Increasing productivity is vital for sustainable economic growth and improvements in living standards. Over the years, numerous empirical studies have explored the topic of productivity at private equity-backed companies.
Given the nature of venture capital-backed businesses and the lack of a similar comparator class of non-VC-backed high growth start-ups, this research is more relevant to private equity-backed businesses. The impact of venture capital on business productivity is likely to be most keenly felt in the new and growing businesses, and the productivity tools invented and commercialised by them.
Recent academic research provides evidence that private equity investment has a positive impact on productivity at target firms and across entire industries through spillover effects. Studies of buyouts from 20 years or so ago struggled to evidence a productivity effect, so these are a significant addition to the literature.
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The UK market has been studied in detail by Lavery, Tsoukalas and Wilson (2024), who use a comprehensive sample of 20-year UK PE buyout deal-level data from 2001 to 2022. The research, in conjunction with the Productivity Institute, finds that PE investment has a positive impact on business productivity. The authors estimate total factor productivity in PE-backed companies to increase by around 4% from the pre-to post-buyout period (up to four years before and after initial investment) relative to control firms. Similarly, labour productivity rises by around 5% relative to the control group from pre-to post-buyout. The study also finds statistically significant increases in employment and capital expenditures in PE-backed companies, compared to control firms supporting the notion that private equity unlocks the growth potential of target firms. Moreover, the analysis shows that the target firm's productivity is more resilient during economic downturns such as the Global Financial Crises and the COVID-19 pandemic.
UK
Lavery and Wilson (2022) examined a sample of over 1,200 realised UK PE buyouts and found that the positive impact of PE ownership on target firm productivity persists after PE exit relative to control firms, highlighting the long-term implication of PE ownership beyond the holding period on business productivity.
Focusing on innovation and patenting, Amess, Stiebale, and Wright (2016) studied 407 UK private equity buyouts between 1998-2005 and measured post-buyout patent filling and citation activity as a measure of innovative productivity for at least three years after the buyout at target firms. They find a 6% increase in quality-adjusted patent stock three years after the buyout, but improvement in innovation is even stronger for private-to-private transactions, which experience a 14% increase in the quality-adjusted patent stock, and for portfolio companies in financially dependent industries.
Europe
In a pan-European study, focusing on private equity deals in emerging markets between 1992 and 2017, Biesinger, Bircan and Ljungqvist (2020) found substantial long-run (up to five years post-exit) increases in labour and capital productivity at target companies.
US
Looking further afield to the US, Davis, Haltiwanger, Handley, Lipsius and Lerner (2019) use a sample of over three thousand private equity buyouts in the US between 1980 and 2013 and find that labour productivity increased by an average of 8% at target companies over two years post-buyout, relative to a control group.
Global
Global studies which include cross-country comparisons include Bernstein, Lerner, Sorensen and Strömberg (2010) who report that industries in OECD countries with prior PE investment grow faster in terms of productivity and employment and are less exposed to aggregate shocks.
Aldatmaz and Brown (2019) investigate spillover effects within business sectors by studying the impact of private equity investments on publicly listed competitor firms operating in the same industry. They find that PE investment in an industry leads to an increase in employment growth, profitability and labour productivity across public companies within the same domestic industry.
Gulliver and Jiang (2020) present a literature review on the impact of private equity buyouts on productivity and jobs on behalf of the Committee on Capital Markets Regulation. This summarises 8 US-focused studies and 6 global studies published between 2005 and 2020 (some of which are highlighted above). They conclude that 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.
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Bibliography
Gulliver, John and Jiang, Wei, The Impact of Private Equity Buyouts on Productivity and Jobs (August 2020). Committee on Capital Markets Regulation, 2020. Available at SSRN: https://ssrn.com/abstract=3672264
Davis, Steven J. and Haltiwanger, John C. and Handley, Kyle and Lipsius, Ben and Lipsius, Ben and Lerner, Josh and Miranda, Javier, The Economic Effects of Private Equity Buyouts (July 8, 2021). Available at SSRN: https://ssrn.com/abstract=3465723
Aldatmaz, Serdar and Brown, Gregory W., Private Equity in the Global Economy: Evidence on Industry Spillovers (July 29, 2019). UNC Kenan-Flagler Research Paper No. 2013-9, 29th Annual Conference on Financial Economics & Accounting 2018. Available at SSRN: https://ssrn.com/abstract=2189707
Lavery, Paul and Wilson, Nicholas, Private Equity Buyouts and Portfolio Company Performance Post-exit (December 6, 2022). Leeds University Business School Working Paper No. 23-02. Available at SSRN: https://ssrn.com/abstract=4295276
P. Lavery, J. Tsoukalas, N. Wilson (2024) Private equity financing & firm productivity, Working Paper No. 041, The Productivity Institute. Available at: www.productivity.ac.uk/research/private-equity-financing-firm-productivity
Amess, Kevin and Stiebale, Joel and Wright, Mike, The Impact of Private Equity on Firms’ Patenting Activity (September 14, 2016). European Economic Review, Vol. 86, 2016. Available at SSRN: https://ssrn.com/abstract=2966209
Biesinger, Markus and Bircan, Cagatay and Ljungqvist, Alexander, Value Creation in Private Equity (May 22, 2020). EBRD Working Paper No. 242, Swedish House of Finance Research Paper No. 20-17. Available at SSRN: https://ssrn.com/abstract=3607996
Bernstein, Shai and Lerner, Josh and Sorensen, Morten and Strömberg, Per, Private Equity and Industry Performance (March 15, 2010). Harvard Business School Entrepreneurial Management Working Paper No. 10-045, AFA 2011 Denver Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1524829
Learn more about the BVCA's Research Advisory Group
These studies have been compiled with the support of the BVCA Research Advisory Group, a committee of senior academics and practitioners who enable us to access a wider pool of research. The BVCA Research team would like to thank all members of the Group for their input, guidance and advice.
