Private equity’s impact on the global economy examined in comprehensive Forum report
• World Economic Forum publishes the second volume of Working Papers on “The Global Economic Impact of Private Equity”
• Report finds that private equity-owned firms are generally better managed than counterparts and have strong operational management practices
• Firms acquired by private equity groups experience higher productivity growth than firms of the same age, size and industry
• Report explores the globalization of private equity by investigating its impact in France and emerging markets
• Read the full report and learn more about the World Economic Forum Investors Industries Community
Geneva, Switzerland/New York, USA - The World Economic Forum today released the Globalization of Alternative Investments Working Papers Volume 2: The Global Economic Impact of Private Equity Report 2009, one of the most exhaustive studies of private equity involving thousands of companies going back to the 1980s. Among the chief findings of the report are that private equity-owned firms are, on average, better managed than government-, family- or privately owned firms. Firms acquired by private equity groups enjoy productivity growth 2% greater than average; in France, private equity funds act as an engine of growth for small and medium size enterprises. Private equity investment in emerging markets raised increasingly significant funds between 2004 and 2007. The research project included an international team of noted academics led by Josh Lerner, Jacob H. Schiff Professor of Investment Banking at Harvard Business School.
According to Lerner and Anuradha Gurung, Associate Director, Investors Industries, World Economic Forum, co-editors of the Working Papers, “this volume builds on the first volume of Working Papers, published in January 2008, which addressed the evolution of the private equity industry since the 1980s by including large-sample studies on such topics as the demography of private equity investments, the willingness of private equity-backed firms to make long-term investments and the impact of private equity activity on employment and governance. It is our hope it will be useful to policy-makers and industry leaders alike.”
“At our Annual Meeting 2009 in Davos-Klosters, heads of state, central bankers and finance ministers from over 60 countries, as well as chairmen and CEOs from over 200 of the world’s leading financial institutions engaged in discussions on how to revive economic growth and promote long-term financial stability. In the context of these ongoing efforts the Working Papers provide further insight into the role of private equity in the global economy,” said Max von Bismarck, Director and Head of Investors Industries, World Economic Forum.
The current volume of Working Papers examines management practices adopted by private equity firms at portfolio companies, the impact of private equity activity on labour productivity; the impact of private equity investment in France; and the demography of private equity in emerging markets.
Key highlights from the research include:
I. Management Practices Study
This study examines management practices across 4,000 private equity-owned and other firms in a sample of medium size manufacturing firms in 12 countries in Asia, Europe and the US using a unique double-blind management survey conducted in 2006 to score monitoring, targets and incentive practices. This study finds that:
• Private equity-owned firms are on average the best-managed ownership group. They are significantly better managed across a wide range of management practices than government-, family- and privately owned firms.
• Most private equity-owned firms are well managed. The high average levels of management practices in these firms are due to the lack of any “tail” of very badly managed firms under their ownership (that is, very few private equity firms are really badly managed).
• Private equity-owned firms have strong operational management practices.
II. Productivity Study
This study builds on the initial paper on private equity and employment in Volume 1 of the Working Papers by looking beyond employment and focusing on whether and how labour productivity changes at firms that were targets of private equity transactions in the US from 1980 to 2005. As in the earlier study, the authors analysed detailed data on private equity transactions that they have integrated with longitudinal micro datasets at the US Census Bureau.
• As in the earlier study, target manufacturing firms, i.e. the sample of manufacturing firms that underwent private equity transactions, experience an intensification of creative destruction.
• Firms acquired by private equity groups experience productivity growth in the two-year period after the transaction that is on average two percentage points more than at controls (of the same age, size and industry), i.e. the typical firm’s productivity increases by 7% in the two-year period, while the private equity-backed firm’s productivity increases 9%.
• About 72% of the outperformance differential reflects more effective management of existing facilities, including gains from accelerated reallocation of activity among the continuing establishments of target firms. About 36% of the differential reflects the productivity contribution of more entry and exit at target firms. It was also found that firms acquired by private equity had higher productivity than their peers at the time of the original acquisition by the private equity group.
• The probability of establishment shutdown is less likely for more productive facilities for both private equity targets and comparable firms, but the relationship is much stronger for private equity-backed firms. In other words, private equity investors are much more likely to close underperforming establishments at the firms they back, where underperformance is measured by labour productivity.
