Private Equity Does Not Sacrifice Long-term Growth
A new working paper* published by Harvard Business School rebuts the argument that private equity funds promote policies that boost short-run performance at the expense of more sustained long-term growth.
The paper investigated 495 transactions with a focus on one form of long-term activities, namely investments in innovation as measured by patenting activity.
The paper’s main findings:
- Firms pursue more influential innovations, as measured by patent citations, in the years following private equity investments.
- Firms display no deterioration in their research, as measured either by patent “originality” and “generality,” and the level of patenting does not appear to change after these transactions.
- There is some evidence that the patent portfolios become more focused in the years after private equity investments.
- The increase in patent quality is greatest in the patent classes where the firm has been focused historically and in the classes where the firm increases its patenting activity after the transaction.
Collectively, these findings are largely inconsistent with the hypothesis that private equity-backed firms sacrifice longrun investments. Rather, private equity investments appear to be associated with a beneficial refocusing of firms’ innovative portfolios.
*Private Equity and Long-Run Investment: The Case of Innovation
Josh Lerner, Morten Sørensen, and Per Strömberg
December 2008
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