The economic impact of private equity: what we know and what we would like to know

Abstract

Private equity and management buyouts have been the subject of considerable controversy. There have been recent calls for more systematic evidence on the impact of private equity and buyouts. Yet there is already an extensive body of scientific evidence stretching back over the past two decades that provides a platform for understanding the current context. This article summarises what we know about private equity from a comprehensive review of approximately 100 studies from around the world under the following headings: the returns to investors; profitability and productivity; the drivers of effects on profitability and productivity; the impact on employment and wages; growth and investment strategies; the extent to which high leverage is associated with failure; the generation of gains from asset disposals (asset stripping); the reselling of assets within short periods of time (asset flipping); and whether the effects persist after private equity firms have exited. This scientific evidence indicates that private equity and buyouts bring particularly important economic and social benefits. What we would like to know about private equity and buyouts is discussed under five broad headings: the difference between the second wave of deals and the first wave; the nature of the fund and its impact on returns; the distinction between secondary and primary buyouts; the failure rate of buyouts; and the tax implications. Implications for policy and practitioners are also discussed.

Do the effects of private equity investments on firm performance persist over time?

“…Specifically, several drawbacks have been associated with PE investments, particularly buy-out (BO), such as the excessive use of debt and the widespread practice of stripping the firm assets (e.g., Wright et al, 2009;Guo et al, 2011). As a consequence, there has been significant attention on the importance of regulation in this area (e.g., the Wall Street Journal reported that the SEC has recently launched a wide-ranging inquiry into the PE industry 3 ), and renewed emphasis has been placed on understanding whether and how PE investments create value for investing firms.…”

A kapitalizmus új királyai: kockázati tőke Magyarországon és a közép-kelet-európai régióban

“…Holott a tudományosan ellenőrzött adatokat és korrekt módszertant alkalmazó "független" tanulmányok száma is eléri a százat, s ezek alapján kiegyensúlyozott álláspont szűrhető le a kockázatitőke-befektetések hatásáról (Wright-Gilligan-Amess [2009]). A tudományos szakirodalom már egy sor olyan témát megvizsgált, ami fényt derít a kockázati tőke hatását érintő alapvető kérdésekre.…”

The employment consequences of private equity acquisitions: The case of institutional buy outs

“…Both Davis et al (2011) and Wright et al (2009) correctly note that recent criticisms of private equity tend to focus on the later stage buy outs rather than the involvement of venture capitalists at the early stage of an organization's life-cycle. However, a significant proportion of existing empirical work has ignored this distinction and presents results for very large numbers of private equity transactions dominated by management buy outs.…”