The Global Economic Impact of Private Equity Investigated in Most Comprehensive Report

World Economic Forum publishes Volume 1 of Working Papers on “The Global Economic Impact of Private Equity”

Davos, Switzerland – January 25, 2008 – The World Economic Forum today released the Globalization of Alternative Investments Working Papers Volume 1: The Global Economic Impact of Private Equity Report 2008 – one of the most comprehensive investigations into private equity. The report focuses on the demography of global private equity deals, the willingness of private equity-backed firms to make long-term investments globally, and the impact of private equity investments on the employment levels of firms in the US and corporate governance in the UK.

“The private equity industry has become an important player in modern capital markets. Here in Davos participating in the World Economic Forum Annual Meeting are almost all G8 and G20 finance ministers along with major financial leaders, including investors, who are discussing the future of the financial system in which private equity has a major stake,” said Max von Bismarck, Head of Investors Industry, World Economic Forum.

“We believe The Global Economic Impact of Private Equity, Working Papers Volume 1 is the first study in the past quarter century to use exhaustive data sets to provide empirical analyses of private equity transactions on a global scale. For instance, the demography study examined 21,937 LBO transactions across 19,500 distinct firms globally from January 1970 to June 2007. The World Economic Forum hopes the report will serve as a platform to enrich dialogue and decision-making on public policy governing private equity,” said Anuradha Gurung, co-editor, with Josh Lerner, of the volume of Working Papers and Senior Project Manager for the Globalization of Alternative Investments project at the World Economic Forum.

The research comprised four large-sample studies on:

  1. the demography of global private equity deals: the number, duration and outcomes of these transactions;
  2. the willingness of private equity-backed firms to make long-term investments globally, with a particular emphasis on investment in innovative activities;
  3. the impact of private equity investment on the employment levels of firms in the US;
  4. the consequences of private equity investments for the governance of firms in the UK.

These analyses were complemented by detailed case studies examining the globalization of the private equity industry via six transactions in China, India, Germany and the United Kingdom.

“While the early private equity deals of the 1980s were extensively scrutinized, the industry has changed so much in the subsequent decades that there was a real need for careful and systematic study,” observes Josh Lerner, the project’s academic leader. “These studies stand out for their depth and comprehensiveness. This is particularly true of the employment study, where previous reports have focused primarily on smaller survey-based samples,” he said.

Key highlights from the research were:

  1. Demography
    • Holding periods – Almost 60% of private equity fund investments are exited more than five years after the initial investment. In addition, the length of time firms remain under the control of private equity investors has increased in recent years.
    • Bankruptcy – 6% of buyout transactions end in bankruptcy or financial distress. This translates to a default rate of 1.2% per year, compared to an average default rate of 1.6% for US corporate bond issuers and 4.7% for US junk bond issuers.
  2. Innovation
    • Focused portfolios – The patenting level is little changed after buyouts, but awards have a higher economic impact. The patent portfolios of PE-backed firms become more focused in the years after the investments.
  3. Employment
    • Employment growth at existing establishments – Employment has a “J-curve” pattern in the years pre-and-post buyout. In the two years preceding a buyout, employment in target establishments grows more slowly than in the control group: the average cumulative employment difference in the two years before the transaction is about 4% lower for the targets than the controls. The growth at the controls continues to be greater than the targets in the three years after the transaction: in the two years after the buyout, the average employment difference is 7% lower for the targets than the controls. In the fourth and fifth years after the transaction, employment at private equity-backed firms mirrors that of the control group.
    • Employment growth at greenfield facilities – When the opening of new “greenfield” facilities after the private equity investment is examined, an opposite pattern emerges. Firms backed by private equity have 6% more greenfield job creation than the control group two years after the buyout.
  4. Governance
    • Fine-tuning of governance – Private equity board members are most active in complex and challenging transactions. Private equity groups appear to adjust their board representation based on the anticipated challenges in the investments (for instance, companies that showed a particular need for monitoring even when they were public).
  5. Globalization
    • Globalization of LBO transactions – From 2001 to 2007, 12% of global LBO transactions took place outside North America and Western Europe (9% in terms of deal value), a considerable increase over previous decades. The dynamics in emerging private equity markets differ from those in the developed private equity markets. The emerging private equity markets focus primarily on minority and growth capital investments. Emerging private equity markets, although not without challenges, present a host of opportunities.

“The private equity industry has grown both in terms of size and geographic reach and, despite its growing global impact, there has been limited research on its impact that stakeholders can use to inform broader public policy discussions. With this in mind, the World Economic Forum initiated The Global Economic Impact of Private Equity, Working Papers Volume 1 under the auspices of its Industry Partnership Programme, as part of a broad project focused on the Globalization of Alternative Investments,” said Kevin Steinberg, Chief Operating Officer and Head of the Centre for Global Industries (New York) at the World Economic Forum USA.

