Private equity has a negative reputation when it comes to job cutting. Recently the Financial Times and also Forbes ran some similar articles with the following headlines: “Private equity takeovers of listed companies hit jobs hardest, study finds” (Financial Times) and “New Study Shows Adverse Economic Effects of Private Equity Buyouts” (Forbes).
Both articles refer to the same study, the research piece “The Economic Effects of Private Equity Buyouts” written by professors and researchers Steven J. Davis, John Haltiwanger, Kyle Handley, Ben Lipsius, Josh Lerner, and Javier Miranda.
After examining 9,800 U.S. private equity (PE) buyouts from 1980 to 2013, during a period that had significant swings in credit market tightness and GDP growth, the economists at Harvard University and the University of Chicago found that when private equity takes over companies, employment in the private-equity backed companies decreases by over 4% in the first two years following the buyout. The research also described that when private equity firms buy out large publicly traded companies with numerous employees, job losses are far worse, about a 13% decrease in jobs in the first two years.
However, these statements refer only to private equity takeovers of public companies, not all private equity takeovers. In this same study, the researchers found that “Other types of buyouts lead to positive outcomes for workers. Employment rises by 12 percentage points when a buyout group acquires a private company. It also rises when buyout groups sell to each other.”
Furthermore, the study points out that private equity takeovers of public companies have represented only 10% of all private equity takeovers. Takeovers of private companies, which seemingly result in substantial employment gains, represent 43% of cases, a far greater percentage. A further 22% are for sale from one private equity firm to another, which they also conclude have generated new jobs.
“Employment rises by 12 percentage points when a buyout group acquires a private company.”
The authors’ evidence also shows that “Labor productivity rises 8% at targets over two years post buyout (again, relative to controls), with large gains for both public-to-private and private-to-private buyouts.”
Further evidence that private equity can have a positive effect was found in a study made by Schroder Adveq in 2012. The study analyzed the change in employment at the 460 European portfolio companies Schroder Adveq had invested in between 2000 and 2011, versus the employment level in 2012 (or the level at the time of exit if the company had left the portfolio).
It found that Schroder Adveq’s European small buyout investments had boosted employment by 33%, and both large and mid-sized buyouts had resulted in employment gains of 23%. Even investments made ahead of the global financial crisis (GFC), in 2008 and 2009, had resulted in employment gains of almost 20% by 2012, this at a time when Europe-wide unemployment was soaring.
Steve Klinsky, chairman of the American Investment Council, and Founder and CEO of New Mountain Capital, states that “the private ownership of businesses by skilled professional managers, strengthened with capital and multiyear planning horizons, is a highly positive form of governance. Private equity is good for the economy overall.”
In conclusion, it is possible to affirm that speaking about the social impact of private equity can be misleading, given the real-side effects of buyouts vary greatly by deal type and with market conditions.
Article published in our December 2019 Newsletter
Marília Souza, MSc in Finance