The Global Economic Impact of Private Equity Report 2008 - World ...

cutting back on the number of filings, it is natural to wonderabout the dynamics behind the change in quality.The initial analysis is presented in the final line in Panel A of Table2. We compare the Herfindahl index, or concentration measure,of the patent classes in which firms’ awards are assigned. Inthis comparison, we restrict the sample to the 59 firms with atleast four patent applications filed prior to the private equityinvestment and at least four patents applied for afterwards, inorder to ensure the computed measures of concentration aremeaningful. When we undertake this comparison, we find thatafter the private equity investments, firms are likely to have moreconcentrated patent portfolios than beforehand, but the p‐valueis just above the 10% threshold.We can gain some additional insights as to how these moreconcentrated portfolios emerge from the cross‐tabulations inTable 7. We use as observations each patent, and examinecitations in the years prior to and after the private equityinvestment, just as we did in Table 2. We now divide thepatents, though, in two ways. In Panel A, we divide theobservations into those whose primary patent classassignment was more or less well‐populated prior to theinvestments: more precisely, whether the firm, in applicationsfiled in the three years prior to the private equity transaction,had above or below the median share of patenting in thatprimary patent class. In Panel B, we divide the patents bywhether the share of patenting in the primary class increasedor decreased after the private equity transaction.The cross‐tabulations provide additional insights into thesources of the increase in patent importance. First, we seefrom Panel A that awards in the firms’ focal technologies –the areas where they had done a disproportionate amountof patenting prior to the transaction – are more likely toincrease in quality, regardless of whether raw or adjustedpatent counts are used. Panel B reveals that patent classesthat experience an increase in patenting share are alsodisproportionately where the increase in patent qualityoccurred. These patterns are consistent with the privateequity‐backed firms focusing their innovative investments intheir core areas of strength and generating higher‐impactpatent portfolios as a result.Consistent results emerge from Table 8, which presentsNegative Binomial regression analyses akin to that in thesixth column of Table 3. We now add controls for the shareof patenting in the primary patent class prior to the privateequity investment (in the first and second regressions) andfor the change in the share of patenting in that class frombefore to after the investment (in the third and fourthregressions), as well as interactions between the patentmeasure and the dummy denoting an award filed in the firstto fifth years after the private equity investment. Because themeasures of patent shares may be misleading if there are justa handful of patents assigned to a given firm, we undertakethe analysis both using the entire sample (the first and thirdcolumns) and only patents of firms which had at least fourpatents prior to the private equity investments and four after(the second and fourth columns).The significantly greater than one coefficient for the variable“Share of firm’s pre‐investment patents in class” suggest thatpatents in the firms’ “core” areas – the areas where therewas more patenting prior to the private equity investment –are disproportionately likely to be important ones. Moreover,the interaction term is greater than one. Not only are thesepatents likely to be important, but their impact is likely toincrease after the private equity investment.The variable “Change in firm’s patent in class pre‐ andpost‐investment” initially presents a more confusing picture.The coefficient is again greater than one – areas where thereis growth are more important ones – but the significance isonly marginal. In column 3, this interaction term is less thanone, but when we restrict the sample to those firms withat least four patents before and after the transaction (orsimilar cut‐offs), the interaction turns greater than one andsignificant. Once we exclude firms with only modestpatenting activity, an increase in patenting is associatedwith a sharp (and highly significant) boost in patent quality.Thus, these analyses suggest that private equity‐backedfirms tend to focus their patent filings. This focusing processis not indiscriminate, however, but tends to concentrate oncore technologies. Moreover, the very process of focusingseems to lead to the patents in these selected classeshaving greater impact after the private equity investment.5. ConclusionsThis paper examines the nature of long‐run investments infirms backed by private equity groups, focusing on innovativeactivities. It examines patents filed by 495 firms that receivedprivate equity backing between 1983 and 2005.We find that:• Patents of private equity‐backed firms applied for in theyears after the investment are more frequently cited• Private equity‐backed firms have no deterioration afterthe investments in patent originality and generality, whichare proxies for the fundamental nature of the research• The quantity of patenting appears not to consistentlychange in the years after the private equity investment• The patent portfolios of firms become more focused inthe years after private equity investments. Breakdowns ofthe patenting patterns suggest that the areas where thefirms concentrate their patenting after the private equityinvestment, and the historical core strengths of the firm,tend to be the areas where the increase in patent impactis particularly greatWe see three avenues for future research into the relationshipof private equity and innovation. While each will requireThe Global Economic Impact of Private Equity Report 2008 Large-sample studies: Long-run investment 35