First-ever global study on impact of private equity

BVWireIssue #64-4
January 30, 2008

At its 2008 meeting in Davos, Switzerland last week, the World Economic Forum (WEF) released the Globalization of Alternative Investments Working Papers Volume 1: The Global Economic Impact of Private Equity Report 2008.  The new, comprehensive report focuses on: the demography of global private equity deals; the willingness of PE-backed firms to make long-term investments globally; and the impact of PE investments on the employment levels of firms in the U.S. and corporate governance in the U.K.  “We believe [this] 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,” says the WEF report. 

For instance, the demography project examined 21,937 LBO transactions across 19,500 distinct firms globally from January 1970 to June 2007.  A core research team, led by Josh Lerner (Harvard Business School) and noted international academics, spearheaded the study.  Among its key findings:

  • Holding periods.  Almost 60% of PE 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 U.S. corporate bond issuers and 4.7% for U.S. junk bond issuers.
  • Employment.  Employment has a "J-curve" pattern in the years pre- and post-buyout.  In the two years prior to a buyout, PE-backed companies cut 4% more of their workforce compared to a control group.  In the two years post-buyout, the average employment difference is 7% lower for the PE targets vs. the controls.  In the fourth and fifth years after the transaction, employment at PE-backed firms mirrors that of the control group.
  • Globalization.  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.”  Compared to developed markets, emerging PE markets focus primarily on minority and growth capital investments, and while “not without challenges, [they] present a host of opportunities.”

Detailed case studies examine the globalization of PE industry via six transactions in China, India, Germany, and the U.K.  Links to the full study—as well as complete coverage of the 2008 WEF meeting—are available here.

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