core sector communique

Forum Study Finds No Evidence of Private Equity Investments Impacting Industry Volatility

• Industries with private equity activity experience more rapid growth, according to new Forum working paper
• Study finds moderate levels of government venture capital support can lead to positive enterprise performance while excessive levels could be detrimental
• Paper is part of Forum’s Globalization of Alternative Investments project, overseen by a distinguished Advisory Board and comprising research conducted by an international team of noted academics

New York, USA, 15 December 2009 – Industries with private equity activity grow more rapidly (as measured by total production, value added and employment) and experience no more volatility in the face of industry cycles than other industries. In some cases, industries with private equity activity are less volatile, particularly in terms of employment. This is according to a new World Economic Forum study, Globalization of Alternative Investments Working Papers Volume 3: The Global Economic Impact of Private Equity Report 2010, which is part of an exhaustive examination of the private equity industry’s impact on the global economy.

The working paper also finds that modest levels of direct and indirect government venture capital support (in conjunction with private funding) can help the performance of young enterprises. Public support seems most effective when provided at a national or international organization level.

The research project included an international team of noted academics led by Josh Lerner, Jacob H. Schiff Professor of Investment Banking at Harvard Business School.

“As private equity and venture capital investment continues to increase on a worldwide scale, many practitioners and observers desire a better understanding of the real impact of these capital flows on the global economy. To help provide answers, the World Economic Forum's research has utilized unique quantitative and qualitative analysis to measure private equity's impact on new innovation, productivity gains, job creation and returns for the institution’s private equity investors,” said Lerner and Anuradha Gurung, Associate Director, Investors Industries, World Economic Forum, co-editors of the Working Papers.

“The World Economic Forum's Working Papers provide new insight on the industry's ecosystem and lay out tangible evidence that, if structured appropriately, private equity is indeed a vital catalyst to sustained economic growth on a global basis,” added Joncarlo Mark, Senior Portfolio Manager, CalPERS, USA; Chairman, Institutional Limited Partners Association, and Member of the Advisory Board comprised of 15 global representatives from diverse sectors including banking, government, institutional investments and organized labour.

Dominique Senequier, Chief Executive Officer, AXA Private Equity, France, and Member of the Advisory Board, said: “The World Economic Forum research provides a very balanced view of how private equity and venture capital function. We hope that the results of these studies lead to a better recognition that private capital has a constructive role to play in the global economy.”

Key highlights from the research include:

I. Private Equity, Industry Performance and Cyclicality study
This paper looks at the macroeconomic impact of private equity by focusing on its impact on industry performance and cyclicality. The study examines the impact of private equity investments across 20 industries in 26 major OECD countries between 1991 and 2007. In particular, the researchers looked at the relationship between the presence of private equity investments and the growth rates of productivity, employment and capital formation.

• Industries where private equity funds have been active in the past five years grow more rapidly than other sectors, whether measured using total production, value added or employment. In industries with private equity investments, there are few significant differences between industries with low or high levels of private equity activity.
• Activity in industries with private equity backing appears to be no more volatile in the face of industry cycles than in other industries, and sometimes less so. The reduced volatility is particularly apparent in employment.
• The aforementioned patterns continue to hold in continental Europe, where concerns about these investments have been most often expressed.
• It is unlikely that these results are driven by reverse causality, i.e. private equity funds selecting to invest in industries that are growing faster or are less volatile. The results are essentially unchanged only if the impact on industry performance of private equity investments made between five and two years earlier is considered.

II. Governments as venture capitalists: Striking the Right Balance study
Governments from London to New Delhi are increasingly active in adopting policies to promote venture capital. This paper assesses the record of government support for venture capital, analysing over 28,800 enterprises based in 126 countries that received venture capital funding between 2000 and 2008.

The performance of enterprises financed by some form of government venture capital was compared with those supported by private venture capitalists to determine the impact of public involvement on performance.

• Enterprises with moderate (some but less than 50%) government venture capital (GVC) support outperform enterprises with only private venture capital support (no GVC support) and those with extensive (more than 50%) GVC support, both in terms of value creation and patent creation.
• GVC performance differs markedly, with GVCs associated with governments and international organizations showing stronger performance than those associated with sub-national (e.g. state, provincial) governments.

"We are grateful to our Advisory Board, chaired by Joseph L. Rice, III, Chairman of Clayton, Dubilier & Rice, for providing intellectual stewardship over the course of the World Economic Forum’s Globalization of Alternative Investments project. Given global concerns about job creation, reduction of systemic risk and the role of government stimuli going forward, the research undertaken in this third volume of Working Papers is being released at a very opportune time and will feed directly into the related discussions at the Forum’s Annual Meeting 2010 in Davos-Klosters,” said Max von Bismarck, Director and Head of Investors Industries, World Economic Forum.

In addition to Joseph L. Rice III, the Advisory Board included Wim Borgdorff (AlpInvest Partners), James W. Breyer (Accel Partners), Hareb Al Darmaki (Abu Dhabi Investment Authority), Nick Ferguson (SVG Capital and SVG Advisers), Emil W. Henry Jr (Tiger Infrastructure Partners and former US Assistant Secretary of the Treasury for Financial Institutions), Huh Yong-Hak (Hong Kong Monetary Authority), Michael Klein (former Chairman, Institutional Clients Group and Vice-Chairman, Citi), Joel Kurtzman (Kurtzman Group; Milken Institute and University of Pennsylvania), Joncarlo Mark (CalPERS and Institutional Limited Partners Association), Dominique Senequier (AXA Private Equity), Kevin Steinberg (World Economic Forum USA), David Swensen (Yale University), Mark Wiseman (CPP Investment Board) and John Zhao (Hony Capital).

Along with Professor Lerner, the research team included Shai Bernstein (Harvard Business School), James Brander (University of British Columbia Sauder School of Business), Qianqian Du (Shanghai Jiao Tong University Shanghai Advanced Institute of Finance), Thomas Hellmann (University of British Columbia Sauder School of Business, Morten Sørensen (Columbia Business School) and Per Strömberg (Swedish Institute of Financial Research and Stockholm School of Economics).

This working paper is the second of five related publications related to financial institutional issues that will be published over the coming months as part of the Financial Services and Investors Industry Partnership programmes. Together, these publications will give a broad range of proposals and insights into different elements of the crisis.

The views expressed in this volume of working papers are those of the authors and do not reflect the opinions of the World Economic Forum or the Advisory Board.

The World Economic Forum is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas.