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Study shows private equity necssary in U.S. economyMuch has been said and written about the activities and outcomes from private equity investment in the United States during the past two years. Now, as the U.S. economy slows at the hands of a troubled real estate market and the resulting tightened credit availability, buyout investment firms face not only more challenges obtaining debt leverage, but also a road less traveled as they try to match previous years’ high returns for shareholders.

“Private Equity is developing to become a major force of creative destruction and innovation which is necessary to improve the competitiveness of the U.S. economy,” says Dr. John Mathis, director of the Thunderbird Global Financial Services Center and professor of Global Finance. Mathis is the author of an economic impact study released during the fourth annual Thunderbird Global Private Equity Investing Conference held in early April. In that report, Mathis exposes numerous realities of the private equity community that speak to the current and future state of investment. Titled The Competitive Impact of Global Private Equity: Creative Destruction and Innovation, Mathis exposes some of the misunderstood facts that have followed private equity investments in the recent past, those large-figure deals that government leaders and the general public have said need further regulation.

One of the main points of his study points to a reality that most private equity firms have ventured into: globalization. Globalization represents new opportunities for high returns as well as risk diversification and adds more  stability to these high returns. Among the most discussed are in the Asian Pacific, most notably the already robust economies in China, India, Korea and Japan, as well as the countries of Taiwan, Australia, Vietnam, Singapore and Malaysia.

In 2006, according to a study by Asia Pacific KPMG and cited by Mathis, nearly $33 billion was raised in the Asian Pacific countries, representing a 39 percent increase from 2005. Meanwhile, the IPO market in this region is still developing, giving buyout firms an easier exit strategy in the near future. To keep pace with returns of previous years, buyout firms must look beyond the old guard – namely the U.S. and Europe.

But while buyout firms continue to enter the foreign markets, they bring more than money, Mathis contends.

“Global private equity transactions help transmit technology, management skills, and operational innovations to other countries,” he says in the study. “To survive, U.S. companies must remain globally competitive.”

The value added to the purchased companies, and their respective countries, is an important theme for future private equity investment worldwide. Often criticized for lack of transactional transparency, leveraged buyouts often center on the dollar figures involved, restructuring of management and cutting of unnecessary jobs and business units. This often makes great fodder for mainstream press outlets and political figures, but what is overlooked in these transactions are the business innovations that lead to more efficient, and therefore profitable, business practices, he says.

When firms purchase companies, their leaders are focused on making their new company as efficient as possible. This could mean reconfiguring the capital structure, depleting idle cash, and pegging executive and director compensation to the amount of work they actually do for the company.

Often times, this means reducing the number of employees and positions in the company. While it is a hard reality for those affected, it is the firm’s shareholders who ultimately gain from these often difficult decisions. Job creation and job reduction is not the goal or mission of a private equity firm, but rather political leaders. It is the return on investment for its shareholders and keeping a competitive pace that private equity firms are charged with upholding.

“Those that chastise private equity and those chastising U.S. multinationals are missing the main point: In order to remain competitive, companies must innovate and become globally efficient,” Mathis says. “If we remember that private equity is doing what is required to improve competitiveness, we will place as few barriers as possible in front of its activities.”