Private Equity and Industry Performance

Josh Lerner is a Professor of Investment Banking at Harvard Business School.

In this paper, Private Equity and Industry Performance, which was recently published on SSRN, my co-authors, Shai Bernstein, Morten Sørensen, and Per Strömberg, and I examine the impact of PE investments across 20 industries in 26 major nations between 1991 and 2007. We focus on whether PE investments in an industry affect aggregate growth and cyclicality. In particular, we look at the relationship between the presence of PE investments and the growth rates of productivity, employment and capital formation. For our productivity and employment measures, we find that PE investments are associated with faster growth. One natural concern is that this growth may have come at the expense of greater cyclicality in the industry, which would translate into greater risks for investors and stakeholders. Thus, we also examine whether economic fluctuations are exacerbated by the presence of PE investments, but we find little evidence that this is the case.

Throughout our analysis, we measure the growth rate in a particular industry relative to the average growth rate across countries in the same year. In addition, we use country and industry fixed effects, so that the impact of PE activity is measured relative to the average performance in a given country, industry, and year. For instance, if the Swedish steel industry has more PE investment than the Finnish one, we examine whether the steel industry in these two countries performs better or worse over time relative to the average performance of the steel industry across all countries in our sample, and whether the variations in performance over the industry cycles are more or less dramatic.

Overall, we are unable to find evidence supporting the detrimental effects of PE investments on industries. In particular:

  • Industries where PE funds have been active in the past five years grow more rapidly than other sectors, whether measured using total production, value added, or employment. 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 we focus on the impact of private equity in continental Europe, where concerns about these investments have been most often expressed.
  • We believe it is unlikely that these results are driven by reverse causality, i.e. PE funds selecting to invest in industries that are growing faster and/or are less volatile. The results are essentially unchanged if we only consider the impact of PE investments made between five and two years earlier on industry performance.

It is important to note that there are a number of limitations to this analysis. First, the question of economic growth and volatility is only one of many questions that regulators must grapple with when assessing the impact of PE investment. Second, we hope to deal more fully with the question of reverse causality in subsequent versions of the study. Finally, 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.

The full paper is available for download here.

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