In pursuit of prosperity: How Europe can climb the growth curve, the latest EVCA Briefing, explains how private equity and venture capital can contribute to the goals of the EU’s plan for sustainable growth, Europe 2020.
Innovation, productivity and competitiveness are central to the European Commission framework to encourage economic recovery. That was reflected in this week’s EU Budget agreement, which increased funding to innovation over the period 2014-2020. The deal is expected to be approved by a plenary vote in the European Parliament later this month.
EU Heads of State and Government also reiterated at October’s European Council that: “Investment in research and innovation fuels productivity and growth and is key for job creation.”
European private equity concurs. Earlier this year, the EVCA commissioned Frontier Economics to conduct independent research on private equity’s impact on economic growth. This work showed that private equity backed companies deliver increased innovation, productivity and competitiveness.
Private equity investors improve operating performance, expand businesses overseas to make them more competitive and increase patent citations and R&D spending. For example, private equity backing improves the operating performance of companies by up to 8.5% in the first three years of investment; and while private-equity backed business employ less than six percent of private sector workers they account for up to 12% of innovation – this is a sector that punches above its weight in delivering this key driver of growth
As the European institutions deliver a welcome spending boost to innovation they must also ensure that regulatory reform in financial markets goes in the same direction. If we starve it of investment from institutional investors such as insurers by setting unjustified capital requirements private equity will not be able to deliver the beneficial impacts to the businesses it supports.
The Frontier Economics findings are encouraging but further research is needed to fully understand private equity’s impact on growth. Even so we hope the new EVCA Briefing, launched today, kickstarts a wider discussion about how private equity can help Europe 2020 and long-term sustainable growth.
You can find our other Briefings on subjects such as long-term investment, private equity and pensions and the mid-market here.