Key Takeaways
- • A European Central Bank study of virtually all Belgian businesses from 2002 to 2021 found that suppliers to private equity-acquired companies generally perform better, with around 8% higher sales and 4% higher employment across the post-buyout period.
- • The supplier gains reverse during economic downturns, when suppliers' markups fell by approximately 8%, suggesting customers secured lower prices or more favourable contract terms.
- • Competitors of private equity-backed firms face headwinds: a one-standard-deviation increase in exposure to shared suppliers was associated with 1% lower employment, 2% lower core earnings and 1% lower markups.
- • Researchers Olivier De Jonghe and Cédric Huylebroek recommend that competition authorities and central banks assess ownership changes across entire supply chains, not just acquired companies.
- • The authors warn that rising interest rates could push private equity-backed firms toward cost-cutting, tougher supplier negotiations and supply chain changes, spreading the impact beyond the directly affected businesses.
Summary
Private equity buyouts boost suppliers' sales and employment but intensify cost-cutting during economic downturns, according to research published by the European Central Bank (ECB). The study, by Olivier De Jonghe and Cédric Huylebroek, draws on data covering virtually all Belgian businesses between 2002 and 2021, including small private firms often missing from commercial supply chain databases. It examined company accounts, transactions and inter-business sales.
Following a buyout, acquired companies typically take on more debt but also grow faster than comparable businesses. Their suppliers benefit accordingly, recording around 8% higher sales and 4% higher employment across the post-buyout period. The researchers attributed these gains mainly to increased demand as private equity-backed companies buy more goods and services from existing suppliers. The benefits were strongest where acquired companies had greater room to expand, suppliers made up a larger share of their inputs, or the relationship was well established. The study found little evidence that knowledge transfer, R&D spending, skilled employment or trade credit explained the gains, and the effect of additional customers linked through the investor's network was relatively small.
The pattern reverses in downturns. Suppliers' markups fell by approximately 8%, suggesting customers secured lower prices or more favourable terms, which the researchers linked to stronger pressure to cut costs and meet debt obligations as sales and profits weaken. Suppliers of easily replaceable products and those in highly competitive industries faced the greatest pressure, particularly when dealing with larger, more experienced investors. Private equity-backed companies were also more likely to end supplier relationships during downturns.
Effects extend to competitors. As an acquired company expands, it may absorb more of a shared supplier's capacity, making supplies harder to secure for rivals. A one-standard-deviation increase in a competitor's exposure to shared suppliers was associated with 1% lower employment, 2% lower core earnings and 1% lower markups. The researchers said competition authorities and central banks should consider how ownership changes affect entire supply chains, and suggested regulators could use publicly disclosed supplier information to assess links between private equity targets and competitors before approving transactions.
The supplier benefits linked to higher demand were not observed among companies funded by bank debt, highlighting differences between bank lending and non-bank financing. The authors also warned that rising interest rates could have wider effects, as private equity-backed businesses, which tend to carry substantial debt, may abandon expansion plans in favour of cost-cutting, tougher supplier negotiations and supply chain changes.
Following a buyout, acquired companies typically take on more debt but also grow faster than comparable businesses. Their suppliers benefit accordingly, recording around 8% higher sales and 4% higher employment across the post-buyout period. The researchers attributed these gains mainly to increased demand as private equity-backed companies buy more goods and services from existing suppliers. The benefits were strongest where acquired companies had greater room to expand, suppliers made up a larger share of their inputs, or the relationship was well established. The study found little evidence that knowledge transfer, R&D spending, skilled employment or trade credit explained the gains, and the effect of additional customers linked through the investor's network was relatively small.
The pattern reverses in downturns. Suppliers' markups fell by approximately 8%, suggesting customers secured lower prices or more favourable terms, which the researchers linked to stronger pressure to cut costs and meet debt obligations as sales and profits weaken. Suppliers of easily replaceable products and those in highly competitive industries faced the greatest pressure, particularly when dealing with larger, more experienced investors. Private equity-backed companies were also more likely to end supplier relationships during downturns.
Effects extend to competitors. As an acquired company expands, it may absorb more of a shared supplier's capacity, making supplies harder to secure for rivals. A one-standard-deviation increase in a competitor's exposure to shared suppliers was associated with 1% lower employment, 2% lower core earnings and 1% lower markups. The researchers said competition authorities and central banks should consider how ownership changes affect entire supply chains, and suggested regulators could use publicly disclosed supplier information to assess links between private equity targets and competitors before approving transactions.
The supplier benefits linked to higher demand were not observed among companies funded by bank debt, highlighting differences between bank lending and non-bank financing. The authors also warned that rising interest rates could have wider effects, as private equity-backed businesses, which tend to carry substantial debt, may abandon expansion plans in favour of cost-cutting, tougher supplier negotiations and supply chain changes.
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