Private equity the way to promote EU growth – Frontier Economics report

As European leaders are urged to find ways to stimulate economic growth, a report from Frontier Economics highlights the extent to which private equity acts as a key driver of economic competitiveness and growth.

The report, commissioned by the European Private Equity and Venture Capital Association (EVCA), analysed more than 60 academic and professional studies, as well as publicly available data.

It found that private equity contributes to the creation of up to 5,600 new businesses in Europe annually, while venture capital investment directly leads to the creation of 2,800 new companies across Europe each year. In addition, a ‘spill-over’ effect caused by knowledge sharing, networking and inspiring role models leads entrepreneurs to create approximately 2,800 more businesses each year.

Private equity investment in innovation is up to nine times more effective than alternative sources of finance, and private equity activity leads to increased foreign investment, improvements in innovation, and enhanced productivity, the report says.

Jose Carbajo from Frontier Economics said the analysis identifies and helps quantify how private equity contributes to economic prosperity through multiplier effects associated with more innovation, operational improvements, productivity gains and increased exports.

“The broad base of evidence highlighting the linkages between private equity and these impacts suggests such activities can make a vital contribution to accelerating growth in Europe,” he said.

Other findings demonstrate that private equity attracts investible funds into Europe by providing risk capital. In the 12 largest private equity markets in Europe, almost €250bn was invested in more than 19,400 companies between 2007 and 2012. Of this, an estimated €50bn was raised from outside Europe.

The degree of innovation is indicated by the number of patents granted to private equity-backed firms, likely to be worth up to €350bn for ventures between 2006 and 2011. Private equity participation increases the number of patent citations by 25%, the report found.

With increased numbers of citations corresponding to greater economic value, this suggests private equity uses resources more effectively to deliver higher returns on investment. Such backing also led to improved productivity (measured by earnings before interest tax, depreciation and amortisation per employee) of some 6.9% in large private equity backed companies over a six year period.

Because of the robust business creation process, private equity backed firms are up to 50% less likely to fail than other funding models, the research found, and are more likely to be focused on internationalisation, where it can often provide funding and access to foreign markets.

Private equity backs a broad range of enterprises, 83% of which are small and medium-sized businesses, considered the engines of economic growth. Three of the top five sectors benefiting from private equity investment – business and industrial products, life sciences and communications – are capital intensive and typically receive significant investment in physical capital including infrastructure, machinery, buildings, and computers.

EVCA chairman Vincenzo Morelli commented: “In light of the economic challenges we face in Europe, these findings clearly demonstrate that private equity has an indispensible role to play in delivering responsible, stable investment to companies of all sizes across Europe, regardless of the economic cycle. Private equity drives the innovation, transformation and improvement in performance that can help European businesses survive, thrive and compete in the global economy.”

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