How do Lead Financiers Select Their Partners in Buyout Syndicates? Empirical Results from Buyout Syndicates in Europe

• Author: Nancy Huyghebaert,Randy K. Priem
• DOI: http://doi.org/10.1111/emre.12051
• Published date: 01 December 2015
• Date: 01 December 2015

How do Lead Financiers Select Their

Partners in Buyout Syndicates? Empirical

Results from Buyout Syndicates in Europe

Nancy Huyghebaert1and Randy K. Priem1,2

1Faculty of Economics and Business, Department of Accountancy, Finance and Insurance, KU Leuven, Leuven, Belgium

2Financial Services and Markets Authority (FSMA), Congresstraat 12-14, 1000 Brussels, Belgium

Relying on a unique dataset covering 366 buyout syndicates in Europe over the period 1999–2009, we

empirically investigate the partnering decisions of lead financiers. Wefind that lead financiers select investors with

whom they developed a prior relationship, either directly or indirectly. Also, lead financiers prefer partners with

expertise in the target industry and partners with knowledge about target-country institutions, particularly when

their own knowledge in these areas is limited. Finally, they favor investors with a similar level of cognition and

status. We further show that these results are mainly driven by the risky buyouts in the sample. Overall, the above

partnering choices are found to have genuine economic effects for the post-buyout performance of target firms,

with expertise as regards the target industry and target-country institutions having the largest beneficial effect.

Keywords: buyout; economic behavior; partner selection; syndication; target performance

Introduction

The European buyout market has grown considerably

over the last twodecades, from €4 billion invested in 1992

to €94 billion in 2008. While deteriorating economic

conditions led to a huge drop in buyout activitythereafter,

investment levels started to pick up again as of the third

quarter of 2009. As a result, the European buyout market

fully caught up with its US counterpart over time (Kaplan

and Strömberg, 2009). According to the European

Venture Capital Association (EVCA), about 15% of

recent buyouts in Europe were syndicated, namely,multi-

ple investors jointly acquired an equity stake in the target

firm. The latter deals correspond to 44% of the total

amount invested, thereby indicating that syndication has

become a non-trivial feature of the European buyout

market. However, unlike the public-to-private transac-

tions in the USA, buyout syndicates in Europe are usually

not established through an auction procedure, known as

club deals.1Rather, firms are sold through private

negotiation with a buyout financier, who may decide to

set up a syndicate and select one or more investors to join

it (Meuleman et al., 2010). Those co-investors may then

help to create more target-firm value, or even restrain the

lead financier from investingin the target firm if their own

due diligence of the target firm proved unsatisfactory

(Sah and Stiglitz, 1986). Although the European buyout

market has several unique features, which also allows

testing ideas that could not be explored up till now,

research on investor decisions and behavior in European

buyout syndicates is still highly embryonic. Anumber of

recent articles have examined the motivesunderlying the

decision to syndicate buyouts in Europe (e.g., Meuleman

et al., 2009b; Huyghebaert and Priem, 2014). While risk

diversification turns out to be a highly influential force,

syndicates are also set up when investorslack information

and skills, and have an appetite for deal flow. In this paper,

we now extend that prior research by studying the

partnering choices of lead financiers in those buyout

syndicates.

The main goal of our study is to investigate which

investor characteristics lead financiers take into account

when selecting investment companies to join the buyout

syndicate. To address this research question, we rely on

a number of non-mutually exclusive and highly comple-

mentary theories from the organizational sociology

Correspondence: Randy Priem, FSMA and KU Leuven, Faculty of Eco-

nomics and Business, Department of Accountancy, Finance, and Insur-

ance, Naamsestraat 69, 3000 Leuven, Belgium. Tel: +32 16 32 67 37.

Fax: +32 16 32 66 83. E-mail address: Randy.Priem@fsma.be

1In the USA, the importance of bidding consortiums in public-

to-private transactions has been growing overtime. In those club

deals, two or more buyout financiers jointly submit a bid for a

target firm. In contrast to the USA, club bidding rarely occurs in

Europe (0.17% of deals in the population of European buyouts

over our sample period, i.e. 1999–2009).

