The Economic Impact of Private Equity and Venture Capital
Private equity and venture capital is one of the United Kingdom's most successful industries. The recent publication of the BVCA's Economic Impact Survey clearly demonstrates the strength and dynamism of the industry. The survey re-enforced the findings of previous research that private equity backed companies provide a substantial impetus to the economic performance and global competitiveness of the UK.
The survey showed private equity backed companies create jobs at a considerably faster rate than more established firms. Over the five years since 1995/6, the number of people employed by private equity backed companies increased by an average of 29% per annum, against a national private sector employment growth rate of just over 2% per annum.
It is estimated that private equity backed firms account for the employment of around 2.7 million people, equivalent to 15% of the current private sector workforce.
The private equity industry has developed a proven and robust track record in boosting the UK's economy. Over the five years since 1995/6, on average private equity backed companies' sales rose by 27% per annum, more than double that achieved by FTSE 100 companies. Exports grew by 27% p.a., compared with a national growth rate of just 4.4% p.a. and investment rose by 24% p.a., compared with a national increase of 8.8% p.a.
This sustained success means that the industry now makes huge contributions to public revenues. It is estimated that, during the latest tax year, we collectively contributed a total of £26.8 billion in taxes.
The story of the UK private equity industry is one of growth and success and the industry has become a driving force in the country's economy. This is an industry that has come of age and embraces the challenges and opportunities that brings. In 1983 we were investing roughly £250 million a year, today we invest over £8 billion a year. Government and others have long recognised the economic benefits associated with start-up and early stage investing and it has also been keen to encourage investing in various areas of technology. The Economic Impact Survey clearly demonstrates the case not only for this stage of investment but also the economic benefits that investment in MBOs and MBIs bring.
MBOs, which by nature are larger companies with higher sales revenues and staff, make up a substantial proportion of the economic contribution of private equity backed companies. Because by definition MBOs are established businesses, annual rates of growth are normally lower than for companies financed at an earlier stage. That said, growth rates for sales, pre-tax profits and employment are still substantially higher than they are for FTSE 100 and FTSE Mid-250 companies.
The survey also showed that MBOs had a further impact at micro economic levels in terms of providing more effective management and better incentives for staff, such as employee share ownership schemes.
The industry continues to prove its resilience by anticipating and shaping economic developments and to evolve with new areas and methods of investment to ensure that returns to investors and management teams are maximised.
We are not a complacent industry. There is no doubt that economic growth this year will be slower than in previous years and investment activity and investment returns will be down in 2001 - particularly in the technology sector. But we are a mature industry and take a long term view and whilst things may be difficult in the short-term I am confident this industry will continue to grow, continue to provide superior returns to our investors and continue to expand its influence on the UK economy.
Transactions are continuing to happen, the doors of our members are open for business and people are actively investing. Whilst a few transactions have been deferred - particularly at the very large end of the market, the overall picture is that the private equity/buyout end of the market is still in pretty good shape.
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