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Summary of research findings
Independent research conducted by noted scholars and institutions has found that private equity investors often save jobs and increase employment over time; improve the performance of the companies in which they invest; deliver superior returns to public, union and private pension funds, university endowments and charitable foundations; build value in companies over time; drive higher levels of innovation; and provide the “first money in” during the early stages of economic recovery.
The facts about private equity are:
PE investment often saves jobs and increases employment over time
• Acquisitions of large companies by major, U.S.-based private equity firms between 2002 and 2005 resulted in a significant increase in U.S. employment, according to a study conducted for the Private Equity Council. Among 26 firms providing U.S. employment data, domestic jobs at private equity-backed firms increased 13.3 percent (or 13,861 net new jobs), compared to 5.5 percent for all U.S. businesses
(Shapiro, Robert and Pham, Nam. “American Jobs and the Impact of Private Equity Transactions,” Private Equity Council, January 2008.)
• In 80 percent of the cases studied, employment levels at PE-owned companies were the same as or higher at the conclusion of a PE investment than they were at the beginning.
(Ernst & Young, Transaction Advisory Services, “How Do Private Equity Investors Create Value? A Study of 2006 Exits in the US and Western Europe,” 2007.)
• Private equity investment over time often slows or halts existing job losses and can drive job growth in new facilities, according to a 2008 study of 5,000 transactions over 25 years commissioned by the World Economic Forum and led by Harvard Business School Professor Josh Lerner.
• Prior to their acquisition, private equity portfolio companies were losing jobs at existing facilities at a rate one to three percent faster than their competitors. Following acquisition, the companies initially experienced a dip in employment but within four years employment rates rose to slightly above the industry average. In addition, private equity firms increased the rate of job growth at new U.S. facilities built by their portfolio companies to six percent above the peer industry average.
(The Global Economic Impact of Private Equity Report 2008, “Private Equity and Employment,” World Economic Forum, January 2008.)
PE partnerships improve the performance of their portfolio companies
• Private equity-owned firms outperform comparable public companies in productivity, employment and cash flow growth. Among a global sample of private equity investments exited in 2007, EBITDA grew at an average annual compound rate of 16 percent – six percentage points better than the public benchmark of 10 percent. Productivity grew at a annual rate of 12 percent, outperforming publicly-listed firms by 4 percentage points.
(“How Do Private Equity Investors Create Value? A study of 2007 Exits,” Ernst & Young, 2008)
• Private equity-owned firms are better managed than companies with other ownership structures, especially government, family and privately-owned firms. Private equity-owned firms have particularly strong operational management practices.
(The Global Impact of Private Equity Report 2009, “Do Private Equity-owned Firms Have Better Management Practices?” World Economic Forum, January 2009.)
• Private equity investment makes companies stronger when they enter public equity markets. The share price of companies owned by PE firms for a year or more that went public between 1981 and 2003 outperformed the stock market as a whole over a three-to-five year period.
(Cao, Jerry X. and Lerner, Josh, “The Performance of Reverse Leveraged Buyouts,” Swedish Institute for Financial Research Conference on The Economics of the Private Equity Market, October 15, 2006.)
PE investments deliver superior returns to pension funds, foundations and endowments
• By 2008, the total net profits distributed to investors worldwide by private equity funds raised through 2007 were $1.12 trillion (Preqin)
• Despite declines relative to historical returns, all private equity performance through the third quarter of 2008 surpassed the performance of public market indices across all time horizons. Five-year private equity returns came in highest at an annualized rate of 12.2 percent. One year performance for private equity in the period ending September 30, 2008 was -8.2 percent, compared to -21.4 percent for the NASDAQ and -22 percent for the Standard and Poors 500 index.
(Thomson Reuters Private Equity Performance Index (PEPI) )
• Between 1980 and 2005, top-quartile private equity firms delivered 39 percent on average, annualized net returns, significantly beating the S&P 500 and other public market indices. Those superior returns helped strengthen major public, union and private pension funds, charitable foundations and university endowments. (“Public Value: A Primer on Private Equity,” – Private Equity Council 2007 – analysis of data from Venture Economics and Bloomberg.)
PE firms are long-term investors
• Of all the companies acquired by PE firms between 1980 and 2007, 69 percent were still PE-owned by November 2007. During the period from 1970 to 2007, nearly 60 percent of 21,400 companies acquired by private equity investors remained under PE ownership for five or more years.
(Strömberg, Per. “The New Demography of Private Equity,” The Global Economic Impact of Private Equity Report 2008, World Economic Forum, January 2008.)
• The average holding period for PE investors is 5.3 years. Only 16 percent of all PE exits take place in less than 24 months. After five years, buyout investors continue to be involved as majority shareholders in more than 45 percent of their investments.
(Gottschalg, Oliver. “Private Equity and Leveraged Buy-outs Study,” Policy Department, Economic and Scientific Policy, European Parliament, IP/A/ECON/IC/2007-25, November 2007.)
PE investment spurs innovation
• PE-owned companies pursued more economically important innovations than non-PE owned companies, as measured by patent citations; the most commonly used and accepted measure of the economic impact of innovation.
(Lerner, Josh, Morten Sørensen, & Per Strömberg. “Private Equity and Long-Run Investment: The Case for Innovation,” The Global Economic Impact of Private Equity Report 2008, World Economic Forum, January 2008.)
PE is “the first money in” during the early days of economic recovery
• Private equity investment plays a critical role in leading the country out of recession. Following the past five periods of negative economic growth in the U.S. (1974, 1975, 1980, 1982 and 1991), real private equity investment increased by an average of 94 percent during the initial year of recovery – substantially stronger than overall business investment or private investment in manufacturing.
(Shapiro, Robert “The Role of Private Equity Promoting Economic Recovery,” The Private Equity Council, March 2009.)
• The number of private equity acquisitions grew by an average of 55.1 percent in each of the five years following an annual decline in GDP. The increased number of private equity acquisitions suggest that private equity retains access to capital during economic downturns and initial recoveries and that more companies actively seek private equity funding during tough times.
(Shapiro, Robert “The Role of Private Equity Promoting Economic Recovery,” The Private Equity Council, March 2009.)