Snapshot - Markets
Does private equity really cause jobs losses?
Private equity has a mercenary reputation for asset stripping and job cutting as a matter of course. We don’t think this shows the whole picture.
Unstructured Learning Time
Private equity has often been cast as a malign figure in finance. Cold blooded capitalism defined; Hollywood often paints the industry with characters that load companies up on debt, sack workers and strip assets (or any combination of the three).
For many, their first exposure to private equity will have been Richard Gere’s character in the 1980s blockbuster, “Pretty Woman”. His strategy was to buy companies before aggressively breaking them up (the story arc was not essential to the plot of the film). The image is often reinforced in the media. The Financial Times recently ran with the following headline:
“Private equity takeovers of listed companies hit jobs hardest, study finds"1
The article says that job losses averaged 13%. You have to be paying attention to realise that this relates to private equity takeovers of public companies, not all private equity takeovers. In this digital age, our eyes are drawn to the key phrases of “private equity takeovers” and “hit jobs”, and not necessarily the detail. In the sixth paragraph we learn the following:
“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 that the article refers to2 makes the point that private equity takeovers of public companies have represented only 10% of all private equity takeovers. A far greater percentage - 43% - are takeovers of private companies, which the article concludes results in substantial employment gains. A further 22% are for sales from one private equity firm to another, which they also conclude have generated new jobs.
The full picture
A study by Schroder Adveq in 20123 – the private equity arm of Schroders – found further evidence that private equity can have a positive effect . The study analysed 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.
The Financial Times headline could just as easily have been that private equity takeovers of private companies create new jobs. . Many segments of private equity generate tremendous social value – we have not even touched on the impact of the venture capital industry in helping build the world beating companies of tomorrow.
The academic study concludes with the following:
“Our results show that it is highly misleading to speak about the social impact of private equity. The real-side effects of buyouts vary greatly by deal type and with market conditions.”
We are generally drawn to simple narratives, but things are rarely so clear cut. As ever, there are good and bad operators. But private equity is not the pantomime villain it is made out to be.
1. “Private equity takeovers of listed companies hit jobs hardest”, FT, October 2019
2. The Economic Effects of Private Equity Buyouts, S. Davis, J. Haltiwanger, K. Handley, J. Lerner, B. Lipsius and J. Miranda, 2019
3. Benefits of private equity for the European economy, Adveq (now Schroder Adveq), 2013