulting in unfavorable long-term
effects for the investee firms. Third, family-owned generally tend to have deep knowledge of
the firm, and often find it difficult to delegate to outsiders the firm’s strategic decisions
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(e.g. Dyer, 1989; Lee et al., 2003). In turn, external shareholders frequently decide to stay
away from family shareholders decisions, and this could limit professional growth, by
restricting the role of the PE investor to that of tutor.
Thus, we define our second hypothesis as follows:
H1b. The performance of PE-backed SMEs is negatively influenced by family
involvement in ownership.

3. Data, variables and empirical strategy

3.1 Sample construction and descriptive statistics
To investigate the relation between the family involvement in ownership and the
performance of PE-backed firms, we select a sample of European family and non-family
firms, which have received a PE financing over the period 2007-2012. Specifically, we start
from the list of European PE-backed firms that received a PE investment over such a period
provided by Zephyr Bureau van Dijk’s database. Then, we exclude financial firms, because
these firms cannot be compared to industrial and other service firms (e.g. Mazzola and
Marchisio, 2002; Anderson and Reeb, 2003; Martínez et al., 2007). Thus, we obtain a
preliminary sample of 9.154 PE-backed firms. Afterwards, we merge the selected data set
with Orbis Bureau van Dijk and extract the list of SMEs. This procedure generates a total
sample of 3.974 PE-backed SMEs. We obtain information about PE deals from Zephyr and
firms’ accounting data and demographic data (like NACE industry codes and country ISO
codes) from Orbis. Due to missing values, our final sample is reduced to 533 PE-backed
firms of which 107 are family-owned firms and 426 are non-family firms.
According to various papers (e.g. Cucculelli and Storai, 2015), to identify a family firm,
we consider the “Global Ultimate Owner” (GUO) reported by Orbis. More specifically, we
identify as family firms those with GUO equal to “one or more named individuals or
families” and the independence indicator equal to “D” which means that main shareholder
has a direct ownership of over 50 percent. Our criterion of family firm is consistent with the
definition provided by Holderness and Sheehan (1988).
Table I provides a detailed description of our sample divided by country, industry and
investment period. Definitions of variables are summarized in Table II. Table III provides
summary statistics related to firm-specific characteristics and firms’ performance both for
the PE investment year and three years after. More generally, the family PE-backed firms
are sounder, show a high growth and productivity potential, more growth opportunities and
higher operating performance compared to PE-backed non-family firms. In Table AI, we
consider the pair-wise correlations. Interestingly, the presence of family owners is positively
related to total assets, consistent with Anderson and Reeb (2003), and negatively with the
 Family Non-family
Private equity
business business financing
Number % Number %

Country
France 67 62.62 146 34.27
Spain 10 9.35 67 15.73
United Kingdom 8 7.48 36 8.45 115
Italy 4 3.74 28 6.57
Other (over 10 countries) 18 16.82 149 34.98
2-digit NACE code Sector
10-33 Manufacturing 29 27.10 97 22.77
58-63 Information and communication 20 18.69 121 28.40
45-47 Wholesale and retail trade 14 13.08 35 8.22
68-75 Professional, scientific and technical activities 12 11.21 94 22.07
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Other (over 10 sectors) 32 29.90 79 18.54

Investment period
2007-2010 17 15.89 52 12.21
2008-2011 15 14.02 81 19.01
2009-2012 18 16.82 59 13.85
2010-2013 18 16.82 91 21.36
Table I.
2011-2014 13 12.15 67 15.73 Sample composition
2012-2015 26 24.30 76 17.84 for family business
Total 107 426 and non-family
Source: Orbis Bureau van Dijk business

