Over the past two decades, the role of private equity in the real economy has dramatically increased. For example, private equity-backed U.S. companies numbered approximately 4,000 in 2006, but by 2018, that figure had doubled to about 8,000. Meanwhile, the number of publicly traded firms in the United States fell by 14 percent, from 5,113 to 4,397. Globally, private equity’s net asset value has jumped more than seven fold from 2000 to 2018, while the market capitalization of the public equity market grew only 2.1 times over the same period. Institutional investors that have historically been public market oriented increasingly allocate investments to private markets, seeing them as necessary vehicles to attain diversification as well as participation in the growth of the full economy.
The growing importance of private equity has generated ongoing debate as to its impact on the real economy, including the impact on productivity at private equity-owned firms (referred to herein as “target firms”), as well as the impact of private equity on job growth. For a long time, such policy debates were not assisted by empirical facts and analyses because of limited data and disclosure requirements and the relatively short history of private equity. However, the past 10-15 years have witnessed a burgeoning academic literature based on increasingly refined and comprehensive data which has since covered much of the real economic impact of private equity.
In this literature review, the Committee on Capital Markets Regulation seeks to provide clarity as to the findings of academic research on the impact of private equity on target firm productivity and jobs.3 In Part I of our review, we describe the methodology used by such studies. In Part II, we summarize and compare the findings of twenty-two empirical studies that measure the impact of private equity ownership on firm productivity and jobs. Our study is intended to be exhaustive of the research since 2005 focused on the United States and Europe.
We review eight U.S.-focused studies and two globally-focused studies (including the U.S.) on the impact of private equity on a target firm’s productivity, such as revenue per employee (i.e. total firm revenue divided by total number of employees), return on assets or innovation. Productivity in an economy is vital to overall macroeconomic growth and is arguably the most important determinant in a country’s standard of living. Overall, a majority of studies find that private equity positively impacts a firm’s productivity, while some find little or no statistically significant effect. Importantly, none of the studies we review find that private equity negatively impacts firm productivity. Moreover, the two global studies find that private equity exerts positive externalities on entire industries as productivity gains not only accrue to the target firms, but also spill over to competitor firms. We then review European-focused studies, all five of which find that private equity buyouts enhance the productivity of target firms, while another finds that an increase in private equity investment in a country is associated with an increase in innovation.
While these studies do not explore the specific mechanisms through which private equity increases productivity, the positive results are consistent with explanations offered by other studies. For example, in the case of consumer products firms, significant increases in post-buyout revenue are the result of new product launches and geographic expansion that occur under private equity management. Moreover, private equity buyouts generally lead to improved management practices at medium sized firms (often the type of firm targeted in private equity transactions).
If productivity gains were primarily the result of job cuts, then the net societal benefit of private equity may be less clear. However, we next review the impact of private equity on job growth and find that this is generally not the case. We consider five U.S. studies and two global studies (including the U.S.) that measure the impact of private equity buyouts on job growth at target firms, as well as the positive externalities that are bestowed on entire industries. The most comprehensive U.S. study finds that the most prevalent types of private equity transaction – buyouts of private firms – are associated with a positive impact on job growth. These job-promoting transactions constitute more than 70% of private equity deals in this study. In the remaining minority of cases, involving buyouts of public companies, private equity is associated with job declines. Due to the larger size of public companies, the net result across all transaction types is that private equity buyouts have no statistically significant effect on employment. However, since the study only examines a two-year window for job growth, it may fail to capture job growth that occurs in subsequent years, which may be significant given the typical 4 to 5-year holding period of private equity investments. In addition, the two global studies we review show that, similar to the positive findings for productivity, private equity also leads to job growth across entire industries, both at target firms and competitor firms.
We then summarize six European-focused studies that examine the impact of a private equity buyout on job growth at target firms. Similar to the U.S. studies, the most comprehensive European study documents a positive impact of private equity on job growth at target firms, albeit to a much larger degree than in the U.S. The stronger conclusions in the European study may result from both a longer examination window (5 years of job growth versus 2 years) and better data availability on private companies in Europe than in the U.S. Limitations as to data regarding private companies in the United States may also mean that U.S. jobs studies underweight the prevalence of private-to-private transactions, as compared to buyouts of public companies for which there is often better data. Finally, we review two studies that find that private equity investment in a certain region is associated with job growth at non-private equity owned firms in that region.
In conclusion, the empirical literature shows that private equity buyouts in the U.S. and Europe generally have positive effects on productivity at target firms and, in most cases, a positive impact on job growth. In addition, private equity exerts positive externalities on entire industries, generating both productivity growth and job growth at competitor firms as well.
The full report can be found here.