The study also found that private equity investment spurred greater sales and productivity at acquired companies. Total sales of the companies studied increased at an average annual rate of 10.8 percent in the years after private equity acquisition, compared to the national average of 6.1 percent. Productivity, as measured by sales-per-employee, also rose significantly following the acquisitions.
The study was authored by Dr. Robert J. Shapiro, former Under Secretary of Commerce in the Clinton Administration and Chairman of Sonecon, LLC, and Dr. Nam D. Pham, founder and president of NDP Group, LLC. It is based on empirical data provided directly by eight major private equity firms to assess the economic impact of private equity on the U.S. economy.(1)
In January 2008, Shapiro and Pham released preliminary findings showing that acquisitions of large companies by private equity investors resulted in significant net gains in U.S. employment. Shapiro and Pham examined data from 42 large companies acquired by eight major private equity firms between 2002 and 2005 and found that overall worldwide employment rose from 310,420 to 336,634 between 2002 and 2007, a net increase of 8.4 percent. For 26 firms reporting data for U.S. employment, the number of U.S. employees increased 13.3 percent during the same period.
"Changes in capital expenditures are central to understanding the economic significance of private equity purchases and operations," said Shapiro. "Our analysis of large private equity-backed companies finds that private equity investment accelerates capital spending five to 12 times faster than the averages for all U.S. businesses."
"At a time when capital investment is likely to prove an important tool in helping to stimulate the economy, this study demonstrates that private equity investors historically have taken a long-range view by investing in the companies they own at a greater rate than their peers," said Private Equity Council President Douglas Lowenstein.
For the capital expenditure portion of the study, Shapiro and Pham examined data from 53 large companies acquired by eight major private equity firms between 2002 and 2005. The companies studied represent 76 percent of all acquisitions valued at $250 million or more made by the eight firms between 2002 and 2005, and nearly 73 percent of the total dollars invested in deals over the $250 million level in the period.
At the time of their acquisitions, the private equity-backed companies had lower average capital spending as a percentage of their sales – 4.4 percent – than the national average of 5.3 percent. Within three years of their acquisitions, the private equity-backed companies increased their capital spending rates to 7.9 percent of sales.
"Generally, increases in a company’s capital spending are undertaken to expand production and sales, either directly or indirectly," said Shapiro. "The data show that connection: In the years following their acquisitions, the large companies acquired by major private equity firms increased their sales, and at a rate nearly 60 percent greater than the average for all U.S. companies."
Productivity, or sales-per-employee, at 27 firms for which data was available increased at an average annual rate of 12.3 percent, compared to annual gains of 5.5 percent for all U.S. companies in this period. Within this group, both private equity-backed manufacturing and non-manufacturing companies reported gains of 12.3 percent a year, substantially higher increases than the annual 7.8 percent for all manufacturing firms and 5.4 percent per-year for all non-manufacturing concerns.
(1) The eight PE firms provided data on 70 companies acquired between 2002 and 2005 in transactions totaling $250 million or more, including 50 which they continued to own in 2007. The companies included 21 manufacturing enterprises and 49 non-manufacturing companies. At the time of the acquisitions, 29 of the 70 companies were privately-owned, 14 were publicly-traded companies, and 27 were subsidiaries of publicly-traded companies. The combined value of the 70 acquisitions was $144.5 billion. The average deal value was $2.2 billion.
