The New York Times-20080125-Study Says Private Equity Isn-t Big Job Killer
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Study Says Private Equity Isn't Big Job Killer
Among the world's private equity kings and policy makers, the issue of whether buyouts create jobs or result in more layoffs has always been the $100 billion question.
In perhaps the most extensive study conducted on the issue, the World Economic Forum plans to announce on Friday the results of yearlong examination of 5,000 private equity transactions from 1980 through 2005.
The answer? Well, the study found that private equity does not create more jobs, but the Gordon Gekko stereotype may be too harsh. Companies owned by private equity, shed on average, about 1 percent more jobs than their peers.
The study, Economic Impact of Private Equity, was led by Josh Lerner, professor at Harvard Business School, and Steven J. Davis, professor at the University of Chicago's Graduate School of Business. Commissioned a year ago, the study is intended to create a set of measurements to further the debate about the impact of private equity amid the buyout boom.
The study was guided by an advisory board that included policy makers, academics, labor representatives and private equity executives.
Among the most interesting findings: two years before a buyout, a company cuts, on average, 4 percent more of its work force compared with its peers, probably because it is struggling or trying to prepare for a sale.
After a buyout, the numbers muddy just a bit. The acquired company, on average, cuts 7 percent of its work force over two years, but at the same time, it added jobs -- usually new positions and in new locations -- at a pace of about 6 percent, resulting in a net loss of 1 percent. By the fourth and fifth years of private equity ownership, the growth of a company's work force becomes similar to its public peers. The study did not look at new or lost jobs abroad.
While the results run counter to the buy it, flip it, strip image of private equity, some buyout executives had been hoping for an even more glowing report.
I thought the numbers would be more positive, said Joseph L. Rice III, chairman of Clayton, Dubilier & Rice, who led the study's advisory board. A fair conclusion from the numbers is there is no pluses or minuses. You wouldn't say that private equity is the demon that some say it is, nor would you say it is the savior.
Other private equity executives said the study did not examine what would have happened to employment had the buyouts not occurred.
Some other findings appear to raise more questions than answers. According to the study, 6 percent of all buyouts eventually end in a bankruptcy filing, slightly higher than the average for public companies. However, compared with those public companies with similar junk debt ratings, buyout companies defaulted at half the rate.
The study also put into perspective the recent buyout boom. While the news media often focus on large deals that move public companies into private hands, such deals reflected only 6.7 percent of the total number of buyouts since 1980. Measured in terms of dollar value, public-to-private transactions represent 28 percent of the firms acquired.
The World Economic Forum's study comes a week after the private equity industry released its own report examining 42 large companies acquired by eight private equity firms from 2002 to 2005. That study, commissioned by the Private Equity Council, a lobby group, showed that employment grew 8.4 percent among acquired companies. The two studies did not examine the same deals; the World Economic Forum's study, which was based on Census data, did not look directly at deals from 2003 to 2005.
Mr. Lerner, comparing the two reports, said in an interview that the samples in the industry-backed study, were selected by the buyout groups, as opposed to being random chosen.
He said that since the industry study looked at only a small number of transactions, it is natural to worry about 'selection biases' in a setting such as this, especially given the visible and highly charged nature of the discussion about employment and private equity.
In a statement released at the time of its study, Douglas Lowenstein, president of the Private Equity Council said of Mr. Lerner's study, Our intent is to complement his work and to make a positive contribution to the global discussion about the economic impact of private equity -- on job growth, productivity, innovation and many other important metrics.
It is unclear how unions, which have criticized private equity, will react to the report, which does not appear to favor its conclusion that the industry slashes jobs.
At the time of the industry-backed study, Stephen Lerner, director of Service Employees International Union's private equity project dismissed it.
This study is part of a multimillion dollar lobbying plan by an industry on the defensive, Mr. Lerner said. There is little reason to trust and no way to verify self-reported claims by the super-secretive buyout industry.
[Illustration]PHOTOS: Bill Gates, top, chairman of Microsoft, during the second day of the World Economic Forum in Davos, Switzerland. Also attending the forum were President Hamid Karzai of Afghanistan, center left, and President Pervez Musharraf of Pakistan. The singer Bono, above left, and Al Gore discussed the Middle East peace process, climate change and other issues. (PHOTOGRAPH BY WOLFGANG RATTAY/REUTERS)