• The roughly 1,400 private equity transactions involving US manufacturing firms from 1980 to 2005 raised output by between US$ 4 billion and US$ 15 billion per year as of 2007 (expressed in inflation-adjusted 2007 dollars), depending on whether and how rapidly the productivity gains dissipate after the buyout.
• Both targets and controls tend to share productivity gains with workers in the form of higher wages, but the relationship between productivity gains and wage increases is slightly stronger at targets. Establishments with higher than average productivity growth have higher than average earnings per worker growth.
• The positive productivity growth differential at target firms (relative to controls) is larger in times of financial stress, i.e. periods with an unusually high interest rate spread between AAA-rated and BB-rated corporate bonds.
III. French Study
This paper examines how leveraged buyout (LBO) transactions impact corporate growth in France. It expands on existing literature that focused primarily on LBO transactions in the US and UK throughout the 1980s by investigating LBO transactions in France over the more recent time frame of 1994-2004.
The study finds that in France, private equity funds act as an engine of growth for small and medium size enterprises.
• Post-LBO growth in jobs, productivity, sales and assets of targets is higher in industries that have insufficient internal capital. In addition, findings suggest that the transitional capital provided by private equity funds fills a critical gap at times when capital markets are weak.
IV. Emerging Markets Study
The final study examines the rapid increase of private equity investment in emerging markets. From 2004 to 2007, the dollars raised by funds investing in the emerging economies of Asia, Russia and the former Soviet Union, Latin America, the Middle East and Africa has increased between eight- and thirty-fold.
• Only equity market development matters for the development of private equity, not the provision of debt; the effects are particularly strong for venture capitalists. One interpretation is that exiting through public offerings is particularly important for these firms.
• The measures of operational engineering appear to be particularly important for buyout activity. In particular, the presence of barriers to free trade, greater complexity in establishing new entities and greater corruption are associated with fewer LBOs.
• Minority transactions are associated with faster-growing countries. The presence of syndicated investments is associated with larger deals and with less favourable fundraising environments, which may be attributable to liquidity constraints.
The Globalization of Alternative Investments project, overseen by a distinguished Advisory Board, comprises research conducted by an international team of noted academics as well as a comprehensive series of targeted discussions and workshops.
The Advisory Board, chaired by Joseph L. Rice, III, Chairman of Clayton, Dubilier & Rice Inc., comprised of global representatives from diverse sectors including academia, banking, industry, institutional investments and organized labour. The Board provided intellectual stewardship and helped ensure the integrity of the work. The Advisory Board included Piero Barucci (Autorità Garante della Concorrenza e del Mercato), Wim Borgdorff (AlpInvest Partners), Ulrich Cartellieri (Former Board Member Deutsche Bank), Nick Ferguson (SVG Capital and SVG Advisers), R. Glenn Hubbard (Columbia Business School), Philip Jennings (UNI GLOBAL UNION), Michael Klein (former Chairman, Institutional Clients Group and Vice-Chairman,Citi Inc.), Joncarlo Mark (CalPERS), Yoshihiko Miyauchi (Orix Corporation), Alessandro Profumo (Unicredit Group), Dominique Senequier (AXA Private Equity), Kevin Steinberg (World Economic Forum USA), David Swensen (Yale University) and Mark Wiseman (CPP Investment Board).
In addition to Professor Lerner, the research team included Nick Bloom (Stanford University), Quentin Boucly (HEC School of Management), Steven J. Davis (University of Chicago Booth School of Business), John Haltiwanger (University of Maryland), Ron Jarmin (US Census Bureau), Javier Miranda (US Census Bureau), Raffaella Sadun (London School of Economics), Morten Sørensen (Columbia Business School), David Sraer (University of California at Berkeley), Per Strömberg (Institute of Financial Research and Stockholm School of Economics), David Thesmar (HEC School of Management) and John Van Reenen (London School of Economics).
The views expressed in this volume of Working Papers are those of the authors and do not reflect the opinions of the World Economic Forum or the Advisory Board.
The World Economic Forum is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas.
Incorporated as a foundation in 1971, and based in Geneva, Switzerland, the World Economic Forum is impartial and not-for-profit; it is tied to no political, partisan or national interests (http://www.weforum.org).
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