06 January 2010

World Economic Forum report on globalization of alternative investments

This study aims to determine whether private equity investments in an industry affect aggregate growth and cyclicality. Key findings include that industries where private equity funds have been active grow more rapidly than other sectors in terms of total production, value added or employment.

This paper looks at the macro-economic impact of private equity by focusing on its impact on industry performance and cyclicality. This study examines the impact of private equity investments across 20 industries in 26 major OECD nations between 1991 and 2007.

The main goal of the study is to determine whether private equity investments in an industry affect aggregate growth and cyclicality. In particular, the researchers look at the relationship between the presence of private equity investments and the growth rates of productivity, employment and capital formation.

Among the key findings are the following:

• Industries where private equity funds have been active in the past five years grow more rapidly than other sectors, whether measured using total production, value added or employment. In industries with private equity investments, there are few significant differences between industries with a low and high level of private equity activity.

• 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 reduced volatility is particularly apparent in employment.

• The aforementioned patterns continue to hold in continental Europe, where concerns about these investments have been most often expressed.

• It is unlikely that these results are driven by reverse causality, i.e. private equity funds selecting to invest in industries that are growing faster and/or are less volatile.

The results are essentially unchanged if we only consider the impact on industry performance of private equity investments made between five and two years earlier.

• Industries with private equity activity experience growth more rapidly (as measured by total production, value added and employment) and are no more volatile in the face of industry cycles than other industries. In some cases, industries with private equity activity are less volatile (as evidenced in terms of employment).

• Modest levels of direct government venture capital support and indirect encouragement (e.g., through subsidies and tax concessions), in conjunction with private financing, could potentially augment the performance of young enterprises. Public support seems most effective when provided at a national or international organization level.

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