Research Archive

Private Equity, Industry Performance and Cyclicality

Shai Bernstein, Morten Sorensen, J. Lerner, Per Strömberg

Publication type: Working paper

Research Archive Topic: Business Economics and Public Policy, Corporate Finance, World Business

Abstract

In response to the global financial crisis that began in 2007, governments worldwide are rethinking their approach to regulating financial institutions. Among the financial institutions that have fallen under the gaze of regulators have been private equity (PE) funds (see, for instance, European Commission (2009)). There are many open questions regarding the economic impact of PE funds, many of which cannot be definitively answered until the aftermath of the buyout boom of the mid-2000s can be fully assessed.

This paper addresses one of these open questions, by examining the impact of PE investments across 20 industries in 26 major nations between 1991 and 2007. We focus on whether PE investments in an industry affect aggregate growth and cyclicality. In particular, we look at the relationship between the presence of PE investments and the growth rates of productivity, employment and capital formation. For our productivity and employment measures, we find that PE investments are associated with faster growth. One natural concern is that this growth may have come at the expense of greater cyclicality in the industry, which would translate into greater risks for investors and stakeholders. Thus, we also examine whether economic fluctuations are exacerbated by the presence of PE investments, but we find little evidence that this is the case.

The full private equity report may be viewed on the World Economic Forum site.


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Citation

Bernstein, Shai, Morten Sørensen, Josh Lerner, and Per Strömberg. "Private Equity, Industry Performance and Cyclicality." In Globalization of Alternative Investments Working Papers Volume 3: The Global Economic Impact of Private Equity Report 2010. Ed. Anuradha Gurung and Josh Lerner. Geneva: World Economic Forum, 2009.


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