Private equity buyouts currently focus on growing their portfolio companies, which in turn leads to a growth in employment, according to new research from Vlerick Business School. Previously, companies purchased by private equity firms tended to enhance their efficiency as opposed to growth.
Private equity buyouts have often had a bad press, seen as a predatory practice that creates value for shareholders at the expense of employees and other stakeholders. However, these findings showcase that private equity buyouts are currently a catalyst for growth.
This research was conducted by Sophie Manigart and Miguel Meuleman, Professors at Vlerick Business School, alongside Ph.D. researcher Jeroen Verbouw, who were interested in understanding the true impact of private equity-backed buyouts, focusing on the effects on companies themselves, rather than on investors.
In order to understand this impact, the researchers reviewed the literature on private equity buyouts on a firm’s efficiency, growth and employment. To do so, the researchers explored 412 samples from 68 independent studies, covering 481,609 companies over 47 years in all regions of the world.
The study found that in the previous century, efficiency enhancement was the dominant way to create shareholder value. Nowadays, portfolio companies grow more strongly than before the buyout, also compared with their peers.
The researchers further examined the outcome of these private equity buyouts in different regulatory, legal, cultural, and economic environments. Post-buyout growth increases most in countries with investor-orientated regulation, well-developed financial markets or with individualistic culture. The researchers also found that post-buyout employment increases in countries with strong employment protection laws but decreases in countries with more individualistic cultures.
Professor Manigart comments: “Negative perceptions of buyouts have persisted in the popular press, with many believing private equity companies act as vultures, stripping a company of assets, and boost shareholder value. While this might have been the dominant private equity model in the previous century, this is not the case anymore.
"Our research showcases that private equity helps to grow portfolio companies and make them stronger. This leads to boosting employment too. While the employment base might be restructured when buying the companies, ultimately this will be followed by an increase in employment.”
The findings clearly show that the common perception of private equity companies being corporate raiders who sell off parts of companies, is wrong. The private equity model has shifted over time and now, private equity buyouts are an entrepreneurial phenomenon that spurs on strategic growth and development.