The Globalization of Alternative Investments project, overseen by a distinguished Advisory Board, comprises research conducted by an international team of noted academics as well as a comprehensive series of targeted discussions and working groups.

The Advisory Board, led by Joseph L. Rice III, Chair of Clayton, Dubilier & Rice, is comprised of global representatives from diverse sectors including academia, banking, industry, institutional investments and organized labour. It provided intellectual stewardship and helped ensure the integrity of the work. Michael Klein (Citi) and R. Glenn Hubbard (Columbia Business School) served as Vice-Chairs of the Advisory Board, which also included Piero Barucci (Autorit?Garante della Concorrenza e del Mercato), Wim Borgdorff (AlpInvest Partners), Ulrich Cartellieri (Former Board Member, Deutsche Bank), Nick Ferguson (SVG Capital and SVG Advisers), Gao Xiqing (China Investment Corporation), Philip Jennings (UNI GLOBAL UNION), Joncarlo Mark (CalPERS), Yoshihiko Miyauchi (Orix Corporation), Alessandro Profumo (Unicredit Group), Kevin Steinberg (World Economic Forum USA), David Swensen (Yale University) and Mark Wiseman (CPP Investment Board).

The core research team was led by Josh Lerner, Jacob H. Schiff Professor of Investment Banking at Harvard Business School, and includes Ann-Kristin Achleitner (Technische Universität München), Francesca Cornelli (London Business School), Lily Fang (INSEAD), Roger Leeds (Johns Hopkins University) and Per Strömberg (Stockholm School of Economics and Swedish Institute for Financial Research). A number of co-authors including Steven J. Davis (University of Chicago Graduate School of Business), John Haltiwanger (University of Maryland), Ron Jarmin (US Bureau of the Census), Õguzhan Karakas (London Business School), Javier Miranda (US Bureau of the Census), Eva Nathusius (Technische Universität München) and Morten Sørensen (University of Chicago Graduate School of Business) contributed to the respective studies.

The views expressed in this volume of Working Papers are those of the authors and do not necessarily reflect the opinions of the World Economic Forum or the Advisory Board.

Notes to Editors

The World Economic Forum is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas.

Incorporated as a foundation in 1971, and based in Geneva, Switzerland, the World Economic Forum is impartial and not-for-profit; it is tied to no political, partisan or national interests. (www.weforum.org)


The Global Economic Impact of Private Equity Investigated in Most Comprehensive Report

World Economic Forum publishes Volume 1 of Working Papers on “The Global Economic Impact of Private Equity”

Davos, Switzerland – January 25, 2008 – The World Economic Forum today released the Globalization of Alternative Investments Working Papers Volume 1: The Global Economic Impact of Private Equity Report 2008 – one of the most comprehensive investigations into private equity. The report focuses on the demography of global private equity deals, the willingness of private equity-backed firms to make long-term investments globally, and the impact of private equity investments on the employment levels of firms in the US and corporate governance in the UK.

“The private equity industry has become an important player in modern capital markets. Here in Davos participating in the World Economic Forum Annual Meeting are almost all G8 and G20 finance ministers along with major financial leaders, including investors, who are discussing the future of the financial system in which private equity has a major stake,” said Max von Bismarck, Head of Investors Industry, World Economic Forum.

“We believe The Global Economic Impact of Private Equity, Working Papers Volume 1 is the first study in the past quarter century to use exhaustive data sets to provide empirical analyses of private equity transactions on a global scale. For instance, the demography study examined 21,937 LBO transactions across 19,500 distinct firms globally from January 1970 to June 2007. The World Economic Forum hopes the report will serve as a platform to enrich dialogue and decision-making on public policy governing private equity,” said Anuradha Gurung, co-editor, with Josh Lerner, of the volume of Working Papers and Senior Project Manager for the Globalization of Alternative Investments project at the World Economic Forum.

The research comprised four large-sample studies on:

  1. the demography of global private equity deals: the number, duration and outcomes of these transactions;
  2. the willingness of private equity-backed firms to make long-term investments globally, with a particular emphasis on investment in innovative activities;
  3. the impact of private equity investment on the employment levels of firms in the US;
  4. the consequences of private equity investments for the governance of firms in the UK.

These analyses were complemented by detailed case studies examining the globalization of the private equity industry via six transactions in China, India, Germany and the United Kingdom.

“While the early private equity deals of the 1980s were extensively scrutinized, the industry has changed so much in the subsequent decades that there was a real need for careful and systematic study,” observes Josh Lerner, the project’s academic leader. “These studies stand out for their depth and comprehensiveness. This is particularly true of the employment study, where previous reports have focused primarily on smaller survey-based samples,” he said.

