Private Equity and Local Industry: Estimating the Spillover Effects of Private Equity Buyouts on Local Industry Peers

Abstract: The impact of private equity (PE) buyouts on stakeholders, especially peer firms, has so far received little attention in the literature. This is surprising given the extensive research on the effects on funds and target firm performance. We address this research gap by studying the spillover effects of PE buyout transactions on local industry peers, using data on Swedish PE deals between 2001 and 2019. Our study is two-fold. First, we investigate the impact of PE firms on their portfolio companies. Second, we estimate the spillover effects on local industries. We apply a fixed effects regression model with time-varying treatment effects. Our most notable findings are 1) that buyout targets increase investments in intangible assets and 2) that these investments spill over to local industries. Thus, our results indicate that PE firms might have been contributing to digital transformations in their portfolio companies, rendering ripple effects throughout local industries. In addition, negative spillover effects are observed in employment and sales growth, suggesting that PE firms may be outcompeting local peers. Lastly, we show that spillover effects are stronger when PE deals are large and that the effects vary with the competitiveness within local industries. We add to the literature on PE buyouts' impact on portfolio companies and their broader stakeholder impact, as well as the literature on spillover effects in general.