Variables Symbol Description

Dependent variables
Operating performance 1 ROA The net income divided by total assets
Operating performance 2 EBIT_TA The EBIT divided by total assets
Operating performance 3 EBITDA_TA The EBITDA divided by total assets
Independent variables
Family business FB Dummy variable which is set at 1 when PE-backed are
family businesses and 0 otherwise
Size TA Natural logarithm of the total asset
Age Age Natural logarithm of the firm age
Capital ratio CR The book value of total equity divided by total assets
Capital productivity CP The sales divided by fixed assets
Growth Opportunity growth_opportunity The intangible assets divided by total assets
PE Experience Experienced Dummy variable which is set at 1 for investment in which
the average PE investor experience exceed 1, 0 otherwise
Crisis d_crisis Dummy variable which is set at 1 for years after the 2008 Table II.
and 0 otherwise Description of
Source: Orbis Bureau van Dijk and World Bank variables

amount of domestic credit provided by financial sector in percentage of GDP. Moreover,

the PE experience is negatively related to firm age implying that older firms select a
less-experienced PE investor and vice versa. Tables IV and V show descriptive statistics
related to characteristics of PE investors. More specifically, we describe firm-specific
variables and firms’ performance distinguishing among PE investors with high and low
experience. We find that firms backed by PE investors with low experience are older, have
 JFBM Family business Non-family business Difference tests
9,1 t-statistics z-statistics
n Mean Median n Mean Median ( p-value) ( p-value)

Panel A: firm characteristic

TA (mln $) 107 (0.20) 8,373 8,449 426 (0.80) 8,046 8,116 0.0000 0.0000
Age 103 (0.20) 24.96 26.39 412 (0.77) 21.32 20.79 0.0000 0.0000
116 CR (%) 107 (0.20) 29.91 36.52 426 (0.80) 2.31 37.8 0.2226 0.0000
Growth (%) 104 (0.15) 1.78 0.007 414 (0.78) 0.82 0.04 0.2556 0.0000
CP 107 (0.20) 18.08 3.64 422 (0.79) 13.89 2.35 0.1392 0.0000
EBITDA 107 (0.20) 223,68 193,5 426 (0.80) −363,78 −86 0.0229 0.0000
(mln $) Growth
Opportunity (%) 107 (0.20) 7.52 0.62 426 (0.80) 17.02 5.75 0.0000 0.0786
Panel B: firm performance
107 (0.20) −1.37 2.25 426 (0.80) −31.39 −9.09
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ROA (%) 0.0003 0.0000

EBIT_TA (%) 107 (0.20) −0.63 1.71 426 (0.80) −29.79 −9.13 0.0004 0.0000
EBITDA_TA (%) 107 (0.20) 3.49 4.86 426 (0.80) −20.27 −3.43 0.0002 0.0000
Notes: This table shows the summary characteristics of family and non-family business in the year of
PE investment and in three year after the investment year. Panel A provides means and medians of various
characteristics of family PE-backed firms and non-family PE-backed firms, along with associated t-statistics
Table III. and z-statistics. Panel B provide means and medians of operating performance indicators for family
Descriptive statistics PE-backed firms and non-family PE-backed firms. Means and medians are measured considering both the full
and univariate test sample period (2007-2012). The tests for mean difference are t-test and z-test

Family business Family business Difference tests

PE investor with high PE investor with low
experience experience
t-statistics z-statistics
n Mean Median n Mean Median ( p-value) ( p-value)

