Private Equity has Minimal Effects on Employment

[Toro]

This paper provides the first comparative examination of the consequences of leveraged buyouts (LBOs) and traditional corporate acquisitions on employment and wages using a uniquely constructed panel data set covering the period 1996-2006. Employing propensity score matching combined with difference-in-differences analysis, the key findings are: (1) related and unrelated acquisitions have employment consequences of a similar magnitude, (2) related and unrelated acquisitions have the largest negative impact on employment followed by non-private equity backed LBOs, (3) acquisitions in the same industry cause an increase in wages, and (4) private equity backed LBOs have no significant impact on either employment or wages.

What are the Wage and Employment Consequences of Leveraged Buyouts, Private Equity and Acquisitions in the UK? by Kevin Amess, Sourafel Girma, Mike Wright :: SSRN

Private equity critics claim that leveraged buyouts bring huge job losses. To investigate this claim, we construct and analyze a new dataset that covers U.S. private equity transactions from 1980 to 2005. We track 3,200 target firms and their 150,000 establishments before and after acquisition, comparing outcomes to controls similar in terms of industry, size, age, and prior growth. Relative to controls, employment at target establishments declines 3 percent over two years post buyout and 6 percent over five years. The job losses are concentrated among public-to-private buyouts, and transactions involving firms in the service and retail sectors. But target firms also create more new jobs at new establishments, and they acquire and divest establishments more rapidly. When we consider these additional adjustment margins, net relative job losses at target firms are less than 1 percent of initial employment. In contrast, the sum of gross job creation and destruction at target firms exceeds that of controls by 13 percent of employment over two years. In short, private equity buyouts catalyze the creative destruction process in the labor market, with only a modest net impact on employment. The creative destruction response mainly involves a more rapid reallocation of jobs across establishments within target firms.

Private Equity and Employment by Steven Davis, John Haltiwanger, Ron Jarmin, Josh Lerner, Javier Miranda :: SSRN

 

[Toro]

The research also indicates that private equity LBOs are associated with lower employment growth than comparable companies. However, uncertainty remains about the employment effect--in part because, as one study found, target companies had lower employment growth before being acquired.

U.S. GAO - Private Equity: Recent Growth in Leveraged Buyouts Exposed Risks That Warrant Continued Attention

 

[Widdekind]

Buyouts cause large layoffs (15-20% of the workforce), initially; and (almost) equally large hirings, within a couple of years. The total job turnover is 10x the net job loss (2% of the workforce):

economists compared job changes at 3,200 private-equity-controlled companies, from 1980 to 2003, with similar non-buyout companies. For the buyout firms, jobs fell about 1.8 percent over their first two years; for the non-buyout firms, there was a slight increase of 0.4 percent during the same period... in both cases, total job gains and losses dwarfed the net change. In the two years, private-equity-owned firms created new jobs equal to about a fifth [20%] of their workforces -- and destroyed old jobs, often at closed locations, in similar numbers. For the non-private-equity controlled firms, the comparable proportion was about one-sixth [15%]. Job turnover is routinely high, but private-equity-controlled firms are quicker at shrinking underperforming facilities and expanding productive and profitable facilities

Buyouts streamline companies, trimming away unproductive facilities, and expanding productive ones. Most of the workforce is unaffected (80-85%); and almost all of the jobs lost, from unproductive facilities, are regained at expanded productive facilities. Failing corporations are kept afloat, and (in net) 98% of their work-force keep their jobs:

In LBOs, private equity firms borrow most of the money used to take controlling stakes in companies. They try to increase the value of those companies by cutting costs, eliminating workers and closing unprofitable businesses, with the aim of unloading their stakes at a higher price. A record $1.6 trillion in LBOs were completed from 2005 to 2007... We had a big private equity boom a few years ago with easy credit and lots of it, and then we had sort of a nasty recession

Again, the flip-side of initial job loss, as unprofitable facilities are closed, is subsequent job gain, as profitable facilities are expanded. Expanding profits requires expanding productive facilities, and their (productive) work-forces. If buyout investors see potential profits, then they will want to expand & grow them.




RealClearPolitics - Romney and 'Private Equity'
http://www.bloomberg.com/news/2011-...ipo-market-as-kkr-blackstone-unload-lbos.html

 

[Widdekind]

Private equity firms are half as likely to be liquidated, during bankruptcy buyouts, than non-private equity firms, tending to preserve jobs. (Either way, creditors tend to recover the same amount, namely half, of their investments.)

Inexpertly, LBOs keep failing firms afloat, preserving most jobs, and recovering nearly all temporarily lost jobs. The alternative would be allowing failing firms to fail -- would that be better for jobs?



In Tough Times, Private Equity Saves Jobs - NYTimes.com