Article from the Financial Times

Private equity takeovers of listed companies hit jobs hardest, study finds

Academics considered impact of US buyouts over more than three decades

Javier Espinoza, correspondent in Brussels from the Financial Times

OCTOBER 6, 2019

Private equity takeovers of public companies lead to substantial lay-offs, according to a new study of the impact of buyouts on the real economy that promises to reignite controversy surrounding the industry.

The study, authored by researchers from institutions including Harvard University and the University of Chicago, analysed private equity takeovers of US companies from 1980 to 2013. It found that publicly listed companies acquired by buyout funds saw employment fall by 13 percentage points over two years, relative to a control group.

Units of corporations sold to private equity groups experience the sharpest relative decline at 16 percentage points, mostly due to jobs lost when facilities are shut down.

The report, published on Monday, comes at a time when buyout groups are picking up public companies at their fastest pace ever. Last month, US buyout fund Advent International agreed to purchase UK defence group Cobham in a £4bn deal, while a group of investors led by private equity group Blackstone took Merlin Entertainments private in a £6bn transaction this summer.

The study found that buyouts have mixed effects, depending on the nature of the transaction. Public companies, which account for one in 10 takeovers by private equity groups, “exhibit large post-buyout employment losses”, the academics concluded. But overall, productivity improves when public groups are taken private in this way.

“When credit is cheap and easy, PE groups may select buyouts — or structure them — to deliver private returns via financial engineering rather than operating improvements”  — Private equity study

Other types of buyouts lead to positive outcomes for workers. Employment rises by 13 percentage points when a buyout group acquires a private company. It also rises when buyout groups sell to each other.

The study concluded that the overall net impact on jobs of a private equity takeover is still minus 4.4 percentage points, after adjusting for post-buyout acquisitions and sales. The report also revealed workers at the target company see their average wages decline by 1.7 per cent after a deal.

Studies of this kind have been criticised for their lack of scientific rigour or limited data in the past, with some funded by private equity groups themselves. These findings, however, rely on the data from 3,600 private equity deals affecting 5m workers. They also rely on data from the US Census Bureau tracked over a large period that experienced huge swings in credit markets and economic performance.

“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,” Josh Lerner, a professor of investment banking at Harvard Business School, told the Financial Times.

Prof Lerner, who has worked as adviser to private equity groups, added: “We expected that there were a lot of differences in the economic impact of transactions across buyout types and over time.”

The results will provide ammunition to critics of the sector, who say private equity groups load up companies with debt in search of a quick profit. In the US, Senator Elizabeth Warren recently introduced the Stop Wall Street Looting Act in efforts to regulate the buyout industry. In Europe, buyout executives have been called a “plague of locusts” for their aggressive job cuts when buying businesses.

The results will add to the debate over whether private equity is a force for good in the economy. “When credit is cheap and easy, PE groups may select buyouts — or structure them — to deliver private returns via financial engineering rather than operating improvements,” the academics conclude.

The performance of a company after being bought by private equity groups also varies depending on credit and macroeconomic conditions. The study found that when the economy is in rude health, buyouts lead to a growth in employment. If the economy performs badly, so does the buyout.

The academics concluded policy prescriptions should eschew a one-size-fits-all solution, given buyouts’ mixed effects.

Article from the Financial Times