Raffaella Sadun (Harvard Business School): Do Private Equity Owned Firms have better Management Practices?

Co-authors: Nick Bloom and John Van Reenen

Several studies have documented that private equity-ownership increases the profitability of companies. This study focuses on one of the underlying reasons for this profitability: That private equity ownership is a way to achieve improved management practices within companies through the introduction of new managers and better management practices.  The authors have looked at management practices across 4 000 private equity-owned and other companies in a sample of medium-sized manufacturing companies in Asia, Europe and the US.

The analysis identifies three main results. First, private equity-owned companies are on average the best-managed ownership group in the sample. Private equity-owned companies are significantly better managed than government, family and privately owned companies. The results are also indicating that private equity-owned companies have slightly higher management practice scores than public companies, but the differences are not statistically significant.

Another result from the analysis is that the main reason for the high average levels of management practices in private equity-owned companies is the lack of any very badly managed companies under their ownership. While government-owned, family-owned and privately held companies have a substantial number of badly managed companies, those owned by private equity appear to be consistently well managed.

The final main result of the analysis is provided by disaggregating the types of management practices. It seems that private equity-owned companies have strong people management practices, as they adopt merit-based hiring, firing, pay and promotions practices. Compared to other companies, they are even better at target management practices, because private equity-owned companies tend to have tough targets, which are integrated across the short and long run, well understood by the employees and linked to company performance. Additionally, private equity-owned companies are better at operational management practices. These include the adoption of lean manufacturing practices, using continuous improvements and a comprehensive performance documentation process. The results suggest that private equity-ownership is associated with broad-based improvements across a wide range of management practices rather than simply just stronger performance incentives..

Read more about the Argentum Conference

Read more about the Argentum Symposium

Read the full paper