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Declan Buss

Eric Baker

English 102

25 February 2024

The Economic Implications of Private Equity

Introduction

Private equity and its effects have been a subject of controversy for some time within

finance. It is defined as a firm taking in capital via bonds (typically) from wealthy individuals or

corporations and then investing that capital into other companies. The private equity firm will

then usually have majority ownership of the target company and proceed with major changes.

Most of which is to maximize revenue and profit margin. They can do so with a few methods:

restructuring the company, changing the means of production, and changing the way the

financial structure is in the company, just to name a few. All of this is to turn around and sell it

within 5-10 years. Firms of this nature have been increasing over the years, bringing with them

consequences that hold both good and bad, as seen in their effects on employment, economic

growth, and environmental issues. Upon thorough examination of the research findings, it

becomes evident that the strategic allocation of capital in such firms yields significant and

positive impacts on both economic prosperity and individual welfare.

References

Davis, S. J., Haltiwanger, J. C., Handley, K., Lipsius, B., Lerner, J., & Miranda, J. (2019,

October). The (heterogenous) economic effects of private equity buyouts. National

Bureau of Economic Research.

https://www.nber.org/system/files/working_papers/w26371/w26371.pdf

The research paper, “The (Heterogenous) Economic Effects of Private Equity Buyouts”

by the National Bureau of Economic Research, explores the consequences of Private Equity and

Venture Capital buyouts of both public and private firms on the economy. The authors scrutinize

a few different key ideas pre-buyout and post-buyout. The research involves analyzing over nine

thousand different buyouts over the timeline of 1980 to 2013. They examine the productivity,

employment, lower GDP effects, and assess the effects of upscaling of PE deal flow. The paper

also notes that the authors evaluate the ramifications of these buyouts two years after the deal.

This comprehensive examination seeks to explore the various ways these buyouts have affected,

and possibly will affect the economy in the future. By scrutinizing many different aspects of

these buyouts coupled with the vastness of the research, the NBER can give valuable insight to

this topic. A particular section the paper addresses is the employment of these firms both before

and after the buying of these companies. Interestingly, if the firm is public, the labor force inside

the company decreases by 13%. As opposed to public, private companies boost employment by

13%. Efficiency is the main goal of these deals which the paper evaluates the outcomes of. The

intended audience of this research paper is policymakers and financial researchers. If there are

issues with the private equity process that negatively touch the economy, government officials

must know about it and change laws accordingly. For financial researchers, this information is

useful to know whether private equity firms or the target firms of these purchases are valuable or

not.
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Gatauwa, J. M., & Mwithiga, A. S. (2014, June). The Future of Finance: How Private Equity

and Venture Capital Will Shape the. European Journal of Business and Innovation

Research.

https://www.researchgate.net/profile/James-Gatauwa/publication/327014272_PRIVATE_

EQUITY_AND_ECONOMIC_GROWTH_A_CRITICAL_REVIEW_OF_THE_LITER

ATURE/links/5b72c43192851ca6505d1c99/PRIVATE-EQUITY-AND-ECONOMIC-

GROWTH-A-CRITICAL-REVIEW-OF-THE-LITERATURE.pdf

This journal, Private Equity and Economic Growth: A Critical Review of the Literature

by John Gatauwa and Anthony Mwithga, provides a more in-depth guide to the effects of private

equity finance. The paper first goes into relate the concept of Gross Domestic Product (GDP)

with the advancement of private equity. The author claims the increase of GDP requires

advancement of technology and entrepreneurial initiatives. Due to this, private equity in

developing parts of society with high growth potential is much more profitable and benefits the

economy more compared to that of a slow society. This leads to more private equity lending in

already profiting societies. After this is established, the research paper introduces Economic

Growth Models and Conceptual models that incorporate the lending of private equity and the

outcome for GDP growth. John Gautawau and Anthony Mwithga provide a conclusion at the end

of the paper discussing that because of the research they have reviewed, they have found private

equity to benefit the economy. They prove this by stating, “increased PE investment activity is

expected to contribute to PE investee firms enhancing their operating and financial capacities

therefore inducing economic growth” (Gatauwa, Page 7). This journal requires higher technical

knowledge of markets, giving the impression that this may not be for individual readers. It would
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make sense for a person already in finance to review this paper looking for information on

whether an increase in private equity deals may influence the economy in a good or bad way.

