by John Wihbey
The private equity practice of buying out a firm and restructuring its operations — often involving job layoffs at the target company — has been criticized for its negative effects on human lives and communities but also praised for improving businesses and making them more efficient and profitable. Past research has tried to weigh and assess these dynamics, but it has often been limited by such factors as incomplete data sets and a failure to compare employment changes at comparable firms during that same period, according to researchers at the University of Chicago Booth School of Business, Harvard Business School, the University of Maryland and the U.S. Census Bureau.
Their 2011 study for the National Bureau of Economic Research, “Private Equity and Employment,” uses comprehensive data from the U.S. Census Bureau’s Longitudinal Business Database between 1980 to 2005 to assess the average outcomes of private equity buyouts. The researchers study some 3,200 U.S. companies bought by private equity firms and the effects on 150,000 “establishments” — “specific factories, offices, retail outlets and other distinct physical locations where business takes place.”
The study’s findings include:
— Relative to comparable businesses in the same industry — and with similar profiles in terms of size, age, and prior growth — establishments bought by a private equity firm will see, on average, a decline of “about 3% of initial employment over two years and 6% over five years.” Moreover, “gross job destruction at these target establishments outpaces destruction at controls [comparable industry businesses] by a cumulative 10 percentage points over five years post buyout.” This means that turnover of workers is indeed accelerated by private equity buyouts.
— However, many bought-out firms either grow establishments in fresh directions or create new establishments — so-called “greenfield establishments” — in the wake of a private equity sale. Indeed, analysis “reveals that target firms create new jobs in greenfield establishments at a faster pace than control firms.” Taking these total effects into account, the employment growth differential is only about 1% less for bought-out firms compared to similar firms in the first two years.
— Private equity’s impact on jobs varies widely among industries and by the nature of the buyout; it can indeed be net neutral or positive, depending on the case. The greatest losses are typically evident in the retail sector and for publicly-traded firms that are taken private: “Public-to-private deals, which tend to be highly visible, also involve large employment losses at targets relative to [other comparable firms]. In contrast, independently owned firms exhibit large employment gains relative to controls in the wake of buyouts, mainly due to greater acquisitions.”
— Overall, “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.”
Despite the study’s finding of a modest overall impact on employment at firms, the research does support the idea that “pre-existing employment positions are at greater risk of loss in the wake of private equity buyouts.”