A study being billed as the most comprehensive examination of private equity’s impact on employment was scheduled to be presented at the Davos summit today.
Commissioned by the World Economic Forum, the “Global Economic Impact of Private Equity” study was conducted by Stephen Davis of the University of Chicago Graduate School of Business and Harvard Business School professor Josh Lerner, and shows mixed results about the industry’s impact on employment, innovation and growth.
A year-long examination of 5,000 private equity transactions in the US from 1980-2005 was compared to a control group comprised of firms with similar characteristics, in terms of industry, age and size, that had not gone through a buyout during same time period.
The resulting analysis is that in the two years following a buyout, companies typically reduce existing jobs more rapidly than the controls, with an average cumulative difference of 7 percent in favour of the controls, however, it also found that new job creation was roughly equal between the two groups. “The difference in net employment is attributable to higher gross job destruction rates in targets”, the study said. It also found that Greenfield job creation is 6 percent higher at PE-backed firms than at controls.
You wouldn’t say that private equity is the demon that some say it is, nor would you say it is the saviour.
When presenting the study’s preliminary findings in November, Davis stressed that they are the result of significant sampling bias, because private equity firms often target companies that are underperforming and already shrinking faster than their peers.
“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.”
Joseph Rice, who is the chairman of Clayton Dubilier & Rice and led the study’s advisory board, told the New York Times he “thought the numbers would be more positive”.
“A fair conclusion from the numbers is there is no pluses or minuses,” Rice said. “You wouldn’t say that private equity is the demon that some say it is, nor would you say it is the saviour.”
The study also debunks many common criticisms of the industry, showing that PE firms tend to be long-term investors that strengthen their portfolio companies in many ways.
It found that 58 percent of private equity investments are exited more than five years after the initial transaction, while “quick flips” account for just 12 percent of all deals. The study also shows that private equity-backed companies pursue more economically important research and innovations after a buyout, as measured by patent citations. The boards of private equity-backed companies tend to be smaller than those of publicly traded companies, and outside directors are frequently replaced by private equity investors.
The study was based on existing databases containing information about the private equity industry, such as Capital IQ, Dealogic and VentureXpert, as well as information from complementary databases with data on bankruptcy, employment and patenting.
US lobbying group the Private Equity Council said in a statement today that the Lerner study is consistent with its own, released earlier this month, and confirms the value of private equity firms in the global economy. The PEC study was based on a sample set of 42 companies acquired by eight PEC-associated US private equity firms between 2002 and 2005, and found that 76 percent of the companies recorded job gains.
Lerner reportedly said in an interview that since the PEC had handpicked its samples and a small number at that, “it is natural to worry about ‘selection biases’ in a setting such as this, especially given the visible and highly charged nature of the discussion about employment and private equity”, according to the Times.
The PEC, however, said: “The WEF studies further validate what we’ve been saying all along: private equity firms invest for the long term and build stronger, more innovative, and more competitive companies.”