The Real Effects of Private Equity Buyouts: A Meta-Analysis

Abstract

Using a meta-analytical approach, this study reviews the fragmented and contradictory empirical literature on the real effects of private equity (PE) on their portfolio companies, focusing on postbuyout operating performance and employment. Based upon 330 samples including 403,820 firms, we find a positive PE effect on operating performance in the medium-to-long term, but no effect on employment. Interestingly, performance gains are stronger in private-to-private buyouts compared to public-to-private buyouts. Countries with strong investor protection laws or with individualistic cultures facilitate larger operating performance gains, while employees are better off in countries with more stringent employee protection laws or with collectivistic cultures.

How private equity-backed buyout contracts shape corporate governance

“…Interestingly, more recent contracts employ more high-leveled outcome-based cash flow rights for management in case of overperformance. This is consistent with the observation that PE investors increasingly seek to grow their portfolio companies and unleash their entrepreneurial potential, rather than narrowly focusing on creating shareholder value through efficiency enhancements (Verbouw et al, 2021).…”

“…In contrast, recent transactions include more frequently an envy ratio (36% of the contracts) or ratchets (50% of the contracts). As such, PE-backed buyouts place more emphasis on rewarding management in case of overperformance, which is in line with the enhanced focus of PE investors on growth, next to efficiency (Meuleman et al, 2009;Verbouw et al, 2021).…”

“…PE investors aim to earn a financial return through intermediate cash flows like dividends or interest payments and through selling their shares at a capital gain upon exit. The latter is achieved through financial engineering, but also through enhancing the value of the company (Verbouw et al, 2021). PE investors typically aim to sell their stakes after 3 to 7 years.…”

“…While PE investors typically target mature companies for their buyout transactions, they increasingly foster an entrepreneurial mindset in their portfolio companies through their active involvement (Meuleman, Amess, Wright, & Scholes, 2009). They thereby limit agency risks, which ultimately leads to both efficiency enhancements and growth in their portfolio companies (Verbouw, Meuleman & Manigart, 2021). This balance is achieved through shaping the corporate governance of their portfolio companies, i.e., the system of rules, practices, and processes by which a firm is directed and controlled, amongst others (Gompers, Kaplan, & Mukharlyamov, 2016).…”

A meta-analysis on private equity technology-driven value creation

“…J. Verbouw et al (2021) investigate the impact of PE on their portfolio companies. The study focuses on the impact on operational activities, as well as employment after the buyout.…”