Private Equity and Leveraged Buy-outs

06-11-2007

Executive Smmary The present study looks at a range of questions related to the social and economic consequences of private equity/LBO activity raised by the European Parliament. Overall, we find private equity to be a well-functioning, established industry that fulfils a crucial role in our economy by providing corporate financing and governance services for the efficient revitalization of underperforming mature businesses. Through long-term controlling investments, Private Equity Firms trigger predominantly growth-oriented changes in the acquired businesses with a positive impact on their short- and long-term competitiveness. Private Equity activity creates value beyond the pure effect of leverage. Historically, private equity funds have generated annual returns approximating 3% above the performance of broad stock market indices gross-of-fees. However the fee structure of Private Equity Firms is such that institutional investors in their funds are left with an average underperformance of 3% relative to these same broad stock market indices. We find no sign of a negative impact of buyouts on the growth or competitiveness of the sectors in which they occur. Also, there is no empirical support for the claim that Private Equity makes the financial and economic system less stable. Finally, we found no evidence of harmful conflicts of interest between Private Equity Firms and their advisors.

Executive Smmary The present study looks at a range of questions related to the social and economic consequences of private equity/LBO activity raised by the European Parliament. Overall, we find private equity to be a well-functioning, established industry that fulfils a crucial role in our economy by providing corporate financing and governance services for the efficient revitalization of underperforming mature businesses. Through long-term controlling investments, Private Equity Firms trigger predominantly growth-oriented changes in the acquired businesses with a positive impact on their short- and long-term competitiveness. Private Equity activity creates value beyond the pure effect of leverage. Historically, private equity funds have generated annual returns approximating 3% above the performance of broad stock market indices gross-of-fees. However the fee structure of Private Equity Firms is such that institutional investors in their funds are left with an average underperformance of 3% relative to these same broad stock market indices. We find no sign of a negative impact of buyouts on the growth or competitiveness of the sectors in which they occur. Also, there is no empirical support for the claim that Private Equity makes the financial and economic system less stable. Finally, we found no evidence of harmful conflicts of interest between Private Equity Firms and their advisors.