European innovation and job creation are enhanced by private equity ownership. Those were among the key findings from Frontier Economics, which was commissioned by the European Private Equity and Venture Capital Association (EVCA) to review more than 60 existing studies and research papers produced over the last 10 years.
Focused on ‘joining the dots’ between different peer-reviewed papers and academic research, the report found that while private equity-backed companies account for less than 6 percent of total private sector employment in Europe, they account up to 12 percent of all industry innovation and eight percent of all industrial spending on research and development (R&D). The report estimated 116,000 patents – worth up to €350 billion – were attributable to private equity-backed companies between 2006 and 2011, and noted the link between investment in patents and R&D and labour productivity growth.
Job creation was also a significant focus, with the report finding private equity contributes to the creation of up to 5,600 new businesses in Europe annually. Three of the top five sectors benefitting from private equity investments were business and industrial products, life sciences and communication – sectors that are capital intensive and often receive capital for infrastructure, machinery, buildings and computers, the report noted.
The report’s findings may not really be a surprise for people inside the industry, but may be a surprise for many observers and commentators who have being focused on more anecdotal issues that have occurred from time to time, Vincenzo Morelli, chairman of EVCA, told Private Equity International.
“We have seen a lot of academia over the years that generally document and prove that the industry has a pretty positive impact on social and economic phenomena. But there has been a lot of controversy around the industry over time and because academic studies are necessary narrowly focussed, it was difficult from all these fragmented studies to join the dots and to get an overall view,” he said, noting that was the “novelty” of the Frontier Economics study.
As governments are cost cutting and banks are retreating because of Basel III requirements, “you are going to have to find risk capital that is essential for recovery and growth somewhere and I think private equity is going to play a larger role,” he said. “Private equity is becoming an indispensable pillar of financing mechanism for industrial recovery and growth.”
This message however has “probably not” been delivered very well by the private equity industry, according to Morelli. “We are still seeing many politicians, and regulators in particular, [group private equity funds] with hedgefunds, which was the case when the AIFM [directive] was first proposed. We have not been able to put across the value that we bring to the real economy, which is really our upmost focus,” he said.