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Kenan Institute 2022 Annual Theme: Stakeholder Capitalism
Market-Based Solutions to Vital Economic Issues
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Sep 4, 2019

Institute Insights: Private Equity in the Global Economy: Evidence on Industry Spillovers

Featuring research by Kenan Institute Executive Director and UNC Kenan-Flagler Business School Professor of Finance Greg Brown and George Mason University Assistant Professor of Finance Serdar Aldatmaz

Private equity investments have risen dramatically during the last two decades, not only in developed countries but in developing economies as well. Several studies have found evidence of improvement in firm performance following a private equity (PE) transaction, but surprisingly little is known about the implications of PE transactions for the economy – particularly the global economy.

My colleague Serdar Aldatmaz, assistant professor of finance at the George Mason University School of Business, and I analyzed $1.9 trillion of global PE investments in 19 industries across 52 countries from 1990 to 2017 to determine the impact of PE on industry dynamics. By focusing on aggregate industry measures of publicly listed companies, we were able to identify spillovers from PE-backed companies to the other companies within the same industry.

Our analysis found that employment growth, profitability growth and labor productivity growth all increase across the public companies in an industry following PE investments, and that industry-level capital expenditures grow faster as well.

On average, following a one standard deviation increase in the amount of PE capital invested (adjusted by industry sales), employment growth increases by 0.6%, labor productivity growth increases by 0.8%, and profitability growth increases by 2.9% within one year. These effects are economically large – each is on the order of a one standard deviation increase in aggregate growth rates.

Consistent with prior literature on competitive spillovers, these effects are more pronounced in country-industries with higher levels of competition, stronger institutions and moderate levels of technological development, suggesting that the competitive pressures from private equity-backed firms cause industry peers to react.

The PE industry has been criticized for its impact on the companies in which it invests. The results of our research present a more complete picture of the implications of PE for the global economy, and suggest that there are positive global economic benefits that come from PE investment.
Read the full paper, here.

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