Private equity buyouts can boost suppliers’ sales and employment but also intensify cost-cutting during economic downturns, with wider consequences for competition and the effects of interest rate changes, according to research published by the European Central Bank (ECB).
The study, based on data covering virtually all Belgian businesses between 2002 and 2021, found that suppliers serving companies acquired by private equity investors generally perform better than comparable businesses, although these gains can disappear when economic conditions deteriorate.
Private equity funds, which invest in companies with the aim of improving their performance and generating returns, have become increasingly important in the euro area, with assets under management growing by more than 10 per cent annually.
The research, by Olivier De Jonghe and Cédric Huylebroek, examined company accounts, transactions and sales between businesses, including small private firms often missing from commercial supply chain databases.
Following a buyout, the acquired companies typically take on more debt but also grow faster than comparable businesses.
Their suppliers benefit from the resulting expansion, recording around 8 per cent higher sales and 4 per cent higher employment across the post-buyout period.
The researchers attributed these gains mainly to increased demand, as private equity-backed companies pursue growth opportunities and buy more goods and services from existing suppliers.
The benefits were strongest when acquired companies had greater scope to expand, suppliers accounted for a larger share of their inputs, or the business relationship was well established.
The study found little evidence that knowledge transfer, research and development spending, highly skilled employment or changes in trade credit explained the gains. Some suppliers secured additional customers through their links to the investor’s network, but this effect was relatively small.
The picture changes during economic downturns, when private equity-backed companies no longer generate better results for their suppliers.
Suppliers’ markups, which reflect the difference between selling prices and costs, fell by approximately 8 per cent, suggesting that customers secured lower prices or more favourable contractual terms.
The researchers linked this reversal to stronger pressure to cut costs and meet debt obligations when sales and profits weaken.
Suppliers of easily replaceable products and those operating in highly competitive industries faced greater pressure, particularly when dealing with larger, more experienced private equity investors.
Private equity-backed companies were also more likely to end supplier relationships during downturns.
The effects can extend to competitors. When an acquired company expands, it may absorb more of a shared supplier’s capacity, making it harder for rival businesses to secure supplies.
An increase of one standard deviation in a competitor’s exposure to shared suppliers was associated with 1 per cent lower employment, 2 per cent lower core earnings and 1 per cent lower markups.
The findings have implications for competition authorities and central banks, which the researchers said should consider how ownership changes affect entire supply chains, rather than just acquired companies.
They suggested that regulators could use publicly disclosed supplier information to assess links between private equity targets and their competitors before approving transactions.
The research also found that the supplier benefits associated with increased demand were not observed among companies funded by bank debt, highlighting differences between bank lending and non-bank financing.
Finally, the authors warned that rising interest rates could have wider effects through private equity-backed businesses, which tend to carry substantial debt.
Tighter monetary policy may prompt these companies to abandon expansion plans in favour of cost-cutting, tougher supplier negotiations and changes to their supply chains, spreading the impact beyond the businesses directly affected.