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Private Equity and Job Creation

There is little reliable quantitative analysis about the private equity buyout industry’s impact on job creation. As Business Week bluntly notes, however, “buyout shops have always been associated with job losses.” Even industry studies that make bold claims that buyouts are creating jobs acknowledge that in many cases jobs are lost. 

A detailed study of more than 1,300 buyouts in Great Britain between 1999 and 2004 by the independent Centre for Management Buy Out Research puts industry claims in perspective. Overall, buyouts result in job losses during the first year. After six years, more than 60 percent of firms have added jobs—while more than 35 percent have cut jobs. In contrast to management buyouts, (situations where existing management partners with a private equity firm), where the study finds that companies increased employment by 36 percent on average, buyouts where the private equity firm installs new management indicate job losses of more than 18 percent after six years. 

Even in the cases where buyouts result in job growth, it is unclear that workers are benefiting. Industry studies make little attempt to look behind the numbers at what is happening to workers and communities:

• What types of jobs are the buyouts creating?

• Are the jobs that buyouts create full time or part time?

• Are wages of both existing and new workers going up or down?

• Do these new jobs come with health insurance and retirement benefits?

• Where are the new jobs located? Are the buyout firms investing in the communities where offices and plants are located? Or are they shifting jobs elsewhere in the United States or overseas where the pay is lower?

• What impact does the job restructuring have on the local economy and tax base?

• What is the real impact of these buyouts on workers, families, and communities?

Industry Studies: Questionable Assumptions, Methodologies, Conclusions

Industry groups claim that buyouts create jobs. But since private companies do not publicly disclose information about their employees or company growth, industry claims are difficult to evaluate. Studies based on self-reported information from a limited set of companies may not paint a reliable picture of what is happening across the economy or in all industries.

A close look at some of the studies provides a number of reasons for treating their numbers with caution.

A recent A.T. Kearney report, a meta-review of 12 existing studies, claims that private equity created 600,000 jobs in the United States between 2000 and 2003. But the Kearney report actually sheds no light on the impact of buyouts on employment because it doesn’t distinguish buyouts from venture capital that provides seed money to start up new businesses.

While such broad studies may help the private equity industry attempt to shape public perception of its industry, they do little to help the public understand what is really happening when the buyout specialists take over established companies.

A 2005 study by the Center for Entrepreneurial and Financial Studies (CEFS) for the European Private Equity and Venture Capital Association claims that more than 400,000 net jobs were created in Europe by buyout-financed companies between 2000 and 2004. The study’s claims are based on self-reported information from a small set of portfolio companies—just 99 out of more than 1,400 companies that underwent a buyout during the period studied.

Any evaluation of how buyouts result in employment growth must distinguish between organic growth and growth through acquisitions and mergers. The CEFS study does not attempt to explain what led to employment growth at specific companies. Instead, the study simply assumes that all employment changes of 20 percent or less are due to organic growth. The study provides no rationale for using the 20 percent figure.

A recent Financial Times analysis of the 30 biggest deals in Europe during 2003 and 2004 found that employment at the acquired companies increased 25 percent since the deals were completed.  But this claim is based on figures that have not been adjusted to account for nonorganic growth. The Financial Times claims that net job growth at the acquired firms totaled nearly 37,000. Analysis of the Times’ figures shows that nearly 50,000 jobs were added and about 12,500 jobs were lost. Most of the 37,000 new jobs, however, were added through acquisitions, including 22,000 attributed to Blackstone’s purchase of Southern Cross, which was then merged into other Blackstone buyout companies. These are not jobs the buyouts created. While it is true that most of the job losses in these 30 deals can be attributed to companies selling parts of their business, actual net job growth was just a fraction of the total claimed by the Financial Times.

Despite claims by recent reports that private equity buyouts create jobs, serious problems with the studies’ methodology, assumptions, and conclusions raise significant questions about the reports accuracy and reliability.