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INtRoDUCtIoN
In the past ew decades, the private equity industry hasgrown both in terms o size and geographic reach. Despitethe growing global impact o private equity, there is limitedresearch on these developments that stakeholders canreerence. It is, perhaps, not surprising that in markets asdiverse as China, Germany, South Korea, the UnitedKingdom and the United States, important questions havearisen about the impact o private equity on employment,managerial time-horizons, the overall health o companiesand the economy more generally.
ReSeARCH PRoJeCt oveRvIeW
While the leveraged buyout transactions o the 1980s werescrutinized in a number o important academic analyses, it is airto acknowledge that the studies examining buyouts 25 yearsago had two important limitations which the current researchhas attempted to address. First, the bulk o the older researchocused on a relatively small number o transactions in the USand, to a lesser extent, in the UK. But the buyout market todayis no longer primarily a US and UK phenomenon, as evidencedby this research. Non-US private equity has grown to be largerthan US private equity in the last ew years, with growth inContinental Europe being particularly pronounced. The secondlimitation o the older research on private equity relates to theact that the industry has grown and evolved since the 1980s. Almost all o the published studies have ocused on theindustry’s ormative years. The World Economic Forum’s research project on the“Global Eonomic Impact o Private Equity” sought to analyseprivate equity transactions, meaning equity investments byproessionally managed partnerships that involve leveragedbuyouts or other equity investments with a substantialamount o associated indebtedness (as opposed, orinstance, to venture capital investments in start-ups). The goal was to complete a rigorous study o the impact o these investments around the world, prepared by a tightlyorganized consortium o leading international scholars.
This volume o Working Papers comprises a series o (I) large-sample studies and (II) case studies.
 Several key choices were made at the outset o the project.Given the tight one-year time-rame or the research, theproject drew on already existing databases about the privateequity industry (such as Capital IQ, Dealogic and VentureXpert), as well as inormation rom complementarydatabases compiling inormation on such activities asbankruptcy, employment and patenting. Inevitably, this meantthat the large-sample studies in this volume o WorkingPapers ocused primarily on the most developed markets,with particular emphasis on the UK and US. It is our intentionthat this study serve as an initial eort, and that subsequenteorts will entail greater scrutiny o proprietary documentsrom market participants, as well as a greater ocus onemerging private equity sectors.
The large-sample studies covered the ollowing broad topics:
 the demography o private equity rms: the number,duration and outcomes o these transactions the willingness o private equity-backed rms to makelong-term investments, with a particular emphasis oninvestment in innovative activities the impact o private equity activity on the employmento existing establishments, as well as the tendency toopen new acilities the consequences o private equity investment or thegovernance o private rms The research team also complemented these studies witha variety o case studies, which examined these issues andothers. Refecting a desire to gain a more global perspective,these studies ocused on companies across a variety o geographies, with a particular emphasis on Germany, the UKand emerging private equity markets such as China and India.
I. KeY FINDINGS: LARGe-SAMPLe StUDIeS
 A. Key fndings: Demography study
 The rst study examines the nature o the 21,397 privateequity transactions that could be identied between 1970and 2007, as well as the outcome o these transactions. The study had three broad goals. The rst is to providedescriptive evidence on the growth and changing nature o theprivate equity market, going beyond the previous analysis o USgoing-private transactions. In the process, the research teambuilds the most comprehensive (to their knowledge) databaseto date on worldwide leveraged buyout (LBO) transactions,a)b)c)d)
excui summary
JoSH LeRNeR
Harvard Business School
 ANURADHA GURUNG
World Economic Forum USA
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 The Global Economic Impact o Private Equity Report 2008
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excutv summary
 The Global Economic Impact o Private Equity Report 2008
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which can be used or urther research o this phenomenon.Secondly, the study analyses the extent to which leveragedbuyout transactions are successully exited, and whether exitsuccess has varied across time periods, regions and dealcharacteristics. Thirdly, and most importantly, the study ocuseson the longevity, or “staying power”, o leveraged buyouts.
