Pretty much everyone knows that employment within the private equity industry, and most all other industries, follows the ups and downs of the business cycle. With the presidential inauguration now finished, and with a historical perspective on job creation and destruction during different administrations in mind, the question of this post is: how much of an effect, beyond the typical business cycle effect, could private equity have on employment growth during President Obama’s coming four years?
Before addressing any potential effect the private equity industry could have on the overall economy (and policy) in the coming four years, let’s first look at how private equity employment has either grown or declined during the prior three presidential administrations.
Coming in first is the Clinton Administration. From 1993 to 2000, estimated direct private equity employment expanded by a little over 15.5K, or about 2K per year. During the Clinton Administration, only one period saw a flattening of the growth trend – from late summer 1994 to early fall 1995.
Taking second place is the Bush Administration, with direct overall employment growth from 2001 to 2008 of an estimated 2.3K. The overall slow growth of about 288 individuals per year was largely due to the technology-induced recession of 2001 to 2002. When excluding the two recession years, private equity employment expanded by about 5.6K from trough to the end of the younger Bush’s administration, or about 65 percent less than that of the Clinton years.
Coming in last place among the prior three presidential administrations is the Obama Administration, with estimated overall growth in the private equity industry of about -0.7K. In bucking with most historical patterns of business cycles (which usually show strong growth following a deep recession), private equity employment has stayed relatively flat at around 0.7K below the employment level it stood at when Obama took office.
So, with this background in mind, how could the private equity industry influence the economy, in a broad, noticeable way, in the coming four years?
The answer, or at least one of the many possible answers, is that private equity professionals could induce greater confidence through hiring and deal making.
Of course, confidence building is a lot easier said than done. The private equity industry is no different than most other competitive industries – maximizing revenue or profit while minimizing costs, where costs include labor costs. And, right now, private equity leaders continue to have weak confidence in the usefulness of expanding the cost side of their balance sheets.
With that said, how much impact would the private equity industry have if the industry just hired analysts, with the sole purpose to just hire analysts? Presuming that after hiring a given number of analysts, a private equity firm simply gave the hired analysts say a year to figure out how to make the firm enough money to cover their costs, how much of an effect would this have on the economy at large? Would it induce confidence? Well, maybe.
The questions is by no means answered by just looking at correlation, although when one looks at the correlation of private equity employment with overall employment from 1990 to 1999, the correlation was pretty much linear, with one job gain in the private equity industry equating to about 200K overall employment gain.
Since 2000, though, the trend has become much weaker, with one private equity job equating to about 325K jobs overall.
Overall, if the private equity industry simply increased employment by 1K, it may not increase overall employment by 3 million, but it likely would add some boost to this fickle thing we call confidence.
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