Private equity buyouts are, depending on your perspective, dangerous, notorious, or a great way of unlocking "shareholder value." But for all the press, they're not terribly well studied.
Do they help employment by creating better companies, or do they only help shareholders -- at the expense of employees?
A recent University of Chicago Booth School of Business working paper takes a look at 3,200 buyouts over 26 years to find out. The results? Private equity buyouts do, on average, cause a slight decline in employment, almost 1%; but the story is not so simple.
Job losses and gains
The researchers estimate that private equity firms controlled more than 7% of employment between 1998 and 2007. So the question of whether they're good or bad for employment is actually rather significant.
Taken comprehensively, the researchers found that employment tended to shrink by less than 1% in the two years after a buyout. But there was a significant amount of activity that led to that net number.
According to the paper, "Private equity buyouts catalyze the creative destruction process, as measured by job creation and destruction and by the transfer of production units between firms." That's because private equity firms don't just fire everyone and congratulate themselves on a job well done. They tend to move a lot of resources around, pushing businesses out of poorly performing areas, and investing in more productive ones.
All in all, there are both job losses and job gains. In fact, in the first year after a buyout, target firms ramp up employment 2% faster than their competitors. They slow down later on, which leads to lower employment over time.
The result is that there isn't a major loss of jobs in the wake of a buyout. However, in light of the hustle and bustle, if your firm goes through a buyout, you wouldn't be unwise to worry: "Jobs at target establishments are at greater risk post buyout than jobs at [other firms]."
The industry and type of buyout matters
Averages are useful, but the researchers find that there are also significant differences across industries when it comes to employment changes. In manufacturing, there tends to be a "modest" fall in employment after a buyout. In retail, target firms look like their competitors leading up to the buyout, then experience a nearly 12% drop in employment for the five years thereafter. Service industry firms, on the other hand, tend to grow much faster than their peers before a buyout, and then much slower afterwards.
Also, though public-to-private deals are much less common than private-to-private buyouts, they also have more dramatic and visible job losses: more than 10% losses over two years compared to peer firms, on average. On the other hand, companies undergoing private deals have an average employment expansion of more than 10% compared to competitors.
In that case, maybe you should worry more if your company is a public firm being taken private.
How do you judge if an individual private equity deal is good or not?
The authors point out that not all deals follow the same pattern, and that, sometimes, a specific situation will look a lot different than the average one. Seems obvious, but it's the obvious things that are often the easiest to forget.
For example, sometimes private equity firms simply fail at whatever their mission is (productivity improvement is a common one). Other times, they might focus on saving money through financial changes, like generating tax savings. In these cases, as the researchers put it, "There is no compelling reason to anticipate positive effects on productivity at target firms."
Other deals improve productivity simply through improving operations rather than investing in new areas. And finally, there are deals that make money by divesting unproductive business units. In both cases, you probably won't see a lot of new investment.
In the end, then, it's important to understand the reasoning behind a particular buyout decision. Sometimes, a buyout will build a stronger company that's better able to employ more people in the future; sometimes it will just change the financial structure without doing much else. On average, though, the changes to employment are modest.