 Among the key fndings are the ollowing:
• Private equity investment activity has accelerated.More than 40% o the buyouts in the sample havetaken place since 1 January 2004. The total value o rms (both equity and debt) acquired in leveragedbuyouts is estimated to be $3.6 trillion over the sampleperiod, o which $2.7 trillion worth o transactionsoccurred between 2001 and 2007.• Public-to-private transactions, which have been the ocuso earlier buyout research and media attention, onlyaccount or 6.7% o all transactions. Measured in termso dollar value, public-to-private transactions represent28% o the rms acquired. The vast majority o buyoutsare acquisitions o private rms and corporate divisions.• Non-US private equity activity has grown to be largerthan that o the US in the last ew years. The growtho Continental European buyouts has been particularlypronounced. Still, LBO transactions outside North America and Western Europe are relatively ew andonly account or approximately 12% o global LBOtransactions in number and 9% in value over theperiod rom 2001 to 2007.• The caricature o buyouts occurring in old and decliningindustries does not refect the rise o buyout activity inhigh-growth, “high-tech” sectors in the last decade. Inact, buyouts have always taken place in a wide rangeo industries, although mature industries such aschemicals, machinery and retailing still providepopular buyout targets.• IPOs account or 13% o private equity investment exits,and this exit route seems to have decreased in relativeimportance over time. The most common exit route is tradesales to another corporation, accounting or 39% o allexits. The second most common exit route is secondarybuyouts (24%), which have increased in importance overthe last decade consistent with anecdotal evidence.• 6% o buyout transactions end in bankruptcy or nancialrestructuring. While this number implies a lower successrate compared to bankruptcy rates among US publiclytraded rms, it also suggests that buyouts have a loweraverage deault rate than US corporate bond issuers, andsubstantially lower than the deault rates among average junk bond issuers.• Private equity investors have a long-term ownership bias.58% o the private equity unds’ investments are exitedmore than ve years ater the initial transaction. So-called“quick fips” (i.e. exits within two years o investment byprivate equity und) account or 12% o deals and havedecreased in the last ew years.• The number o businesses operating under private equityownership has grown rapidly. The number o rmsentering LBO status has been substantially higher thanthe number o rms leaving LBO status over time everyyear since 1970. As a result, at the beginning o 2007,close to 14,000 rms worldwide were held in LBOownership, compared to ewer than 5,000 in 2000and ewer than 2,000 in the mid-1990s. The LBOorganizational orm seems more long term thantemporary: almost 40% o all LBOs remain in thisorganizational orm 10 years ater the original leveragedbuyout was announced. In addition, the length o timerms remain private has increased in recent years.
B. Key fndings: Long-run investment study
 This study was motivated by the lively debate about theimpact o private equity investors on the time horizons o thecompanies in their portolios. The private status, accordingto some, enables managers to proceed with challengingrestructurings without the pressure o catering to themarket’s demands or steadily growing quarterly prots,which can lead to rms ocusing on short-run investments.Others have questioned whether private equity-backedrms take a longer-run perspective than their public peers,pointing to practices such as special dividends to equityinvestors. They suggest private equity investors are likelyto encourage steps that boost short-run perormance atthe expense o sustained corporate growth.In this study, one orm o long-run investment was examined:investments in innovation. Innovation oers an attractivetesting ground or the issues delineated above due to variousactors. These actors include the long-run nature o R&Dexpenditures, their importance to the ultimate health o rmsand the extensive body o work in the economics literaturethat has documented that the characteristics o patentscan be used to assess the nature o rms’ technologicalinnovation. Moreover, patents can be used to study bothpublic and private rms, which is important when studyingprivate equity transactions. The authors examine the impact o private equity investment onthe patenting behaviour o 495 rms worldwide with at least onesuccessul US patent application led rom three years beore tove years ater a later-stage private equity investment.
Key fndings include:
• Firms that undergo a buyout pursue more economicallyimportant innovations, as measured by patent citations,in the years ater private equity investments. In a baselineanalysis, the increase in the key proxy or economicimportance is 25%.
