Private equity’s effects on the economy — productivity, employment, enterprise value, and more — are often considered and frequently debated among business executives and policymakers. Now, a major new study has been published, reviewing some 9,800 private equity buyouts of U.S. firms and examining the real-side effects of those buyouts from 1980 to 2013.
One headline: Results of all private equity cannot be judged — or even considered — equally, and under a range of circumstances, including private-to-private and secondary buyouts, “employment at targets rises.”
The study is titled “The Economic Effects of Private Equity Buyouts” and was written by a series of academics from the University of Chicago, Hoover Institution, University of Maryland, University of Michigan, Harvard University, and U.S. Bureau of the Census.
The breadth of the input data is impressive. The authors write: “For roughly 6,000 of these buyouts, we successfully merge their information with comprehensive Census micro data on firm-level and establishment-level outcomes. Next, we estimate the effects of buyouts on employment, job reallocation, labor productivity, and compensation per worker at target firms relative to contemporaneous developments at comparable firms not backed by private equity. Our large sample, long time period, high-quality data, and ability to track firms and establishments enable a careful look at buyout effects. Because our sample encompasses huge swings in credit market tightness and macroeconomic performance, we can address questions about how these external conditions relate to the performance of target firms.”
One of the authors, Harvard Business School Professor Josh Lerner, told the Financial Times: “We were motivated to do this study by the fact that our last study only went through 2003, missing the huge changes with the mid-2000s boom and subsequent bust.”
As a result, the authors write that they “find striking and systematic outcome differences depending on buyout type, credit market conditions at the time of buyout, and the evolution of macroeconomic and credit conditions post buyout.”
Related Podcasts& Transcripts:
- Private Equity, Employment, and Management — Josh Lerner, Harvard Business School & PCRI (Part 1)
- Private Equity, Employment, and Management — Josh Lerner, Harvard Business School & PCRI (Part 2)
Indeed, as the authors later state: “Our study takes up that challenge for private equity buyouts, a major financial enterprise that critics see as dominated by rent-seeking activities with little in the way of societal benefits. We find that the real-side effects of buyouts on target firms and their workers vary greatly by deal type and market conditions. To continue the metaphor, separating wheat from chaff in private equity requires a fine-grained analysis.”
Results: The Economic Effects of Private Equity Buyouts
The study demonstrates how different macroeconomic conditions (like credit cycles) and different deal types — and the circumstances under which buyouts occur — can drive varying outcomes. For example, employment rises in private-to-private and secondary buyouts, while it drops in buyouts of publicly listed firms and divisional buyouts. Meanwhile, when compared to the control group, labor productivity rises at target firms.
Key findings include:
- “Relative to control firms, employment at targets rises 13 percent in firms previously under private ownership (private-to-private buyouts) and 10 percent in secondary buyouts (sale from one PE entity to another). Employment falls by 13 percent in buyouts of publicly listed firms (public-to-private deals) and by 16 percent in divisional buyouts.” [Note: The report notes that only 10 percent of buyouts are of publicly listed firms.]
- “The overall average employment impact of PE buyouts is a statistically insignificant -1.4 percent in our sample. After netting out post-buyout acquisitions and divestitures to isolate organic changes, the overall average impact is -4.4 percentage points.”
- “Target productivity gains and intra-firm job reallocation increases are larger yet (relative to controls) for deals executed amidst tight credit conditions.”
- “A post-buyout widening of credit spreads or slowdown in GDP growth lowers employment growth at targets and sharply curtails productivity gains in public-to-private and divisional buyouts.”
- “Compensation per worker falls by 1.7% at target firms after buyouts, largely erasing a pre-buyout wage premium relative to controls. Wage effects also differ greatly by buyout type.”
Conclusions & Questions: Private Equity’s Economic Effects
The authors outline several conclusions, including: “This conclusion cast doubts on the efficacy of ‘one-size-fits-all’ policy prescriptions for private equity. Our results also highlight how buyouts can lead to large productivity gains on the one hand and job and wage losses for incumbent workers on the other. This mix of consequences presents serious challenges for policy design, particularly in an era of slow productivity growth (which ultimately drives living standards) and concerns about economic inequality.”
In particular, the authors address questions about private equity and employment: “Our evidence that buyout effects on employment growth are pro-cyclical, particularly for private-to-private and secondary buyouts, also warrants attention in future research. This aspect of our results suggests a ‘PE multiplier effect’ that accentuates cyclical swings in economic activity.”
The report concludes with a series of important questions, including:
- “Do public-to-private and divisional buyouts cause avoidable employment losses? Or were target firms in dire need of restructuring and retrenchment to prevent worse outcomes at a later date?”
- “Given the productivity gains at target firms in the wake of public-to-private buyouts, were the matched control firms also in need of major restructuring?”
- “More broadly, are job losses and compensation cuts after certain types of buyouts essential to achieve post-buyout productivity gains and, if so, is the tradeoff an acceptable one?”
But in keeping with the finding that private equity activity outcomes can be dependent on certain factors characterizing the PE firms themselves, “another set of questions involves whether and how the economic effects of buyouts vary across private equity groups.