Panel A: firm characteristic

TA (mln $) 93 (0.87) 8,301 8,401 13 (0.12) 8,733 8,738 0.0047 0.0035
Age 90 (0.84) 24.16 25.64 12 (0.11) 30.37 32.96 0.0000 0.0000
CR (%) 93 (0.87) 28.18 36.18 13 (0.12) 42.36 43.80 0.1127 0.3381
Growth (%) 90 (0.84) 1.99 0.006 13 (0.12) 3.16 0.026 0.6443 0.0000
CP 93 (0.87) 19.35 3.39 13 (0.12) 10.23 9.52 0.2849 0.0000
EBITDA 93 (0.87) 171.51 185.5 13 (0.12) 443.19 306 0.0845 0.0000
(mln $) Growth Opportunity
(%) 93 (0.87) 8.01 0.62 13 (0.12) 4.55 0.76 0.1009 0.8153
Panel B: firm performance
ROA (%) 93 (0.87) −2.62 1.60 13 (0.12 7.29 4.37 0.0046 0.5032
EBIT_TA (%) 93 (0.87) −1.52 1.28 13 (0.12) 5.38 3.32 0.0707 0.6411
EBITDA_TA (%) 93 (0.87) 2.91 4.60 13 (0.12) 7.32 5.48 0.2285 0.7656
Notes: This table shows the summary characteristics of family business, distinguishing PE investor with
high experience and PE investor with low experience in the year of PE investment and in three year after the
investment year. Panel A provides means and medians of various characteristics of family business with
PE investor with high experience and family business with PE investor with low experience, along with
associated t-statistics and z-statistics. Panel B provide means and medians of operating performance
Table IV. indicators for family business with PE investor with high experience and family business with PE investor
Descriptive statistics with low experience. Means and medians are measured considering both the full sample period (2007-2012).
and univariate test The tests for mean difference are t-test and z-test
 Non-family business Non-family business Difference tests
Private equity
PE investor with high PE investor with low financing
experience experience
t-statistics z-statistics
n Mean Median n Mean Median ( p-value) ( p-value)

Panel A: firm characteristic

TA (mln $) 374 (0.88) 8,063 8,141 50 (0.12) 7,949 8,003 0.2273 0.1304 117
Age 361 (0.85) 20.79 21.18 49 (0.12) 22.44 21.97 0.0307 0.0941
CR (%) 374 (0.88) −1.70 37.72 50 (0.12) 31.43 42.08 0.3472 0.0000
Growth (%) 363 (0.85) 0.78 0.04 49 (0.12) 1.22 0.07 0.6459 0.0000
CP 371 (0.87) 12.99 2.07 49 (0.12) 21.01 5.38 0.0391 0.0000
EBITDA 374 (0.88) −541.33 −103.5 50 (0.12) 931.44 −4 0.0002 0.0000
(mln $) Growth
Opportunity (%) 374 (0.88) 17.28 6.41 50 (0.12) 15.15 2.33 0.2085 0.7773
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Panel B: firm performance

ROA (%) 374 (0.88) −31.20 −9.87 50 (0.12) −34.03 −4.72 0.8274 0.7074
EBIT_TA (%) 374 (0.88) −29.66 −9.90 50 (0.12) −32.03 −3.86 0.8518 0.7524
EBITDA_TA (%) 374 (0.88) −21.46 −4.14 50 (0.12) −12.85 −0.24 0.3819 0.2525
Notes: This table shows the summary characteristics of non-family business, distinguishing PE investor
with high experience and PE investor with low experience in the year of PE investment and in three year after
the investment year. Panel A provides means and medians of various characteristics of non-family business
with PE investor with high experience and non-family business with PE investor with low experience, along
with associated t-statistics and z-statistics. Panel B provide means and medians of operating performance
indicators for non-family business with PE investor with high experience and non-family business with Table V.
PE investor with low experience. Means and medians are measured considering both the full sample period Descriptive statistics
(2007-2012). The tests for mean difference are t-test and z-test and univariate test

higher growth opportunities and greater growth of sales compared to PE investors with
high experience. With respect to operating performance, we find that firms backed
by highly experienced PE investors exhibit lower profitability than those backed by PE
investors with low experience. This result is consistent with those reported by several
studies (e.g. Shepherd and Zacharakis, 2002; Shepherd et al., 2003) that figure out that
institutional investor experience may not always result in better investment decisions.

