PRIVATE EQUITY GIVES EUROPEAN ECONOMIES A COMPETITIVE EDGE
New research released today highlights the extent to which private equity positively influences several key drivers of European economic competitiveness and growth.
The findings, produced by Frontier Economics, show that private equity activity leads to increased foreign investment, improvements in innovation, and enhanced productivity.
The economic impact created by private equity supports the strategic priorities of the EU’s growth plan, Europe 2020, as a result of the following:
- Private equity attracts investible funds into Europe providing much needed risk capital for businesses. In the 12 largest private equity markets in Europe, private equity invested almost €250 billion in more than 19,400 companies between 2007 and 2012. Of this, an estimated €50 billionii was raised from outside Europe.
- Private equity builds businesses that are more innovative than non private equity-backed firms. Patents granted to private equity-backed businesses between 2006 and 2011 are likely to be worth up to €350 billioniii. Private equity participation increases the number of patent citations by 25%iv. With increased numbers of citations corresponding to greater economic value, this suggests it uses resources more effectively to deliver higher returns on investment. In some sectors, private equity finance can be up to nine timesv more effective than non-private equity financing.
- Private equity boosts productivity by improving management, operational expertise and production processes. Private equity backing also leads to improved productivity (measured by EBITDA (earnings before interest tax, depreciation and amortisation) per employee) of 6.9% in large private equity backed companies over a six year period.
- Private equity contributes to the creation of up to 5,600 new businesses in Europe annually. Venture capital investment directly leads to the creation of 2,800 new companies across Europe each year. In addition, a ‘spill-over’ effect - caused by knowledge sharing, networking and inspiring role models - leads would-be entrepreneurs to create approximately 2,800 more businesses each year.
These findings are among the most significant to emerge from the comprehensive secondary research report which analysed more than 60 academic and professional studies, as well as new analysis of publicly available data. Commissioned by the European Private Equity and Venture
Capital Association (EVCA), the study is based on a unique framework created by Frontier Economics to comprehensively define the various activities private equity undertakes, the measurable improvements achieved in portfolio companies, and quantification of the collective impact produced.
Other key findings include:
- Private equity creates robust, resilient businesses. Such businesses are at least as resilient as businesses under other forms of ownership and with similar characteristics, with some studies suggesting private equity-backed businesses are up to 50% less likely to fail than comparable, non private equity-backed businesses.
- Private equity-backed companies are more focussed on internationalisation. Although it is limited in scope, existing evidence points to private equity having a potentially significant role in supporting firms’ internationalisation efforts. It does this through providing strategic and operational guidance for portfolio companies on entering foreign markets as well as directly funding them.
- Private equity backs a broad range of businesses, 83% of which are small and mediumsized businesses - the engines of economic growth. Three of the top five sectors benefiting from private equity investment – business and industrial products, life sciences and communications – are capital intensive and typically receive significant investment in physical capital including infrastructure, machinery, buildings, and computers.
Commenting on the findings, Dr. Jose Carbajo from Frontier Economics said: “This report helps to identify and quantify the contribution of private equity to economic prosperity in Europe, through multiplier effects associated with more innovation, operational improvements, productivity gains and increased exports. The broad base of evidence highlighting the linkages between private equity and these impacts suggests such activities can make a vital contribution to accelerating growth in Europe.”
A 2008 NVP research paper about the economic impact of private equity and venture capital in the Netherlands can be found here.
This master thesis looks at possible differences in investment horizons between captive and standard private equity fund managers:
Beek, F.J., van (2016): ''Short- versus long-termism in private equity buyouts: Evidence from the Netherlands
This master thesis by Ivana Ducanovic from 2014 looks at evidence for excess employment growth in private equity backed companies using NVP data:
Ducanovic, I. (2014): ''Private equity and employment: Evidence from Netherlands''
Other paper on the economic impact of private equity and venture capital are:
Adveq Applied Research Series: Risk Management Practices at Private Equity Firms
Coller Institute of Private Equity, juni 2014
Global Private Equity Report 2014
Bain & Company, Inc., 2014
Private Equity Trend Report 2014
PwC, februari 2014
BVCA Annual Report on the Performance of Portfolio Companies, 2013
BVCA, december 2014
How Do Private Equity Investors Create Value?
EY – 2013
Rating Operative Performance of Private Equity portfolio companies
AT Kearney, 2013
Private Equity and Employment
Davis, Steven J., Haltiwanger, John, Jarmin, Ron S., Lerner, Josh, and Miranda, Javier, oktober 2011
Private Equity and Entrepreneurial Management in Management Buy-outs
Bruining, Verwaal, Wright, 2011
Private Equity and Insolvency
Private Equity-backed buy-outs less likely to fail according to new report commissioned by the British Private Equity and Venture Capital Association
The credit performance of private equity-backed companies in the 'Great Recession' of 2008-2009
PE-backed companies wheatered Great Recession better than peers, new PEC study concludes
The Global Economic Impact of Private Equity Report 2010
World Economic Forum – december 2009
Globalization of Alternative Investments
Working Papers Volume 2: The Global Economic Impact of Private Equity Report 2009 World Economic Forum – februari 2009
The Impact of Private Equity-backed Buyouts on Employee Relations
CMBOR, the Centre for Management Buyout Research - december 2008
In samenwerking met de European Private Equity and Venture Capital Association (EVCA)
Private Equity en Leveraged Buy-Outs
Prof. Oliver Gottschalg – november 2007
In opdracht van het Europees Parlement