Private equity: good for jobs?

As private equity bidders continue to circle some of the UK’s biggest retail names, employees may be forgiven for feeling confused about how safe their jobs will be under private equity ownership. James Taylor explains.

Two contradictory reports about private equity’s record on employment suggest that this issue will continue to be a thorny problem for the industry, as yet more high-profile companies find themselves on the buyout radar.

The Next bid target?

UK clothing retailer Next has become the latest company to be subjected to bid speculation, following in the wake of prospective deals for fellow high-street chains Alliance Boots and Sainsbury’s. But should its 40,000 employees be worried?

The industry’s record on job creation and employment rights has come under the spotlight in recent months, after the GMB trade union’s confrontation with Permira (over AA and Birds Eye) and 3i (over NCP) sparked a broader debate about the benefits of private equity ownership. The row rumbles on, although Permira’s meeting with the GMB in London yesterday suggested some easing of hostilities.

The UK industry – led by the BVCA trade body – has consistently pointed towards its record on job creation as a key argument in its favour, suggesting that private equity backed companies grow faster and create more jobs than the average company. Even Permira head Damon Buffini highlighted his firm’s record with retailer New Look and budget chain Travelodge in his first attempt to diffuse the GMB’s criticisms. “These are now strong businesses that employ thousands more people,” he said.

One recent report seems to support this argument. Consultancy AT Kearney’s analysis, which was based on a review of a number of studies in the area (albeit some conducted by industry associations with a vested interest in preserving the industry’s reputation), found that private equity backed firms have created more than one million jobs in Europe in the last four years – including 364,000 in the UK alone. The US saw more than 600,000 new jobs: the report cites examples like KTM, a motorcycle manufacturer backed by BC Partners, which increased employment tenfold under private ownership.

Private equity firms are not job killers.

AT Kearney

“Private equity has gotten a bad rap,” says the report. Rather than destroying jobs, the industry actually does the reverse: “PE-financed firms on average generate employment at a much faster pace than comparable traditionally financed firms.” In some cases, there was a double-digit gap between rates of annual employment growth: in Britain for example, a BVCA survey suggests employment in PE-backed companies grew at 14 percent between 2001 and 2004, compared with 0.3 percent for the rest of the private sector.

“Private equity firms are not job killers,” AT Kearney concludes. “In fact, they contribute more to job growth than shrinkage and unemployment.”

But not everyone takes such a rosy view of the industry’s employment record. A report out this week from the UK-based Work Foundation, a left-wing think tank, accepts that the majority of buyout firms create jobs. However, it also points out that over a third cut jobs, while stricter private equity controls have a detrimental effect on wages and morale – particularly when firms introduce new management teams.

The report found that about 60 percent of private equity-backed companies increase jobs over a six-year period, while 36 percent cut them. However, there are other negative implications for the workforce, it said. Workers in these companies will be, on average, £83.70 a year worse off than a comparable worker elsewhere in the private sector. For management buy-ins, where the private equity firms introduce new management teams, this discrepancy is even more pronounced – workers are on average £231 per year worse off.

Will Hutton

Stricter performance management may also make the experience more challenging for employees. “Private equity firms pride themselves on their ability to squeeze performance from the organisations they own, and they turn up the pressure on individuals in order to do so,” says Will Hutton, chief executive of the Work Foundation and a leading UK journalist.

Hutton believes that job creation is not, in itself, the be all and all. “In some cases, private equity ownership may be inconsistent with the principles of ‘good work’ – fairness, job security, the ability of individuals to have a say over their working life, to manage stress, and to be able to communicate effectively with senior management appear to fall down the list of organisational priorities under PE ownership. This seems to be especially true where managers have no prior relationship and few psychological bonds with the company and the workforce.”

So should the employees of Next, Sainsbury’s and Boots be worried? The current evidence seems to suggest that most buyout firms actually have a positive effect on job creation. However, unless employees happen to be part of the management team – which could reap substantial financial rewards from a successful period of private equity ownership – they probably shouldn’t expect a big wage hike any time soon.