Private equity buyouts reshape supply chains, create spillovers

The study reveals a dual impact of PE buyouts on suppliers.

In normal economic conditions, suppliers of PE-backed firms outperform their peers, showing 5% higher employment growth and 10% higher sales growth.

This outperformance is primarily driven by increased input demand from faster-growing PE-backed customers.

However, this benefit diminishes during economic downturns.

In such periods, suppliers of PE-backed firms no longer outperform and instead compress markups by around 8%.

This shift occurs as PE investors intensify bargaining pressure and reconfigure supply chains to extract cost savings.

Beyond these direct effects, the research also documents crowding-out, where PE-backed firms absorb supplier capacity, leading to performance declines for competitors relying on the same suppliers.

The analysis employs a matched difference-in-differences framework using data from 2002–2021.

The paper addresses a significant gap in the understanding of private equity's economic effects, moving beyond the direct impact on acquired firms.

While proponents argue PE creates value through operational improvements, critics claim returns are generated by redistributing surplus via aggressive cost cutting.

This study empirically examines how PE buyouts propagate through complex production networks, a channel previously underexplored due to demanding data requirements.

Theory presents opposing predictions: suppliers could benefit from increased demand or knowledge spillovers if PE fosters growth, or face pressure for cost reductions due to PE firms' high leverage and short investment horizons.

The researchers leveraged unique Belgian production network data, covering virtually all firms, including the small, private companies that constitute over 90% of PE buyouts globally, to test these hypotheses.