Private Equity Ownership and Firm Performance: A Framework for Interpreting the Evidence

Abstract

We review the evidence on the impact of private equity (PE) ownership on firms, stakeholders, and the economy. We organize this literature using a framework that emphasizes the costs and benefits of PE as an ownership form and implies five main predictions: ( a ) Only some firms are natural PE targets, ( b ) PE ownership is optimally temporary, ( c ) debt is typically a cheaper source of capital than PE equity, ( d ) PE activity is strongly cyclical, and ( e ) the PE model is a second-best response to underlying agency and contracting frictions. We use this framework to interpret existing evidence and to clarify when, and for whom, PE ownership creates value.