13 Jan 2010Working Paper Summaries

Private Equity and Industry Performance

by Shai Bernstein, Josh Lerner, Morten Sørensen and Per Strömberg

In response to the global financial crisis that began in 2007, governments worldwide are rethinking their approach to regulating financial institutions. Among the financial institutions that have fallen under the gaze of regulators have been private equity (PE) funds. There are many open questions regarding the economic impact of PE funds, many of which cannot be definitively answered until the aftermath of the buyout boom of the mid-2000s can be fully assessed. HBS professor Josh Lerner and coauthors address one of these open questions, by examining the impact of PE investments across 20 industries in 26 major nations between 1991 and 2007. In particular, they look at the relationship between the presence of PE investments and the growth rates of productivity, employment, and capital formation. Key concepts include:

It is still too early to assess the consequences of the economic conditions in 2008 and 2009, a period where the decrease of investment and absolute volume of distressed private equity-backed assets was far greater than in earlier cycles. Despite this caveat, it appears that:
PE investments are associated with faster growth.
There is little evidence that economic fluctuations are exacerbated by the presence of PE investments.
In industries with PE investments, there are few significant differences between industries with a low and high level of PE activity.
Activity in industries with PE backing appears to be no more volatile in the face of industry cycles than in other industries, and sometimes less so. The reduced volatility is particularly apparent in employment.
These patterns continue to hold when the focus is on the impact of private equity in continental Europe, where concerns about these investments have been most often expressed.

Author Abstract

The growth of the private equity industry has spurred concerns about its potential impact on the economy more generally. This analysis looks across nations and industries to assess the impact of private equity on industry performance. Industries where PE funds have invested in the past five years have grown more quickly in terms of productivity and employment. There are few significant differences between industries with limited and high private equity activity. It is hard to find support for claims that economic activity in industries with private equity backing is more exposed to aggregate shocks. The results using lagged private equity investments suggest that the results are not driven by reverse causality. These patterns are not driven solely by common law nations such as the United Kingdom and United States, but also hold in Continental Europe. 40 pages.