In the great debate over whether private equity adds value or is a scourge, new research from the University of Glasgow and Leeds University Business School adds credence to the former.
The research compared over 1,500 U.K. companies PE firms owned when the pandemic started with their private market counterparts. Their data show that private equity-backed firms beat their unsponsored peers in sales, assets, head count and other KPIs during the pandemic period of 2020-2021, Institutional Investor reported. During the time period studied, “sales at PE-owned companies increased 6 percent more than at other private companies, while total assets rose 10% more.”
The reason? The network effect – the same theory we have used to build Tompkins Ventures. According to Metcalfe’s Law, the value of a network is proportional to the square of the number of connected users in the network. From an organizational perspective, the larger your network, the greater the value of your network.
Private Equity firms have powerful, far-flung networks that can provide their companies access to capital markets, credit lines, managerial skills, turnaround experience and business relationships. Injections of capital and operational improvements allowed portfolio firms to move quickly and act with more agility than their public counterparts.
The downside? Easy access to capital could spur excessive borrowing, as 3.2% of PE-owned firms filed for insolvency, compared to just 1.1% of the control group.
Study co-author Paul Lavery (University of Glasgow) told Institutional Investor that an economic downturn, which everybody has been predicting for years, could make for a target-rich environment for PE firms. “A recession can make for decent acquisition opportunities, often at lower multiples,” he said. “[But] funds need to balance ensuring the safety and survival of current portfolio with looking for new opportunities.”