Demand for private equity minority investments: A study of large family firms

Private equity is invested mostly in established firms, of which family businesses are the dominant form. Under the pecking order hypothesis, private equity is a finance of last resort. Tests of the pecking order and its assumptions have provided conflicting results. For family firms, the pecking order hypothesis is incomplete because it ignores family effects. Case studies of 21 large family firms in Germany are analysed. Testable propositions are derived. Family firm owners balanced financial and non-financial resources of private equity with the need to cede control rights. Non-financial resources were valued more highly when resolving family issues. The observed pecking order was driven by control rights. Important implications for family firms and investors are discussed.

► Twenty-one case studies of family firms with private equity.
► Private equity was not seen as a finance of last resort.
► Non-financial resources from private equity are valued for resolving family issues.
► High cost of ceding control rights is explained by socioemotional wealth.
► Expands pecking order hypothesis to consider control and family issues.