We study how private equity (PE) firms generate returns for their investors, by using detailed confidential data to study their value creation plans and actions. We show that PE firms improve operational efficiency: both labor productivity and total factor productivity improve as PE-backed companies ramp up investment, employment, and sales.
We find no evidence that PE-backed companies increase their market power. In fact, the PE-backed companies in our sample reduce their price markups by 6%, which allows them to gain substantial market shares. The majority of the operational improvements instigated by PE firms persist even after they fully exit their investments. Finally, we link value creation plans and actions to the financial returns PE funds deliver to their investors.