The Production Network Spillovers of Private Equity Buyouts: Evidence from Firm-To-Firm Sales Data

The private equity (PE) industry has grown substantially over the last two decades, from roughly $1 trillion in assets under management in 2010 to over $4 trillion by 2023. While a large body of research has documented positive effects of PE ownership on target firms’ productivity, governance, and innovation (e.g., Davis et al. 2014; Bloom et al. 2015; Lerner et al. 2011), firms are part of complex production networks. Yet, little is known about the role of supply chains in PE investors’ ability to create or extract economic value. This question is of first-order importance for at least two reasons: (i) critics often argue that PE investors’ short-term value creation strategies may conflict with the long-term nature of supply chain relationships, and (ii) examining the supply chain spillovers of buyouts may improve our understanding of the real economic implications of PE investments.

Theoretically, the supply chain spillovers of PE buyouts are ambiguous. On the one hand, if PE buyouts enable targets to pursue new growth opportunities or improve operational efficiency, suppliers may benefit from increased demand for inputs (Holmström 1988) or knowledge spillovers (Grossman and Helpman 1991). On the other hand, PE firms’ high leverage and short investment horizons may lead them to exert pressure on suppliers for cost reductions—e.g., by renegotiating contracts or switching suppliers (Shleifer and Summers 1988; Kaplan and Strömberg 2009).

To investigate these hypotheses, our study leverages unique production network data from Belgium—a representative country in terms of PE activity. These data record the buyer-supplier relationships of virtually all firms active in Belgium, and can be linked to detailed firm balance sheet data for the period 2002–2022. Using this unique dataset, we employ a difference-in-differences framework to compare the economic trajectories of suppliers with versus without PE-backed customers, after versus before PE buyouts.

We document several key findings. On average, suppliers to PE-backed firms experience approximately 5 percent higher growth in sales, employment, and profitability compared to observably similar suppliers to non-PE-backed firms. These effects appear to be driven by increased input demand from (faster-growing) PE-backed customers, rather than technology or knowledge spillovers. However, these positive effects diminish during economic downturns. In such periods, suppliers to PE-backed firms no longer outperform their peers and reduce markups by approximately 8 percent. These results can be explained by the fact that, in times of economic distress, PE firms exert greater pressure on suppliers and more actively reconfigure their supply chains to deliver short-term cost savings for their portfolio companies.

In addition to these first-order effects, we uncover significant second-order "crowding-out" effects for rival firms sharing the same suppliers. Specifically, rivals of PE-backed firms that share suppliers suffer declines in performance, particularly when those common suppliers are capacity constrained. These "crowding-out" effects suggest that suppliers reallocate limited resources toward their faster-growing PE-backed customers at the expense of other customers.

Taken together, our findings underscore the central role of supply chains in understanding how PE investors create and extract value. On average, PE ownership benefits upstream suppliers, but PE firms exert greater pressure on suppliers during periods of economic distress. These results suggest that policymakers and practitioners should consider not only the direct effects of PE investments but also the broader spillover effects on supply chains and the implications for market competition.

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Cédric Huylebroek is a PhD Candidate in the Department of Finance at KU Leuven and a research fellow at Research Foundation Flanders (FWO).

Olivier De Jonghe is a Senior Economist at the research department of the National Bank of Belgium, an affiliated Associate Professor at the department of Finance at Tilburg University, and a Lead Economist at the European Central Bank.

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