The Global Economic Impact of Private Equity Report 2008 - World ...

Executive summaryJosh lernerHarvard Business SchoolAnuradha GurungWorld Economic Forum USAIntroductionIn the past few decades, the private equity industry hasgrown both in terms of size and geographic reach. Despitethe growing global impact of private equity, there is limitedresearch on these developments that stakeholders canreference. It is, perhaps, not surprising that in markets asdiverse as China, Germany, South Korea, the UnitedKingdom and the United States, important questions havearisen about the impact of private equity on employment,managerial time-horizons, the overall health of companiesand the economy more generally.Research project overviewWhile the leveraged buyout transactions of the 1980s werescrutinized in a number of important academic analyses, it is fairto acknowledge that the studies examining buyouts 25 yearsago had two important limitations which the current researchhas attempted to address. First, the bulk of the older researchfocused on a relatively small number of transactions in the USand, to a lesser extent, in the UK. But the buyout market todayis no longer primarily a US and UK phenomenon, as evidencedby this research. Non-US private equity has grown to be largerthan US private equity in the last few years, with growth inContinental Europe being particularly pronounced. The secondlimitation of the older research on private equity relates to thefact that the industry has grown and evolved since the 1980s.Almost all of the published studies have focused on theindustry’s formative years.The World Economic Forum’s research project on the“Global Eonomic Impact of Private Equity” sought to analyseprivate equity transactions, meaning equity investments byprofessionally managed partnerships that involve leveragedbuyouts or other equity investments with a substantialamount of associated indebtedness (as opposed, forinstance, to venture capital investments in start-ups).The goal was to complete a rigorous study of the impact ofthese investments around the world, prepared by a tightlyorganized consortium of leading international scholars.This volume of Working Papers comprises a series of(I) large-sample studies and (II) case studies.Several key choices were made at the outset of the project.Given the tight one-year time-frame for the research, theproject drew on already existing databases about the privateequity industry (such as Capital IQ, Dealogic andVentureXpert), as well as information from complementarydatabases compiling information on such activities asbankruptcy, employment and patenting. Inevitably, this meantthat the large-sample studies in this volume of WorkingPapers focused primarily on the most developed markets,with particular emphasis on the UK and US. It is our intentionthat this study serve as an initial effort, and that subsequentefforts will entail greater scrutiny of proprietary documentsfrom market participants, as well as a greater focus onemerging private equity sectors.The large-sample studies covered the following broad topics:a) the demography of private equity firms: the number,duration and outcomes of these transactionsb)c)d)the willingness of private equity-backed firms to makelong-term investments, with a particular emphasis oninvestment in innovative activitiesthe impact of private equity activity on the employmentof existing establishments, as well as the tendency toopen new facilitiesthe consequences of private equity investment for thegovernance of private firmsThe research team also complemented these studies witha variety of case studies, which examined these issues andothers. Reflecting a desire to gain a more global perspective,these studies focused on companies across a variety ofgeographies, with a particular emphasis on Germany, the UKand emerging private equity markets such as China and India.I. Key findings: large-sample studiesA. Key findings: Demography studyThe first study examines the nature of the 21,397 privateequity transactions that could be identified between 1970and 2007, as well as the outcome of these transactions.The study had three broad goals. The first is to providedescriptive evidence on the growth and changing nature of theprivate equity market, going beyond the previous analysis of USgoing-private transactions. In the process, the research teambuilds the most comprehensive (to their knowledge) databaseto date on worldwide leveraged buyout (LBO) transactions,The Global Economic Impact of Private Equity Report 2008Executive summaryvii