Steven Davis, a professor at the University of Chicago Graduate School of Business, has unveiled preliminary findings of what will be the most comprehensive study ever conducted into private equity’s impact on employment. The early results indicate that private equity ownership of companies, on average, is followed by job losses, and disproportionately so relative to non-private-equity-backed companies.
The preliminary findings were revealed Tuesday at an American Enterprise Institute conference on private equity in Washington DC.
Davis, the University of Chicago’s William H. Abbott Professor of International Business, used data sets about characteristics of US buyouts from 1980 until 2000 from data services companies Capital IQ and Dealogic, and then mapped them onto statistics from US tax records during the period. The resulting data set includes every private equity-backed transaction during the period and compares these against control companies with similar characteristics that were not the targets of buyouts.
Davis said he used tax records to determine staff headcount during each of three years leading up to a merger, and during the three years following the merger. On average, companies acquired by private equity firms had fewer employees in the years following the transaction than prior to it. Davis also found that while employment shrinks at both control firms and at private equity-backed firms, employment shrinks faster at private equity-backed firms.
Past studies focussing on M&A’s effect on employment have been criticised for not taking into account the type of buyer, for using narrow data sets and for relying on survey responses of uncertain quality. Davis’ study will address all of these shortcomings, he said.
Davis stressed that his results are simply “the early installment of one piece of a broader research agenda”. He also stressed that these findings are the result of significant sampling bias, because private equity firms often target companies that are already shrinking faster than their peers. In the wake of the buyout event, private equity-backed companies tend to show employment numbers growing at a slower rate than the control group.
“It’s a fairly significant difference,” Davis said.
“You take any set of establishments in the economy that exist up until [the buyout date]; follow them afterwards [and] they’ll tend to shrink,” he said. “That’s just a reflection of the kind of creative destruction that’s going on in the economy all the time, whereby new firms tend to arise and gradually replace older firms.”
Private equity’s critics, particularly labour unions, have long attacked the industry, claiming general partners cut jobs at portfolio companies without concern for workers’ welfare. But defenders of the industry have until now contended that private equity is not necessarily bad for employment, and that private equity firms are no more prone to cut jobs than are corporate executives. In its first white paper, US lobbying group the Private Equity Council cited a British Venture Capital Study that found that between 2000 and 2004, employment at private equity-backed companies in the UK grew at an average of nine percent per year, while employment at non-private equity-backed companies grew at between one and two percent per year.
“While similar data have not yet been developed in the United States, there is no reason to doubt performance here mirrors that of PE companies in other developed countries,” the PEC white paper said.
When Davis’ study is completed early next year, it could give private equity critics plenty of ammunition to fight that claim.