European Central Bank analysis finds private equity buyouts boost suppliers but amplify downturn and competition spillovers

In a new article, the European Central Bank examines how private equity buyouts transmit through supply chains, finding that they generally increase demand and growth among suppliers but can expose them to stronger cost pressure during downturns. The analysis, based on Belgian firm and transaction data from 2002 to 2021, also identifies crowding out effects on competitors and suggests that leveraged buyouts may strengthen monetary policy transmission through production networks. Following a buyout, suppliers of the acquired firm recorded sales around 8% higher and employment around 4% higher than comparable suppliers, mainly because private equity backed customers purchased more inputs. During downturns, however, those suppliers no longer outperformed their peers and their markups fell by about 8%, with the greatest pressure on providers of standardized inputs and firms with weaker bargaining positions. Private equity backed companies were also more likely to terminate supplier relationships as they sought to reduce costs. The effects extended to competitors using the same suppliers. A one standard deviation increase in exposure to shared suppliers was associated with declines of 1% in employment, 2% in core earnings and 1% in markups. The authors argue that competition authorities could assess upstream supplier overlap when reviewing transactions, while central banks should account for the potential of highly leveraged private equity backed firms to shift from expansion to cost cutting as monetary policy tightens.