European Management Review, Vol. 12, 221–246 (2015)

DOI: 10.1111/emre.12051

© 2015 European Academy of Management

literature, which can help to explain how networks of

relationships are formed and maintained through part-

nering choices. Specifically, we infer insights from

Coleman’s (1988) network closure theory, Burt’s (1992)

structural holes theory, and Lazarsfeld and Merton’s

(1954) homophily theory. Coleman’s (1988) network

closure theory claims that prior social relationships

produce trust, which might subsequently constrain

opportunistic behavior among investors. To limit moral-

hazard problems in the buyout syndicate, lead financiers

might thus prefer investment partners with whom they

cooperated before. Burt’s (1992) structural holes theory

implies that lead financiers will invite investors capable

of providing complementary information and manage-

ment skills; this should be useful for the selection and

the management of portfolio firms. Lazarsfeld and

Merton’s (1954) homophily theory contends that lead

financiers favor partners similar to themselves, such as

investors with a similar levelof buyout experience (‘cog-

nitive similarity’) and a similar position in the buyout

network (‘status similarity’). The reason is that

homophily tends to reduce interorganizational conflicts,

thereby adding to the syndicate’s effectiveness. Argu-

ably, although network closure theory, structural holes

theory, and homophily theory all can contribute to our

understanding of syndication networks, each theory by

itself can offer only a partial explanation for lead finan-

ciers’ partnering choices in buyout syndicates and may

not even be supported empirically.

Next, we examine in more detail whether lead finan-

ciers use different decision rules in different contexts.

For this purpose, we consider various measures captur-

ing different aspects of target riskiness, given that risk

diversification is a key rationale for the syndication

of European buyouts (Meuleman et al., 2009b;

Huyghebaert and Priem, 2014). Moreover, when target

risk is substantial, we expect lead financiers to attach

more importance to the proposed investor characteris-

tics, as they could now be even more dependent on the

assistance of their co-investors in target screening, moni-

toring, and value adding. Such a detailed analysis of the

conditions that influence lead financiers’ partnering

choices could help to better understand how syndicates

are structured so as to achieve their strategic objectives.

Finally, in order to analyze whether those partnering

choices have genuine economic consequences for target

firms, we relate investor experience and interrelationship

variables to the change in target-firm profitability and

growth after the buyout. Indeed, when a syndicate is

structured so as to improve its functioning and effective-

ness, this should ultimately be reflected in how the

buyout transaction affects target-firm performance. We

rely on a unique sample of 366 syndicated buyouts in

Europe to conduct the above analyses.

Our study provides an important contribution to the

literature on partner-selection decisions in a private-

equity context, as empirical research on this topic is still

rather limited. Up till now,only a handful of studies have

examined partnering behavior, mostly in the context of

venture capital (VC) syndicates (e.g., Lockett and

Wright, 1999; Kogut et al., 2007; Sorenson and Stuart,

2008; Keil et al., 2010). Nonetheless, as buyouts entail a

once-for-all structuring of the deal, we argue that

partner-selection decisions can be examined more accu-

rately for buyouts than for VC transactions. Indeed, VC

generally involves stage financing, with later financing

rounds being initiated after pre-specified milestones

were achieved. The composition of the VC syndicate

and even the identity of the lead financier in a VC syn-

dicate could then change across the subsequent financ-

ing rounds. In contrast, the complexities associated with

multiple financing rounds can be avoided when examin-

ing partnering choices in buyout syndicates. The once-

for-all structure of buyouts also necessitates the lead

financier to carefully consider who to invite to join the

syndicate. Despite the obvious advantages of examining

partner-selection decisions in buyout syndicates,

research on this topic is still highly embryonic. To the

best of our knowledge, Meuleman et al. (2010) is the

only study that has examined the structuring of buyout

syndicates, using unique survey data on 183 MBO syn-

dicates in the UK between 1993 and 2003. They find that

lead financiers tend to select familiar partners when

moral-hazard risk in the buyout syndicate is substantial.

Compared with Meuleman et al. (2010), our study

hinges on a more extensive theoretical framework that

can help to further improve our understanding of how

networks of relationships among investment companies

are formed and maintained. We also contribute to the

literature by examining investor-selection decisions in a

European buyout context. For that purpose, we have

access to the data on the population of buyouts in Europe

over the period 1997–2009. With this dataset, we can

reconstruct all buyout relationships among investors and

calculate investor experience variables. Interestingly,

93.2% of target firms in our sample is non-listed before

their buyout, thereby also increasing the relevance of

studying the effects of target risk on investor-selection

decisions.2We are able to compute various accurate

measures of target risk from the firms’ annual accounts,

as many non-listed firms in Europe have to file their

financial statements with national authorities. Moreover,

a considerable fraction (33.7%) of buyouts in Europe are

cross-border in nature, with the lead financier and the

2Although most prior buyout research has focused on the US

public-to-private deals of the 1980s, Kaplan and Strömberg

(2009) point out that over 90% of recent buyouts in the USAalso

concern privately-held firms. However, data on these US firms

are very hard to collect. In contrast, the disclosure requirements

for non-listed firms in Europe allow us to also examine private-

to-private transactions.

222 N. Huyghebaert and R.K. Priem

© 2015 European Academy of Management