Well done, private equity

An examination of more than 4,000 private equityowned and comparable businesses in 12 countries across Asia, Europe and the US has found private equity-backed businesses are, on average, “significantly better managed across a wide range of management practices” than their government-, family- or privately owned counterparts.

Commissioned by the World Economic Forum and conducted by a team of academics including Josh Lerner of Harvard Business School, the study found that firms acquired by private equity groups experience 2 percent greater productivity growth in the two-year period following a buyout than their comparables.

The researchers attributed this to 72 percent more effective management of existing facilities by private equity-backed groups, while about 36 percent of the differential gains reflect increased demand. However, this assessment is put into perspective by the fact that, on average, firms acquired by private equity have higher production rates than their peers at the time of acquisition. They also outperform during economic downturns, the researchers found.

“When doing the research, we didn't really know what we would find in terms of productivity over time. We found that the gap between private equity-backed firms and their comparables actively widened during times of financial stress, with private equity coming out on top,” Lerner said in an interview.

The study was released as an addendum to a report published in January 2008, following a year-long examination of 5,000 US private equity transactions from 1980 to 2005. Last year's report was primarily focused on the US, but this edition sought to examine the influence of private equity on a global scale.

“At our annual meeting 2009 in Davos, heads of state, central bankers and finance ministers from over 60 countries, as well as chairmen and chief executive officers from over 200 of the world's leading financial institutions discussed how to revive economic growth and promote long-term financial stability. In the context of these efforts [the study] provides further insight into the role of private equity in the global economy,”Max von Bismarck, director and head of investor industries, World Economic Forum, said in a statement.