Private equity firms improve the operating performance of the companies they buy according to a new study that challenges critics who claim fund returns are largely due to financial engineering.

The authors analysed more than 800 European cases where private equity firms have made an initial acquisition and then built on it with further add-on deals. The firms increased return on sales of the enlarged group by 27% over the first five years (or exit if earlier) compared with what would have been expected for the individual businesses, according to the researchers from Erasmus University Rotterdam.