Does Private Equity Employment Respond to Corporate Profits?

Everyone knows that the private equity business is about making profits.  Common sense would indicate that when corporate profits are growing strong across the board, employment in the private equity industry would also be going strong, and vice versa. Is this the case?  Here’s a look at the connection between employment in the private equity industry and corporate profits.

Employment in the Private Equity Industry

First let’s take a look at employment in the private equity industry since 1990.  Following the actual employment graphic is a look at the year-over-year picture of employment in the private equity industry. Overall, since 1990, there have been 3 private equity slowdowns.  The three occurred in 1994, 2001 to 2003, and 2008 to 2009.

Of the 3 private equity downturns, the worst was followed by the technology bubble in 2001 to 2003.  During the 2001 to 2003 downturn, private equity employment declined by 2,500 employees. The next least positive private equity recession occurred in 2008 and 2009, when private equity employment declined by about 2,400 from peak to trough.

Switching to the year-over-year picture, the largest decline occurred in August 2009, when private equity employment was down about 6% from the prior year.

Corporate Profits

As background, here is a look at the corporate profits picture.

Corporate profits have been through 2 long periods of weakness. The first was a very slow downturn, from 1998 to 2002. The second came as a result of the recent global financial crisis, with corporate profits weakening from 2006 to 2009.

Connecting the Two

So, does it look like private equity employment is connected with economy-wide corporate profits? Here is the connection.

Overall, conventional wisdom is probably right on this one.  Private equity employment is somewhat connected with economy-wide corporate profits. The interesting thing isn’t perhaps that there’s a general connection, but rather which indicator provides a leading indication.

One might think that corporate profits would be the leader.  After all, why would private equity employment decelerate or decline when corporate profits are strong.

Interestingly, this presumption would have been somewhat right in the slow 1990s corporate profit slowdown.  During the period when corporate profits were weakening, private equity employment for most of the period was growing strong.  At its peak, when corporate profits were weakening, the private equity industry was adding jobs by as much as 10% (year-over-year). It wasn’t until the end of the corporate profit slowdown that employment in the private equity industry finally got dragged down.

A similar picture emerges in 2006, when corporate profits peaked and provided an indication a few months before private equity employment growth peaked.

Conclusion

Overall, private equity employment generally responds to changes in corporate profits with a lag, consistent with conventional wisdom that private equity employment responds to changing economic conditions.  Employment in the private equity industry does not provide a leading indication of where corporate profits are heading.