Key highlights from the research were:

  1. Demography
    • Holding periods – Almost 60% of private equity fund investments are exited more than five years after the initial investment. In addition, the length of time firms remain under the control of private equity investors has increased in recent years.
    • Bankruptcy – 6% of buyout transactions end in bankruptcy or financial distress. This translates to a default rate of 1.2% per year, compared to an average default rate of 1.6% for US corporate bond issuers and 4.7% for US junk bond issuers.
  2. Innovation
    • Focused portfolios – The patenting level is little changed after buyouts, but awards have a higher economic impact. The patent portfolios of PE-backed firms become more focused in the years after the investments.
  3. Employment
    • Employment growth at existing establishments – Employment has a “J-curve” pattern in the years pre-and-post buyout. In the two years preceding a buyout, employment in target establishments grows more slowly than in the control group: the average cumulative employment difference in the two years before the transaction is about 4% lower for the targets than the controls. The growth at the controls continues to be greater than the targets in the three years after the transaction: in the two years after the buyout, the average employment difference is 7% lower for the targets than the controls. In the fourth and fifth years after the transaction, employment at private equity-backed firms mirrors that of the control group.
    • Employment growth at greenfield facilities – When the opening of new “greenfield” facilities after the private equity investment is examined, an opposite pattern emerges. Firms backed by private equity have 6% more greenfield job creation than the control group two years after the buyout.
  4. Governance
    • Fine-tuning of governance – Private equity board members are most active in complex and challenging transactions. Private equity groups appear to adjust their board representation based on the anticipated challenges in the investments (for instance, companies that showed a particular need for monitoring even when they were public).
  5. Globalization
    • Globalization of LBO transactions – From 2001 to 2007, 12% of global LBO transactions took place outside North America and Western Europe (9% in terms of deal value), a considerable increase over previous decades. The dynamics in emerging private equity markets differ from those in the developed private equity markets. The emerging private equity markets focus primarily on minority and growth capital investments. Emerging private equity markets, although not without challenges, present a host of opportunities.

“The private equity industry has grown both in terms of size and geographic reach and, despite its growing global impact, there has been limited research on its impact that stakeholders can use to inform broader public policy discussions. With this in mind, the World Economic Forum initiated The Global Economic Impact of Private Equity, Working Papers Volume 1 under the auspices of its Industry Partnership Programme, as part of a broad project focused on the Globalization of Alternative Investments,” said Kevin Steinberg, Chief Operating Officer and Head of the Centre for Global Industries (New York) at the World Economic Forum USA.

The Globalization of Alternative Investments project, overseen by a distinguished Advisory Board, comprises research conducted by an international team of noted academics as well as a comprehensive series of targeted discussions and working groups.

The Advisory Board, led by Joseph L. Rice III, Chair of Clayton, Dubilier & Rice, is comprised of global representatives from diverse sectors including academia, banking, industry, institutional investments and organized labour. It provided intellectual stewardship and helped ensure the integrity of the work. Michael Klein (Citi) and R. Glenn Hubbard (Columbia Business School) served as Vice-Chairs of the Advisory Board, which also included Piero Barucci (Autorit?Garante della Concorrenza e del Mercato), Wim Borgdorff (AlpInvest Partners), Ulrich Cartellieri (Former Board Member, Deutsche Bank), Nick Ferguson (SVG Capital and SVG Advisers), Gao Xiqing (China Investment Corporation), Philip Jennings (UNI GLOBAL UNION), Joncarlo Mark (CalPERS), Yoshihiko Miyauchi (Orix Corporation), Alessandro Profumo (Unicredit Group), Kevin Steinberg (World Economic Forum USA), David Swensen (Yale University) and Mark Wiseman (CPP Investment Board).

The core research team was led by Josh Lerner, Jacob H. Schiff Professor of Investment Banking at Harvard Business School, and includes Ann-Kristin Achleitner (Technische Universität München), Francesca Cornelli (London Business School), Lily Fang (INSEAD), Roger Leeds (Johns Hopkins University) and Per Strömberg (Stockholm School of Economics and Swedish Institute for Financial Research). A number of co-authors including Steven J. Davis (University of Chicago Graduate School of Business), John Haltiwanger (University of Maryland), Ron Jarmin (US Bureau of the Census), Õguzhan Karakas (London Business School), Javier Miranda (US Bureau of the Census), Eva Nathusius (Technische Universität München) and Morten Sørensen (University of Chicago Graduate School of Business) contributed to the respective studies.

The views expressed in this volume of Working Papers are those of the authors and do not necessarily reflect the opinions of the World Economic Forum or the Advisory Board.

Notes to Editors

The World Economic Forum is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas.

Incorporated as a foundation in 1971, and based in Geneva, Switzerland, the World Economic Forum is impartial and not-for-profit; it is tied to no political, partisan or national interests. (www.weforum.org)