Private Equity: Barbarians at the Gate?

The recent collapse of Dutch department store V&D has lead to much controversy again about the effects of private equity firms on the overall market. This study examines the effect of private equity on the economic growth to provide a concrete example on the effects of private equity in line with the goal of the European Private Equity & Venture Capital Association (EVCA). Using a dataset of 21 European countries from 1989-2014, I find strong evidence that private equity investments promotes economic growth in Europe. Specifically, I find evidence that an increase in private equity investments by 1% increases the economic growth by 1.9% to 2.8%. Furthermore, the results are robust to different specifications and after controlling for endogeneity using an instrumental variable approach. This study therefore contributes to both the existing literature and the field of private equity in practice. This study is one of the first papers to use European data and to empirically examine the direct effects of private equity on economic growth. Furthermore, private equity firms and the EVCA can use the results of this paper to revise the image of the private equity industry.