Key Takeaways
- • Private equity assets under management in the euro area are growing at annual rates above 10%, according to the European Central Bank, which is making PE's indirect effects on the wider economy more important to monitor.
- • Using near-complete Belgian firm data, ECB economists Olivier De Jonghe and Cédric Huylebroek find that suppliers' sales volumes grow faster when a larger share of their business comes from PE-backed customers.
- • The supplier advantage disappears during downturns, when PE investors press portfolio companies for cost savings.
- • Buyouts can crowd out competitors that rely on the same suppliers, raising competition policy considerations.
- • Higher leverage in PE-backed firms increases interest rate sensitivity, so buyouts may amplify the transmission of monetary policy to target firms and their production networks.
Summary
The European Central Bank has published research examining how private equity buyouts affect businesses beyond the acquired company itself. The authors, Olivier De Jonghe and Cédric Huylebroek, note that the importance of PE for euro area firms is rising, with annual growth rates in PE funds' assets under management exceeding 10%.
Consistent with earlier studies, the authors find that after a PE buyout, the financial leverage of target firms rises significantly and these firms grow faster than matched control firms. Target firms also outperform their peers more strongly during economic downturns, a pattern the authors attribute to the potentially greater value of PE investors' managerial expertise in difficult conditions. Prior research cited by the authors, including Davis et al. (2014), has documented effects on jobs and productivity at bought-out firms.
The article's central argument is that buyouts affect the wider production network. Using Belgian data covering virtually all firms in the country, the authors show that suppliers' sales volumes grow faster when a higher proportion of their business is with PE-backed customers. That advantage, however, is lost during downturns, as PE investors press for cost savings. The authors also warn that buyouts can crowd out competitors that depend on the same suppliers, a development with implications for competition policy.
Finally, the authors highlight the monetary policy dimension. Because PE-backed firms carry high leverage, they are more sensitive to interest rate changes. The authors conclude that PE buyouts can therefore intensify the transmission of monetary policy to target firms and beyond.
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Consistent with earlier studies, the authors find that after a PE buyout, the financial leverage of target firms rises significantly and these firms grow faster than matched control firms. Target firms also outperform their peers more strongly during economic downturns, a pattern the authors attribute to the potentially greater value of PE investors' managerial expertise in difficult conditions. Prior research cited by the authors, including Davis et al. (2014), has documented effects on jobs and productivity at bought-out firms.
The article's central argument is that buyouts affect the wider production network. Using Belgian data covering virtually all firms in the country, the authors show that suppliers' sales volumes grow faster when a higher proportion of their business is with PE-backed customers. That advantage, however, is lost during downturns, as PE investors press for cost savings. The authors also warn that buyouts can crowd out competitors that depend on the same suppliers, a development with implications for competition policy.
Finally, the authors highlight the monetary policy dimension. Because PE-backed firms carry high leverage, they are more sensitive to interest rate changes. The authors conclude that PE buyouts can therefore intensify the transmission of monetary policy to target firms and beyond.
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