3.2 Variable measurement

This section describes the detailed information about the variables. Specifically, we
describe our dependent variables, i.e., the firms’ performance indicators (Section 3.2.1.),
and the independent variables, i.e., the family business indicator and control variables
(Section 3.2.2.). Definitions of variables are also summarized in Table II.
3.2.1 Firm’s performance indicator. To test our research hypotheses, we focus on three
firm performance indicators that are widely used in literature, this is (e.g. Bena and Ortiz-
Molina, 2013): Return on assets (ROA), EBIT divided by total asset (EBIT/TA) and EBITDA
divided by total asset (EBITDA/TA).
3.2.2 Independent variables. Following several studies (e.g. Villalonga, and Amit 2006;
Maury, 2006) that analyze the impact of family businesses on firm-level indicators, our
primary independent variable is a dummy (FB), which is set at 1 for family-owned firms and
at 0 otherwise. In addition, because various additional factors may influence a firm
operating performance, we add several control variables.
We include a number of “firm-specific” characteristics widely used in the analysis of
operating performance as controls (e.g. Dushnitsky and Lenox, 2006; Meles et al., 2014). TA
is the natural logarithm of the total asset, Age is the natural logarithm of a firm’s age, CR is
 JFBM measured as the book value of total equity divided by total assets, CP is the sales divided by
9,1 fixed assets, Growth Opportunity is the ratio between the intangible assets and the total
assets. Furthermore, for taking into account the PE investor’s characteristics, we include a
dummy variable (Experienced), which is set at 1 for investments in which the average PE
investor experience exceeds 1 and 0 otherwise. According to Tykvová and Borell (2012), this
measure is constructed to verify if the experience of a PE investor influences its ability to
118 select good firms and provides them with effective value-added services. Finally, we control
for time-variant, macroeconomic and industry-specific variation by using a dummy variable
for the financial crisis (Crisis) (it takes the value of 1 for the years after 2008 and 0 otherwise)
and a set of industry and country dummies.

3.3 Empirical strategy

We specify a linear model to explore the relation between the family involvement in
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ownership and the performance of PE-backed SMEs. To test our hypothesis, we estimate
Equation (1) using OLS, where a firms operating performance is a function of the presence
or not of family shareholders, various other firm-specific characteristics, the experience of
PE investor and a dummy for the financial crisis:
Perf i;t ¼ aþ b1 FBi þ dX i;t þei;t (1)

where i denotes a firm (i ¼ 1, 2 ,…, 533). Here t denotes the time dimension represented by
the three years after the investment year (t ¼ 0, 1, 2, 3); Perf is the operating performance
measure (ROA, EBIT/TA and EBITDA/TA); FB is a dummy variable is set to 1 for family
business and 0 otherwise; X is a vector of control variables; and e is the random error term.
We begin by developing a base Equation (1) and then we include state and industry
dummy variables to capture additional information.

