Impact Study Aftermath / Tomi Alén

Two weeks ago, I had a chance to present the results of my master’s thesis on the impact of private equity investments in Finland in a morning seminar organized by the FVCA. The Finnish private equity industry is still relatively young and has only recently reached the level of maturity that making such studies has become possible, so my thesis belongs to one of the very first impact studies conducted using Finnish data. Thus, many of the participants were obviously very interested in hearing my results that also later on evoked eager discussion.

In short, my results show that the Finnish private equity investors invest in R&D intensive companies that desperately need cash to finance their growth. And after receiving the investment, they indeed do grow: according to my results the private equity financed companies grow significantly faster compared to other similar companies in terms of sales, number of employees, added value, and total assets. These companies also become more international, have more experienced board members, and in case of venture capital investments, also become more innovative compared to their competitors. Based on these findings it seems clear that private equity does have a positive impact on the development of the individual companies, but I also dare to claim that it also has a positive effect on the society at large, thanks to the various multiplier effects caused by the unusually fast growth of these companies.

After presenting the results a reporter asked me: “So what, aren’t these results self-evident?” Well, the results do indeed in many ways confirm, what people often think venture capitalists intend to achieve in their portfolio companies. However, in the world of science nothing is self-evident before it has been empirically proven – and even in spite of this some researchers often disagree with the results. Anyhow, from my point of view that is just probably the most important single conclusion we can make from these results: as we have now clearly shown that private equity can significantly boost new economic activity, instead of arguing about its prospective impacts, we can start thinking about how we could best leverage this resource for the good of the whole economy.

However, I do agree that there is still plenty to do on the research side. Firstly, even though we know that the VCs do create value, we still have no idea of how they actually do it. Some researchers claim, for instance, that most of the value is created already in the target selection, while others believe that investor’s participation in company decision making and corporate governance are more important. In addition, also aspects like the investor’s contact network and signalling power may also be valuable for the portfolio companies. Furthermore, it would also be useful to examine the long-term performance of the private equity financed companies – all the way from the first-round investment to the eventual exit – and also compare the performance of individual VCs. This would significantly broaden our understanding of the impacts of private equity, and might also help VCs improve their investment performance and achieve even better results in the future.

Tomi Alén Aalto-yliopisto