New research on private equity buyouts has identified another way in which PE ownership adds value: by pushing portfolio companies to export more.
Private equity buyouts increase the probability, value, and impact of exporting in target companies, according to the study from authors Paul Lavery, Jose-Maria Serena, Marina-Eliza Spaliar, and Serafeim Tsoukas. Lavery, Spaliar, and Tsoukas are academic researchers at the University of Glasgow, while Serena is an economist at the Bank for International Settlements in Switzerland.
Their study, which focuses on private equity buyouts and their effect on target firms’ exporting, found that private equity owners have a positive effect on exporting infrastructure, therefore improving the overall performance of their portfolio companies. Private equity investors are able to loosen credit constraints, meaning their target companies are subject to fewer “distortions.” This matters because access to financing is “critical” for export activities, the authors said, citing previous research.
Exporting is important to the survival of companies amid economic crises, according to the paper. With private equity support, exporting firms receive strategic advice, financial help, and industry specialization. Private equity firms also tend to be globally connected, which creates an opportunity for target companies to expand their services to overseas markets, the authors said.
“Private equity ownership is having a positive impact on firms’ exports, the probability of exporting, and the value of the export, i.e. how much they're exporting,” Lavery said in an interview with Institutional Investor. “We’re really shining a light on a new area on how private equity adds value to firms.”
For the study, the researchers gathered a sample set of non-financial firms operating in the United Kingdom from from 2004 to 2017. They then compared the exporting performance of 733 private-equity-backed companies to the performance of 3,104 “control” companies without PE backing.
Lavery and his co-authors then divided the sample set into groups based on deal types and firm characteristics. They found that private equity’s positive impact on exporting was driven by private-to-private buyouts, not public-to-private deals. They argued that this is because firms targeted by take-private transactions had better access to capital markets in the pre-buyout period, adding that private equity ownership was more beneficial for “financially constrained” portfolio companies.
“This finding implies that the availability of outside capital through private equity investment plays an important role when markets face higher trade costs and exporters require more external finance to meet these costs,” the researchers concluded.