4. Results
Table VI reports the results obtained from estimating the effect of family involvement in
ownership on the profitability of a PE-backed SMEs by using OLS model. The dependent
variables are ROA, EBIT_TA and EBITDA_TA that exhibit high values when a firm has a
higher profitability. We use as independent variables various firm-specific characteristics,
the PE investors’ experience, a dummy for the financial crisis, country and industry
dummy variables (see Table AI for the correlation matrix between independent variables).
We find that several factors influence a PE backed firm’s performance. Specifically, a PE
backed firm’s profitability is positively influenced (at the 5 percent confidence level or less)
by firm age (Age), firm size (TA) and capital productivity (CP). Unsurprisingly, the set of
dummy variables describing territorial differences and industry contributes significantly to
explaining a PE backed firm’s profitability. In contrast, a PE investor’s experience
(Experienced) that is generally associated to higher firm’s performance (e.g. Dyck and
Pomorski, 2016), exhibits a negative coefficient (at the 1 percent confidence level or less).
We interpret these results considering that experienced PE investors may suffer from
overconfidence that causes them to make mistakes during the screening and investment
process (e.g. Shepherd et al., 2003).
Regarding the effects of family owners on PE-backed SMEs and consistent with H1a, we
find that family ownership positively influences (at the 1 percent confidence level or less) the
corporate profitability while controlling for other firm-specific differences. For example,
looking at the results reported in column (1), the variable FB exhibits a positive (0.0975) and
highly significant coefficient (t ¼ 6.26). These results indicate that family involvement in
ownership is associated to superior performance over the PE investment period and may
support the idea that favorable effects of PE investments are more pronounced in family
 (1) (2) (3)
Private equity
ROA EBIT_TA EBITDA_TA financing
FB 0.0975*** (6.26) 0.0968*** (6.17) 0.0938*** (6.15)
Age 0.0380*** (4.05) 0.0388*** (4.13) 0.0428*** (4.81)
TA 0.0702*** (8.94) 0.0771*** (10.30) 0.0614*** (8.55)
Growth Opportunity −0.0149 (−0.36) −0.0180 (−0.45) 0.128*** (3.58)
Experienced −0.0548*** (−2.61) −0.0561*** (−2.61) −0.0624*** (−3.05) 119
CP 0.000405** (2.14) 0.000498** (2.52) 0.000505** (2.44)
CR −0.00255 (−0.59) −0.00404 (−1.02) −0.00250 (−0.68)
Crisis −0.0368* (−1.76) −0.0221 (−1.01) −0.0173 (−0.82)
State Yes Yes Yes
Industry Yes Yes Yes
_cons −0.510*** (−3.79) −0.546*** (−3.71) −0.319* (−2.32)
n 2083 2083 2083
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Adj. R2 0.245 0.261 0.240

Notes: Panel regression analysis of operating performance of a sample of 107 European family PE-backed firms
and 426 non-family PE-backed firms is reported considering the 28 European Union countries. The dependent
variables are ROA (column I), EBIT_TA (column II), EBITDA_TA (column III). FB is a dummy variable that Table VI.
takes value 1 for family business and 0 otherwise. The control variables are: Age, natural logarithm of the firm Results from OLS
age. TA, natural logarithm of the total asset. Growth Opportunity, is the intangible assets divided by total assets. regressions by
Experienced, is a dummy variable which is set at 1 for investment in which the average PE investor experience distinguishing
exceed 1, 0 otherwise. CP, is the sales divided by fixed assets. CR, is the book value of total equity divided by between family and
total assets. Crisis, is a dummy variable which is set at 1 for years after the 2008 and 0 otherwise. State and non-family
industry dummies are included in the estimates. *,**,***Significant at the 10, 5 and 1 percent levels, respectively PE-backed firms

firms because of their specific characteristics. However, we are aware that because we do
not control for screening effects, we can misestimate the impact of PE investments on both
family and non-family firms’ performance. Thus, to further test our research hypothesis, we
also perform two robustness checks.
First, in order to exclude that our results are influenced by the fact that PE-backed family
SMEs are concentrated in countries with specific economic and financial characteristics, we
restrict our analysis to those firms that are incorporated in one of the 15 old member states
of the European Union. The results reported in Table VII are very similar to those above
discussed. More specifically, the coefficient of FB variable remains positively and significant
(at the 1 percent confidence level or less) related to all firm’s profitability indicators.
Second, we also control the robustness of our results for endogeneity problems by
omitted variables. In particular, following various studies (e.g. Tykvová and Borell, 2012),
we include among the independent variables the one-year lagged values of the dependent
variable. Unsurprisingly, results reported in Table VIII show that the one-year lagged
values of the dependent variable is always significant at the 1 percent level. Furthermore,
while our model increases its explanatory power, the effects of various independent
variables (included the FB variable) on firm’s profitability remain substantially unchanged.

