The Economic Effects Of Private Equity Buyouts

HBS study finds overall PE improves firm productivity, employment at previously public firms shrinks 13%, but grows 13% in buyouts of privately held firms. Labor productivity rises 8% and average earnings fall 1.7%.

However where the investment falls in the credit cycle has a big impact on returns, “.. In particular, public-to-private deals proliferate in advance of credit market tightening, and their targets exhibit large post-buyout employment losses and poor productivity performance during aggregate downturns…“

“…Relative to control firms,employment at targets rises 13 percent in firms previously under private ownership (private-to-private buyouts) and 10 percent in secondary buyouts (sale from one PE entity to another).Employment falls by 13 percent in buyouts of publicly listed firms (public-to-private deals) and by 16 percent in divisional buyouts. The overall average employment impact of PE buyouts is a statistically insignificant -1.4 percent in our sample. After netting out post-buyout acquisitions and divestitures to isolate organic changes, the overall average impact is -4.4 percentage points The pace of intra-firm job reallocation at target firms rises relative to control firms post buyout. This pattern holds across all buyout types, and much of it reflects greater acquisition and divestiture activity by target firms. Labor productivity rises by an average of eight percent at target firms (again, relative to controls), a striking impact given that targets tend to be mature firms in mature industries. Productivity gains are concentrated in private-to-private and public-to-private buyouts….. Compensation per worker falls by 1.7% at target firms after buyouts, largely erasing a prebuyout wage premium relative to controls. Wage effects also differ greatly by buyout type. In short, the impact of private equity is more complex and varied than champions or detractors claim…Our results also reinforce concerns about public-to-private deals, which account for 10% of PE buyouts from 1980 to 2013 and 31% of employment in target firms. In particular, public-to-private deals proliferate in advance of credit market tightening, and their targets exhibit large post-buyout employment losses and poor productivity performance during aggregate downturns…We examine thousands of U.S. private equity (PE) buyouts from 1980 to 2013, a period that saw huge swings in credit market tightness and GDP growth. Our results show striking, systematic differences in the real-side effects of PE buyouts, depending on buyout type and external conditions. Employment at target firms shrinks 13% over two years in buyouts of publicly listed firms but expands 13% in buyouts of privately held firms,both relative to contemporaneous outcomes at control firms. Labor productivity rises 8% at targets over two years post buyout (again, relative to controls), with large gains for both public-to-private and private-to-private buyouts. Target productivity gains are larger yet for deals executed amidst tight credit conditions. A postbuyout widening of credit spreads or slowdown in GDP growth lowers employment growth at targets and sharply curtails productivity gains in public-to-private and divisional buyouts. Average earnings per worker fall by 1.7% at target firms after buyouts, largely erasing a pre-buyout wage premium relative to controls. Wage effects are also heterogeneous. In these and other respects, the economic effects of private equity vary greatly by buyout type and with external conditions…”

Steven Davis, John Haltiwanger, Kyle Handley, Ben Lipsius, Josh Lerner and Javier Miranda, “The Economic Effects Of Private Equity Buyouts,” Harvard Business School, 2019, https://www.hbs.edu/faculty/Publication%20Files/20-046_ceb00b98-e62a-45db-8d5f-9793ffd0226e.pdf