Study: PE-backed firms outperform counterparts

An examination of more than 4,000 private equity-owned and comparable businesses in 12 countries across Asia, Europe and the US has found private equity-backed businesses are, on average, “significantly better managed across a wide range of management practices” than their government-, family-owned or private counterparts.

Commissioned by the World Economic Forum and conducted by a team of academics including Josh Lerner of Harvard Business School, the study found that firms acquired by private equity groups experience 2 percent greater productivity growth in the two-year period following a buyout than their comparables.

The researchers attributed this additional 2 percent to 72 percent more effective management of existing facilities by private equity-backed groups, while about 36 percent of the differential gains reflect increased demand. However, this assessment is put into perspective by the fact that on average firms acquired by private equity have higher production rates than their peers at the time of acquisition. They also outperform during economic downturns, the researchers found.

“When doing the research, we didn't really know what we would find in terms of productivity over time. We found that the gap between private equity-backed firms and their comparables actively widened during times of financial stress, with private equity coming out on top,” Lerner said in an interview.

The study was released as an addendum to a report published in January 2008, following a year long examination of 5,000 US private equity transactions in from 1980 to 2005. Last year’s report was primarily focused on the US, but this edition seeks to examine the influence of private equity on a global scale.

For example, this year, researchers looked at leveraged buyouts in France between 1994 and 2004, and

Josh Lerner

found that “private equity funds act as an engine for growth for small and medium sized enterprises”, with evidence of growth in jobs, productivity, sales and assets within industries in the region with liquidity problems pre-takeover.

The research team also looked at emerging markets from 2004 to 2007, finding that during that time dollars raised by investing in the economies of Asia, Russia and the former Soviet Union, Latin America, the Middle East and Africa increased by between eight- and 30-fold. From 1990 to 2008, emerging markets accounted for just 4 percent of private equity activity examined, accounting for $5.45 trillion or 76,398 sample transactions. However, this has grown significantly in recent years particularly in the growth equity and venture capital segment, the report found. It explains this by showing that deals in wealthier countries where there are large private equity fundraising markets are less likely to be successfully executed, which is why minority transactions and syndicated investments are growing in the emerging markets.

“At our annual meeting 2009 in Davos, heads of state, central bankers and finance ministers from over 60 countries, as well as chairmen and chief executive officers from over 200 of the world’s leading financial institutions discussed how to revive economic growth and promote long-term financial stability. In the context of these efforts [the study] provides further insight into the role of private equity in the global economy,” Max von Bismarck, director and head of investor industries, World Economic Forum, said in a statement.