Private Equity Investors as Matchmakers: Alliance Formation between PE-backed firms

Alliances as long term inter-firm cooperation are seen as an important factor of economic growth. They are particularly important for small to medium sized companies whose internal resources are scarce. This article analyses the role of Private Equity Firms that constitute a major source of financing for non-publicly traded small to medium sized companies, in the formation of alliances for their portfolio companies. While previous studies analyse the question in the light of mainstream theories, we rely on the dual theory of the firm, combining the contractual/mainstream view and the knowledge-based view. Contrary to the current literature, our study does not rely on statistical tests but on a multiple and embedded case study with explanatory design to test hypotheses. The present study is therefore the first that enables testing the causal mechanisms at work beyond correlations. Results show that the roles that Private Equity Firms play can be intentional (detecting new growth opportunities, driven by the Private Equity Firm's competences) as well as unintentional (reducing market inefficiencies through, mainly, informal mechanisms such as reputation and trust). Furthermore, our study highlights the benefits of the joint use of these theories and the complementary nature of both theories in explaining the phenomenon as a whole.