Does Private Equity Really Not Boost Employment?

The American presidential election is a little over a year away.  With Democratic candidates trying to drum up support, they are again looking at the financial services industry.  And, perhaps the most common target within the broad financial services industry is private equity. 

If one pays close attention, Democratic candidates have taken many shots at what they view are deleterious effects from private equity takeover.  For instance, leading Democratic candidate Elizabeth Warren has proposed new legislation, the Stop Wall Street Looting Act of 2019, targeting the way private equity is governed and requiring changes in some of the most lucrative business practices.  

Ms. Warren is not alone in her criticism of Wall Street.  Mr. Sanders, the Vermont socialist, is a very frequent critic of the private equity industry.  Sanders “faulted the leveraged buyout model employment the investment firms for causing [Toys ‘R Us] to fail, and asked executives whether it was a deliberate policy to load the company with debt.” 

A New Study on Private Equity Buyouts

With political candidates intensely interested in private equity again, a new study from professors out of Chicago, Maryland, Michigan, and Harvard found that, in their opinion, some companies that are targets of private equity may perhaps lose jobs when being subject to a private equity takeover. 

The authors examined thousands of U.S. private equity buyouts from 1980 to 2013.  A summary of their data follows.  In all, they studied 177,000 targeted establishments and of those, 6,000 matched buyouts. 

What did they find?

What They Found

Unsurprisingly, the authors found conflicting evidence.  Fascinatingly, the authors found that private-to-private private equity buyouts are correlated with statistically significant positive effects on employment.  That’s right.  In private-to-private private equity buyouts, they found that private equity boosted employment. 

Alternatively, they found that public-to-private buyouts were associated with a statistically significant decrease in firm employment.  No doubt the Democratic presidential candidates will focus on this result, while ignoring the other results. 

Criticism of the Study

Interestingly, when asked what he thought of the study, billionaire investor (private equity) Stephen Schwarzman had one major criticism of the study – they only looked two years out.  He argued that private equity buyouts have long-term effects that last far longer than the two years the authors considered in the study.   

Conclusion

Overall, the U.S. is entering another election season, and with it comes the typical bashing of the private equity business model.  A recent study provides further fodder to criticize the industry, with the authors arguing that buyouts of publicly traded companies by private equity companies leads to significant job losses compared to similar firms operating in similar economic conditions.  Supports of private equity, including the famous Mr. Schwarzman, have a different view on the effects private equity brings to the table.  Let the election-induced debate begin, again.