Study affirms the key role private equity plays in creating jobs and increasing productivity
The Financial Times
By Drew Maloney, AIC President and CEO
October 15, 2019
Javier Espinoza, in “PE takeovers lead to job losses, study finds” (October 7), draws too narrow a conclusion from a recent paper from professors Josh Lerner and Steve Davis and others. Despite the FT headline, the study affirms the key role private equity plays in helping businesses create jobs and increase productivity.
From 1980-2013, employment grew by 13 per cent when private equity investors bought privately owned companies and by 10 per cent when one private equity fund bought a company previously owned by another private equity fund.
Private equity also played a crucial role in increasing worker productivity by 8 per cent, according to the study. This means that workers at private equity-backed businesses became more efficient for every hour they worked. This affirms that private equity managers add value and improve businesses over the long term through their expertise and hands-on work with portfolio companies.
The study did find that publicly traded companies often see a small decrease in jobs in the first two years following private equity takeovers. But this conclusion requires context.
Private equity mostly acquires public companies that suffer from management problems and structural flaws. These companies often failed to cut costs and institute necessary reforms prior to private equity firms’ involvement. Private equity managers then work to make these companies stronger over the long term, which often requires painful but necessary reforms. Ultimately, these reforms help the workers who remain and those later hired by the improved business.
Public company buyouts make up just 10 per cent of private equity deals. Most private equity deals involve acquisitions of already private companies, which the study shows overwhelmingly increase employment and productivity. Furthermore, the study ends in 2013 as the economy continued to recover from the great recession. This fails to capture job growth realised during and after the crisis.
Private equity firms’ successful record investing in private companies led the study’s authors to doubt the effectiveness of, “one-size-fits-all” policy prescriptions for private equity. Policymakers should be careful advancing policies that would disrupt job creation and productivity growth.
This study confirms that private equity continues to invest in and improve businesses across the nation that support the jobs of millions of Americans.
President and CEO,
American Investment Council (AIC),
Washington, DC, U.S.