Paglia, J. K. (2012, July 31). The effects of private equity and venture capital on sales and

employment growth in small and medium-sized businesses. Journal of Banking &

Finance.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2479574

In the journal, The Effects of Private Equity and Venture Capital on Sales and

Employment Growth in Small and Medium-Sized Businesses by John Paglia, the author delves

into what influences not only Private Equity, but Venture Capital as well, have on smaller

companies. This is opposed to the buying of large, public firms that other works examine. To

push this further, the research paper also only evaluates companies that have not been

previously involved in “acquisitions or divestitures” (Paglia, Page 4) . Doing this can provide a

more concrete answer to the question as it is much easier to focus on the pure effects of a

private equity buy-out on these companies. In addition to this, the work by Paglia also finds

that firms owned by minorities are less likely to receive funding from these firms, thus further

impacting the potential for an increase in wage gap in the United States. Finally, the paper

analyzes research that focuses on companies that receive government contracts versus ones that

do not. It states that, although the “contracts themselves to not provide growth” (Paglia, 2012),

the consistent cash flow is appealing when looking for funding from firms. The Effects of

Private Equity and Venture Capital on Sales and Employment Growth in Small and Medium-

Sized Businesses is a great journal article for those looking to learn not only the

macroeconomic consequences of private equity but goes deeper into smaller sides of the
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market that people may not see. Due to this, I see this article being good for researchers and

policy makers to not only look at the big picture, but the smaller parts too.

Sorensen, M., & Yasuda, A. (2023). Impact of private equity. Handbook of the Economics of

Corporate Finance (forthcoming), 1.

https://nfa-net.jp/wp-content/uploads/2022/05/ProfessorAyakoYasudaPapers0530.pdf

From the Handbook in Economics, Morten Sorensen and Ayako Yasuda provide Impact

of Private Equity. The authors attempt to review research related to private equity and its effects

on the U.S. economy and the individual people inside the companies that are being lended to by

private equity firms. They approach the subject from two points: first is public-to-private deals

and second is private-to-private deals, examining the effects from both sides. Public-to-private

deals strive for maximizing operating margin while private-to-private deals look to maximize

revenue and growth potential within the company. Another point the authors evaluate is the

impacts on the current workers inside companies. The article gives the example of IT workers as

highly skilled employees that benefit from the rapid growth of the company while low skilled

workers are typically underpaid or fired due to the low need for them (Sorensen, 2023). Finally,

the paper reviews literature based on the Environmental, Social, and Governance (ESG) score. In

regulated or subsidized industries, the private equity market can exacerbate current distortions

and affect consumer experience in places like “healthcare, for-profit education, [and] insurance.”

(Sorensen, Page 38) The author’s purpose for writing this article seems to be clear. While private

equity does positively influence the economy, the investment must correlate with helping the

broader market, including the consumer. As the article states in the abstract, the intended
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audience for this writing is regulators. They must understand the power these private equity deals

hold and see the impact on not just the economy, but smaller parts within it.

Wright, M., Gilligan, J., & Amess, K. (2008, March 6). The economic impact of private

equity: what we know and what we would like to know. Taylor & Francis Online.

https://www.tandfonline.com/doi/epdf/10.1080/13691060802151887?needAccess=true

This article, The economic impact of private equity: what we know and what we would

like to know by Mike Wright, John Gilligan, and Kevin Amess, reviews many aspects of the

private equity business. Particularly, it looks at the controversial ways private equity creates

profitability and the repercussions associated with productivity; employment and wages; and the

effect of high leverage on failure rate. It does this by examining about 100 studies related to the

subject. A difference between this study and others is it looks at the way private equity firms

gain capital which may be a useful explanation for readers. It shows how much these companies

raise by issuing bonds to investors which can have risks associated with it long term, especially

if the buy-out does not profit. Another key point the authors review is the way these firms do

profit. One of the examples they use is the method of “asset stripping” (Wright, Page 1) these

companies illegally participate in to ensure rapid growth. The authors of this article are clearly

attempting to inform readers about the practices these firms are using. Although not criticizing

them, it is helpful for policy makers and people attempting to learn more about the subject to

read this paper. By explaining what private equity and venture capital is and their methods of

working, anyone can read this and be informed of what happens when these firms carry out their

business.
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Conclusion

The research is clear in that private equity does have major benefits to the market. Issues

arise when these firms forget they have to follow regulations and start to change items within the

target company that have major effects on things outside of it. As long as these firms consider

the consequences of major capital advances, private equity does have a positive impact on the

economy. Future research could be done about the difference in effects outside of the United

States. Countries outside of the United States have different economic conditions. There might

be a difference to the outcome of the companies because of this. Due to the rapid advancement in

technology and new products within the companies, the market can grow substantially, and life

can improve for the population.