Research and conclusions

Research was conducted by dr Jeroen E. Ligterink, dr Jens K. Martin, prof. Arnoud W.A. Boot (all University of Amsterrdam), prof. Kees Cools (Tilburg University) and prof. Ludovic Phalippou (University of Oxford).

Private equity firms have become increasingly important in society. The pro and cons of this type of ownership and governance model dominate this debate. How should we look at private equity? Does it help companies prosper, and benefit economic growth in general?

This publication, Private equity: een stakeholder-perspectief, a study is written on request of the Dutch Ministry of Finance and provides a nuanced overview of the current status quo of the research in this field, and the actual practices in the Netherlands. It focuses on corporate buy-outs (the typical manifestation of private equity apart from venture capital).

The study observes that private equity firms have an active role in the firms in which they invest. They actively engage with management compared to other investors, often for periods longer than 5 years. Typically, private equity also operates via securing more hands-on and knowledgeable non-executive directors. The report also highlights the role that leverage plays. The authors conclude that while negative incidents exist, typically a more productive picture emerges. Nevertheless, painful reorganizations for stakeholders (including employees) are no exception, and the possibility of inherent conflicts of interest should not be ignored. What this implies is that the returns that PE investors realize not just reflect possible true value creation (better performance etc.), but also redistributions of wealth at the expense of other stakeholders (including exploiting the favorable tax treatment of debt via higher leverage).

An important caveat to this study is that lack of data is a concern, and makes that the results should be interpreted as conclusive evidence on the value creation of private equity. Firms change considerably under private equity ownership (via mergers & acquisitions and divestitures) and selection biases are not easy to control for, also due to a lack of data. There is a need for more specific data at the firm level to facilitate a more complete analysis of the overall effects of private equity on performance. 

Both the report and management summary (both in Dutch) are available for download through the links below.