Smaller private equity firms are more likely to achieve success than their larger peers, according to research conducted by the Edhec Business School.
The research, conducted by Florencio Lopez-de-Silanes and co-authored with Ludovic Phalippou and Oliver Gottschalg, has found that the success of these firms depends on largely on hierarchal and structural features.
Larger firms are prone to limited communications as company growth leads to increased communicative costs. Eventually, these costs outweigh the benefits of ensuring all employees are privy to all information.
Equally important are the increased difficulties associated with the implementation of managerial expertise and support experienced by larger firms. Further benefits are recorded when firms employ managers that have similar professional backgrounds. (article continues below)
The number of simultaneous investments held by a firm has a detrimental effect on the firm’s performance. Those that hold a high number of simultaneous investments were found to substantially underperform.
Investments in developing countries exhibit poorer performance across all measures, with the exception of bankruptcy rates.
The research also revealed a strong negative association between performance and duration. A large proportion of high-return deals are quick flips, or investments held less than two years.