Industries rife with private equity activity grow faster and are sometimes less affected by industry cycles than sectors without private investment activity, according to a new study commissioned by the World Economic Forum.
Also, modest levels of government venture capital support and “indirect encouragement” – through tax subsidies – can combine with private investment to help increase the performance of young businesses.
The findings were part of working papers created by a team of academics, including Josh Lerner of Harvard Business School, examining alternative investments and their impact on the global economy. The paper studied the impact of private equity investment across 20 industries in 26 major developed nations between 1991 and 2007.
One of the key findings is industries where private equity has been active in the past five years grow more rapidly than other sectors, whether measured using total production, value-added or employment criteria. Activity in industries with private equity backing appears to be no more volatile in the face of industry cycles than in other industries, and sometimes less so, the study found.
“Industries where private equity funds have invested in the past five years have grown more quickly, using a variety of measures,” researchers said in the report. “It is hard to support the claim that economic activity in industries with private equity backing is more exposed to aggregate shocks.”
On government investment in venture capital, the study found companies with moderate government venture capital support outperform companies with only private venture capital support and those with extensive government backing.
Researchers analysed more than 28,800 companies that receive venture backing between 2000 to 2008. Companies were based in a number of industries, but concentrated mostly in technology.
“This independent report demonstrates the strong performance of the private equity industry, particularly in difficult times and refutes many of the criticisms the industry has often had to face,” Simon Walker, chief executive officer of the British Venture Capital Association, said in a statement.
Prior studies from the WEF have found employment falls more rapidly at target companies after private equity acquisitions close, though private equity managers accelerate the pace of acquisitions and divestitures.
Researchers in prior WEF studies also found that private equity-backed businesses are, on average, “significantly better managed across a wide range of management practices” than their government, family-owned or private counterparts.
“Coupled with the previous two WEF studies, this report should silence critics who doubt that private equity over time strengthens companies and the economy,” Douglas Lowenstein, president of lobbying group the Private Equity Council, said in a statement.