Private Equity: Job Creation or Destruction

Merchant Banks

January 25, 2008 (Davos, Switzerland) - The World Economic Forum announced results of a yearlong study of 5,000 private equity transactions (randomly chosen) from 1980 through 2005 to determine whether buyouts create jobs or result in more layoffs. It is titled “Economic Impact of Private Equity,” was led by Josh Lerner, professor at Harvard Business School, and Steven J. Davis, professor at University of Chicago Graduate School of Business, was guided by an advisory board that included policy makers, academics, labor representatives and private equity executives.

The study found that:

1) private equity does not create more jobs, but cut, on average, only about 1% more jobs than their peers,

2) two years before a buyout, a company cuts, on average, 4% more of its work force compared with its peers (possibly because it is preparing for a sale),

3) acquired companies, on average, cut 7% of their work force over two years, but at the same time, added jobs (usually new positions in new locations) at a pace of about 6%, resulting in a net loss of 1%,

4) by the fourth and fifth years of private equity ownership, the growth of a company’s work force becomes similar to its public peers,

5) 6% of all buyouts eventually end in a bankruptcy filing, slightly higher than the average for public companies (buyout companies defaulted at half the rate compared with those public companies with similar junk debt ratings),

6) public-to-private transactions reflected only 6.7% of the total number of buyouts since 1980 (28% of the firms acquired, measured in terms of dollar value). The study did not look at new or lost jobs abroad, did not examine what would have happened to employment had the buyouts not occurred.

Results contrasted with study commissioned by the Private Equity Council, a lobby group, of 42 large companies (selected by the buyout groups) acquired by eight private equity firms from 2002 to 2005 (World Economic Forum data did not look at deals from 2003 to 2005). Its results showed that employment grew 8.4% at acquired companies.