5. Limitations and conclusion

This paper investigates the relationship between family shareholders and performance of
PE-backed SMEs. Since we assume that PE investors may strengthen a family firm’s strong
points whilst mitigating its drawbacks (e.g. Martí et al., 2013; Croce and Martí, 2016), in our
first research hypothesis, we predict that PE-backed SMEs performance are positively
influenced by family involvement in ownership. By using a sample of European PE-backed
SMEs which have received a PE financing over the period 2007-2012, we find that PE-
backed family SMEs outperform non-family PE-backed SMEs over the post-investment
 JFBM (1) (2) (3)
9,1 15 countries ROA EBIT_TA EBITDA_TA

FB 0.100***(6.09) 0.0976***(5.87) 0.0938***(5.79)

Age 0.0405*** (4.21) 0.0397*** (4.14) 0.0432*** (4.76)
TA 0.0696*** (8.58) 0.0785*** (10.20) 0.0628*** (8.52)
Growth Opportunity 0.0253 (0.58) 0.0226 (0.53) 0.166*** (4.32)
120 Experienced −0.0562*** (−2.66) −0.0573*** (−2.67) −0.0633*** (−3.11)
CP 0.000631** (2.41) 0.000776*** (2.99) 0.000818*** (3.02)
CR −0.00253 (−0.59) −0.00411 (−1.05) −0.00256 (−0.70)
Crisis −0.0482** (−2.21) −0.0333 (−1.45) −0.0261 (−1.17)
State Yes Yes Yes
Industry Yes Yes Yes
_cons −1.172*** (−6.49) −1.368*** (−7.60) −1.065*** (−8.25)
n 1927 1927 1927
Adj. R2 0.247 0.263 0.243
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Notes: Panel regression analysis of operating performance of a sample of 107 European family PE-backed
firms and 426 non-family PE-backed firms is reported considering the 15 European Union countries with the
same political viewpoint. The dependent variables are ROA (column I), EBIT_TA (column II), EBITDA_TA
Table VII. (column III). FB is a dummy variable that takes value 1 for family business and 0 otherwise. The control
Results from OLS variables are: Age, natural logarithm of the firm age. TA, natural logarithm of the total asset. Growth
regressions by Opportunity, is the intangible assets divided by total assets. Experienced, is a dummy variable which is set at
distinguishing 1 for investment in which the average PE investor experience exceed 1, 0 otherwise. CP, is the sales divided by
between family and fixed assets. CR, is the book value of total equity divided by total assets. Crisis, is a dummy variable which is
non-family set at 1 for years after the 2008 and 0 otherwise. State and industry dummies are included in the estimates.
PE-backed firms *,**,***Significant at the 10, 5 and 1 percent levels, respectively

(1) (2) (3)

ROA EBIT_TA EBITDA_TA

Lagged 0.622*** (21.10) 0.640*** (23.39) 0.668*** (24.85)