 
• Private equity-backed companies maintain comparablelevels o cutting-edge research. Post-buyout, thesebusinesses display no deterioration in the extent towhich their research is basic or undamental, asmeasured by patent originality and generality.• The quantity o patenting does not appear tosystematically change ater private equity transactions.• Innovation becomes more targeted post-buyout. The patent portolios o rms become more ocusedin the years ater private equity investments.• Private equity-backed rms concentrate on coretechnologies. The increase in patent importance, asdenoted by patent citations, is greatest in the patentclasses where the rm has had its historic ocus and whereit increases its activities ater the private equity investment.
C. Key fndings: Employment study
 The impact o private equity on employment arousesconsiderable controversy. Critics have claimed huge joblosses, while private equity associations and other groupshave released several recent studies that claim positiveeects o private equity on employment. While eorts to bringdata to the issue are highly welcome, many o the priorstudies have signicant limitations, such as the reliance onsurveys with incomplete responses, an inability to control oremployment changes in comparable rms, the ailure todistinguish cleanly between employment changes at rmsbacked by venture capital and rms backed by other ormso private equity, diculties in disentangling organic jobgrowth rom acquisitions, divestitures and reorganizationsat rms acquired by private equity groups, and an inabilityto determine where jobs are being created and destroyed.In this study, the research team constructed and analyseda dataset in order to overcome these limitations and, at thesame time, encompass a much larger set o employers andprivate equity transactions. This study examines US privateequity transactions rom 1980 to 2005. The study utilizes theLongitudinal Business Database (LBD) at the US Bureau o the Census to ollow employment at virtually all privateequity-backed companies in the US, beore and ater privateequity transactions. Using the LBD, it was possible toanalyse employment at both the rm level and establishmentlevel. Establishments in this context means the specicactories, oces, retail outlets and other distinct physicallocations where business takes place. The LBD covers theentire non-arm private sector and includes annual data onemployment and payroll or about 5 million rms and 6 millionestablishments, including 5,000 US rms (target rms) and300,000 establishments (target establishments) that were thesubject o a buyout. Employment at target establishmentswas tracked or ve years beore and ater the private equitytransaction, irrespective o whether these establishments areowned and operated by the target rm throughout the entiretime period around the private equity transaction. Each targetrm and each target establishment is matched against otherrms and other establishments that are comparable in termso industry, age and size. These comparable rms andestablishments served as the control group.
 Among the key results were:
• Employment grows more slowly at target establishmentsthan at the control group in the year o the private equitytransaction and in the two preceding years. The averagecumulative employment dierence in the two years beorethe transaction is about 4% in avour o controls.• Employment declines more rapidly in targetestablishments than in control establishments in the wakeo private equity transactions. The average cumulativetwo-year employment dierence is 7% in avour o controls. Just as was the case beore the private equitytransaction, growth at controls is higher in the three yearsater the private equity transaction. In the ourth and thyears ater the transaction, employment at private equity-backed rms mirrors that o the control group.• Post-transaction, buyout establishments seem to createroughly as many jobs as peer group establishments.Gross job creation (i.e. new employment positions) inthe wake o private equity transactions is similar intarget establishments and controls. The dierencein net employment is attributable to higher gross jobdestruction rates in targets.• Firms backed by private equity have 6% more greeneld job creation than the peer group. Greeneld job creation inthe rst two years post-transaction is 15% o employmentor target rms and 9% or control rms. It appears thatthe job losses at target establishments in the wake o private equity transactions are partly oset by substantiallylarger job gains in the orm o greeneld job creation bytarget rms.
D. Key fndings: Governance study
 The nal study examines the boards o companies whichhave been taken rom public to private ownership to learnmore about the governance model o private equity investors. There has been almost no scrutiny o these boards orcomprehensive analysis o how they dier systematicallyrom those o public companies. This study constructs a new dataset, which ollows the boardcomposition o all public-to-private transactions in the UKrom 1998 to 2003. Out o 142 such transactions, 88 weresponsored by at least one private equity und. The researchteam looked at the change in the composition o the boardwhen the company became private and any subsequentchange throughout the period in which the private equityund was still involved. The public-to-private transactionswere compared to private equity transactions where therewas no private equity sponsor: i.e. pure management buyouts(MBOs), or buyouts backed by non-nancial sponsors.
excutv summary
 The Global Economic Impact o Private Equity Report 2008
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