What are the general findings of this study and what makes it groundbreaking compared to other studies of private equity inflows?
MH and JP: Our study focuses on single-entity business establishments (firms), allowing us to cleanly measure the impact of private equity and venture capital investments on these firms’ organic sales and employment growth. By examining single-entity firms, we remove the confounding growth effects that come from acquisitions and divestitures as well as growth from arms-length subsidiaries that are aggregated into a corporate entity. We isolate the pure impact of PE and VC funding on a firm’s internal growth rate measured by the firm’s annual revenue and number of employees. Additionally, we examine smaller firms than in previous studies: In our study, the medians of annual net sales and number of employees are $3.5 million and 40 employees, respectively. So using the Small Business Administration’s definition, our study focuses on small- to medium-sized private businesses that represent 63 percent of net new private sector jobs, 48.5 percent of private sector employment and 46 percent of private sector output.
What is private equity’s impact on mid-sized companies’ sales and employment growth, compared to capital infusions from venture capital firms?
MH and JP: We find there are fundamental differential impacts between private equity versus venture capital financing on net sales and employment growth in terms of the timing and the long-lasting impact. The positive impact of PE financing materializes one year after the firms receive funding and persists for three years after funding. In contrast, the positive impact of VC funding is realized immediately after a firm receives funding and lasts for two years. We believe that it takes some time for private equity firms to execute their strategies to propel their targets’ growth; in contrast, venture capital can immediately influence companies’ potential growth since VC targets are more likely capital-constrained. However, the duration of the impact of VC funding tends to be shorter compared to PE funding. This led to the phenomenon that we observe in the market of multiple rounds of VC funding compared to fewer rounds of PE funding.