FB 0.0688*** (4.22) 0.0649*** (4.44) 0.0604*** (4.37)
Age 0.00826 (0.89) 0.00153 (0.17) −0.00210 (−0.25)
TA 0.0374*** (4.59) 0.0388*** (5.05) 0.0264*** (3.76)
Growth Opportunity −0.0135 (−0.34) −0.0328 (−0.87) 0.0497 (1.55)
Experienced −0.0425** (−1.98) −0.0398* (−1.88) −0.0452** (−2.34)
CP 0.000467** (2.47) 0.000511*** (2.84) 0.000562*** (3.26)
CR −0.00453 (−1.57) −0.00582** (−2.02) −0.00492* (−1.87)
Crisis 0.0694* (1.81) 0.0806** (2.10) 0.0779** (2.13)
State Yes Yes Yes
Industry Yes Yes Yes
_cons −0.563** (−2.61) −0.542* (−2.55) −0.313 (−1.57)
n 1574 1574 1574
Adj. R2 0.504 0.555 0.563
Notes: Panel regression analysis of operating performance of a sample of 107 European family PE-backed firms
and 426 non-family PE-backed firms is reported considering the 28 European Union countries. We employ OLS
regression to controls for endogeneity of all the explanatory variables, we include independent variables lagged as
Table VIII. regressors. The dependent variables are EBIT_TA (column I), EBITDA_TA (column II). FB is a dummy variable
Results from OLS that takes value 1 for family business and 0 otherwise. The control variables are: Age, natural logarithm of the firm
regressions by age. TA, natural logarithm of the total asset. Growth Opportunity, is the intangible assets divided by total assets.
distinguishing Experienced, is a dummy variable which is set at 1 for investment in which the average PE investor experience
between family and exceed 1, 0 otherwise. CP, is the sales divided by fixed assets. CR, is the book value of total equity divided by total
non-family assets. Crisis, is a dummy variable which is set at 1 for years after the 2008 and 0 otherwise. State and industry
PE-backed firms dummies are included in the estimates. *,**,***Significant at the 10, 5 and 1 percent levels, respectively
 period in terms of profitability. This result can be analyzed from two different standpoints. Private equity
First, family shareholders play a critical role in the decision-making process, have a financing
long-term outlook of financial and strategic plans and have interpersonal skills (Romano
et al., 2000; Sirmon and Hitt, 2003). Second, agency costs in family firms are minimized
(e.g. Dawson, 2011), and this can give PE investors the opportunity to implement a firm’s
strategic plan with less difficulty. As a result, we support the idea that PE
investment represents an alternative means to fund family firm growth with positive 121
effects on profitability.
However, this study has some potential limitations, which arise opportunities for future
research. In our empirical analysis, we do not take into account the years before the
PE investor’s entry, and this may reflect on our inability to isolate the screening effect.
In addition, we do not observe the performance of PE-backed family SMEs after the exit of
PE investor. Hence, future studies on the impact of PE involvement on firm’s performance
when the investee is a family firm could therefore consider these aspects separately.
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Moreover, future research may expand on other PE investments, such as VC and buy-out or
consider extending the data, as well as possibly other region or different time periods.
In conclusion, our work has some implications for both PE investors and family
shareholders. Perhaps most importantly is that PE investor does not affect negatively
family firms, and increases operating performance in the investment period. In this respect,
our findings show that family involvement in ownership is able to augment PE investors’
ability to create value in terms of firms’ profitability over the investment period.
Furthermore, PE investment gives the opportunity for family firms to have the necessary
resources to growth (gaining competitive advantage) and allow family members to remain
as owners.

Notes
1. Family Firm Institute is the leading association worldwide for family enterprise professionals and
the organization of choice for the advisers, consultants, educators and researchers who help
perpetuate trans-generational family business enterprise. Source of definition: FFI.
2. In European Union, family businesses account for 9 percent of the GDP. Furthermore, European
family firms represent 1 trillion euros in turnover and create over 5 million jobs. Source of data:
FFI on KPMG data.

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Appendix

(1) (2) (3) (4) (5) (6) (7) (8)

Growth
FB Age TA Opportunity Experienced CP CR Crisis

FB 1.0000
Age 0.1798 1.0000
TA 0.1074 0.2721 1.0000
Growth −0.1780 −0.2030 −0.1695 1.0000
Opportunity
Experienced −0.0058 −0.0914 −0.0001 0.0373 1.0000
CP 0.0322 0.0103 −0.1030 −0.1709 −0.0275 1.0000
CR 0.0264 −0.0108 0.2024 −0.1299 −0.0227 −0.0132 1.0000
Table AI. Crisis −0.0076 0.0536 −0.0636 0.0623 0.0031 0.0204 0.0085 1.0000
Bivariate Notes: This table shows Pearson pairs-wise correlation matrix. italic texts indicate statistically significant at
correlation matrix 1 percent level or more. See Table II for variable definitions

Corresponding author
Dario Salerno can be contacted at: dario.salerno@uniroma2.it

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