Private equity takeovers result in significant job losses, according to a landmark new study by Josh Lerner of Harvard Business School and Steve Davis of the University of Chicago.
Why it matters: Private equity regularly defends its employment record by citing a 2011 study by the same two academics.
By the numbers: The new report finds average job losses of 4.4% in the two years after a company is bought by private equity, relative to control companies. This is up from less than 1% in the earlier study. It also finds average per worker wage decreases of 1.7%. It also finds significant differences based on the type of buyout:
- Employment falls 13% in buyouts of publicly traded companies, relative to controls.
- Employment falls 16% in divisional carveouts.
- Employment rises 13% in buyouts of privately held companies (non PE-backed).
- Employment rises 10% in buyouts of PE-backed companies.
What the authors are saying: "We find that the real side effects of buyouts on target firms and their workers vary greatly by deal type and market conditions. ... This conclusion cast doubts on the efficacy of 'one-size-fits-all' policy prescriptions for private equity."
The report's big silver lining for private equity is around productivity, which is found to rise an average of 8%, compared to controls. This should help the industry's argument that it's about much more than financial engineering.
Methodology: Lerner and Davis constructed a data set based on the U.S. Census Bureau’s Longitudinal Business Database, which is derived from IRS records and for which they needed to receive special access. They then used Capital IQ and other databases to match up the LBD employment records with nearly 10,000 deals from between 1980 and 2013 (earlier report was for 1980–2005).