Cutting costs, bolt-ons, multiple arbitrages, a little leverage. Just a few tried-and-true methods that private equity uses to create value in portfolio companies, to deliver the investment returns that LPs so crave. Well, now you can add exports to that list.
In a paper published this month, academics found that companies backed by PE funds increase their probability of exporting, the value of exports, and their export-to-sales ratio.
Adjusted for macroeconomic tailwinds, the research shows that the probability of a company exporting after a PE buyout increases by 4-5%, and the share of export sales to total sales increases by between 2%-3%. These may not seem like huge numbers but consider this: the value of exports among PE-backed companies rises by around 30% post-buyout relative to unsponsored firms.
The study looked at data from 2004 through 2017, the sample specifically covering non-financial UK firms. It is estimated that less than 10% of British businesses export overseas. However, these findings have profound implications that go beyond the UK. All governments and policy makers may want to review their economic policies and ensure there the correct incentives are in place for private equity to support businesses.
Credit where it’s due
The authors of the study see the secret to PE’s success in their access to credit and extensive networks. Financing is critical to export activities. For these smaller, overlooked firms, GPs are able to capitalize on their strong relationships with the banking industry on which they rely for acquisition financing. What’s more, being tapped into a global industry, customer, and supplier networks means that GPs can help their portfolio companies develop and execute an export strategy. PE is the force that connects the dots.
This “export effect” was not observed across the board, however. The research shows that it is only private-to-private deals, not buyouts of companies listed on the stock market, that benefit. Company size also plays a role. Smaller and younger firms see the greatest benefit, and these companies are also more bank-dependent. Large, listed firms, meanwhile, are able to tap capital markets for their debt needs and, in any case, are likely to have grown to a size fit for an IPO by already globally diversifying their revenues.
A return to health
The timing of this research could not be more appropriate. We are currently experiencing a reset and, following a year that no one will forget, many businesses are now finally seeing a recovery of demand. It stands to reason that these findings apply to other geographic markets, not just the UK, and boosting international trade is the key to the post-COVID economic recovery.
According to World Bank data, exports account for more than 43% of global GDP. Without question, the reopening of restaurants and cinemas that everyone misses so much will deliver much-needed domestic consumption, lifting growth and employment after an extended hiatus. But countries cannot rely on the return of their consumers alone. Global trade is necessary to hoist economies back to their former levels, and it is critical that SMEs, which account for the majority of employment, are part of this bounce-back phase.
It looks like PE may play a more significant hand in the post-pandemic recovery than some might have imagined.