To some, private equity has a nasty reputation: big investments, big job losses and big riches for a select few. Recently, a team of researchers led by Steven J. Davis, of the Booth School of Business at the University of Chicago, released a new paper that sheds some light on the complexity, and eventual outcome, of private equity transactions. It finds that while private equity transactions do often lead to job loss, they also lead to job gains -- and the net results are nowhere near as dramatic as widely believed.
The researchers were able to construct a database of private equity investments that was uniquely wide and deep: thirty-two hundred firms that were the subject of private equity buyouts or investments between 1980 and 2005. Collectively, those firms had about 150,000 locations, such as factories, offices, and retail outlets. The researchers were able to compare these companies to similar ones that did not have private equity investments. By tracking employment not just at companies as a whole, but by looking at individual locations, the researchers were able to get a better idea of where jobs were being lost, gained, or shifted.
Big job losses, but growth, too
The researchers found that on average, job losses from private-equity transactions are not as steep as popularly believed: About 3 percent over two years and about 6 percent over five years. Although private-equity investments do often lead to big layoffs, they also often lead to a lot of new jobs. But those jobs tend to be at different areas of the company and don't happen in one big blast.
The losses tend to be much worse at companies in the services or retail industries. Over five years, retailers that get private equity have 12 percent fewer jobs, on average, than those that don't. The number of jobs at services companies grows "somewhat more slowly" than average after a private equity transaction, the authors write.
Public versus private
Public and private firms seem to fare quite differently at the hands of private equity investors. The most damage is done, jobs wise, when a public company is taken over by a private equity firm. These deals tend to be larger than other private equity transactions, and get the most attention. And here, job loss is striking: Average employment at these companies shrinks by 10 percent compared to public companies that don't have private equity investors. By contrast, in private-to-private transactions, companies appear to end up with 10 percent more jobs than they would without private equity.
What's most dramatic about the effect of private equity investments on employment, though, is that they have an outside impact on shifting jobs from one part of a company to another. Over two years, the sum of job creation and loss at firms that get private equity 13 percent higher than at companies that don't get private equity.
Private equity firms are also more likely to close locations, open up new ones, and buy and sell off various locations, which makes the job churn more obvious.