New research highlights the extent to which private equity positively influences several key drivers of European economic competitiveness and growth.
The findings, produced by Frontier Economics, show that private equity activity leads to increased foreign investment, improvements in innovation, and enhanced productivity.
The economic impact created by private equity supports the strategic priorities of the EU’s growth plan, Europe 2020, as a result of the following:
Private equity attracts investible funds into Europe providing much needed risk capital for businesses. In the 12 largest private equity markets in Europe, private equity invested almost EUR250bn in more than 19,400 companies between 2007 and 2012. Of this, an estimated EUR50bn was raised from outside Europe.
Private equity builds businesses that are more innovative than non-private equity backed firms. Patents granted to private equity-backed businesses between 2006 and 2011 are likely to be worth up to EUR350bn. Private equity participation increases the number of patent citations by 25 per cent. With increased numbers of citations corresponding to greater economic value, this suggests it uses resources more effectively to deliver higher returns on investment. In some sectors, private equity finance can be up to nine times more effective than non-private equity financing.
Private equity boosts productivity by improving management, operational expertise and production processes. Private equity backing also leads to improved productivity (measured by EBITDA (earnings before interest tax, depreciation and amortisation) per employee) of 6.9 per cent in large private equity backed companies over a six year period.
Private equity contributes to the creation of up to 5,600 new businesses in Europe annually. Venture capital investment directly leads to the creation of 2,800 new companies across Europe each year. In addition, a spill-over effect – caused by knowledge sharing, networking and inspiring role models – leads would-be entrepreneurs to create approximately 2,800 more businesses each year.
These findings are among the most significant to emerge from the secondary research report which analysed more than 60 academic and professional studies, as well as new analysis of publicly available data. Commissioned by the European Private Equity and Venture Capital Association (EVCA), the study is based on a unique framework created by Frontier Economics to define the various activities private equity undertakes, the measurable improvements achieved in portfolio companies, and quantification of the collective impact produced.
Private equity creates robust, resilient businesses. Such businesses are at least as resilient as businesses under other forms of ownership and with similar characteristics, with some studies suggesting private equity-backed businesses are up to 50 per cent less likely to fail than comparable, non-private equity backed businesses.
Private equity backed companies are more focussed on internationalisation. Although it is limited in scope, existing evidence points to private equity having a potentially significant role in supporting firms’ internationalisation efforts. It does this through providing strategic and operational guidance for portfolio companies on entering foreign markets as well as directly funding them.
Private equity backs a broad range of businesses, 83 per cent of which are small and medium-sized businesses – the engines of economic growth. Three of the top five sectors benefiting from private equity investment – business and industrial products, life sciences and communications – are capital intensive and typically receive significant investment in physical capital including infrastructure, machinery, buildings, and computers.
Dr Jose Carbajo from Frontier Economics says: “This report helps to identify and quantify the contribution of private equity to economic prosperity in Europe, through multiplier effects associated with more innovation, operational improvements, productivity gains and increased exports. The broad base of evidence highlighting the linkages between private equity and these impacts suggests such activities can make a vital contribution to accelerating growth in Europe.”
Vincenzo Morelli, EVCA chairman, says: “In light of the economic challenges we face in Europe, these findings clearly demonstrate that private equity has an indispensable role to play in delivering responsible, stable investment to companies of all sizes across Europe, regardless of the economic cycle. Private equity drives the innovation, transformation and improvement in performance that can help European businesses survive, thrive and compete in the global economy.”
