the impact of private equity investing -- 11/16/22
Today's selection -- from Private Equity at Work: When Wall Street Manages Main Street by Eileen Appelbaum. Investing in privately held companies by private equity firms that specialize in this type of investing has become a widespread phenomenon over the past generation. While the approaches and results of these private equity firms vary widely, what has been the overall impact of this form of investing on the quality of jobs, employment levels, and labor relations?:
"Earlier chapters examined the private equity business model, how PE makes money, and how different types of PE firms influence the management of organizations across a wide spectrum of industries and markets. We have argued that the classic private equity model is different from that of public corporations in its debt-heavy capital structure, light legal oversight, lack of transparency and accountability, and higher risk-taking. We have also shown that the PE market is segmented, with buyouts of small and midsize companies offering less collateral for leveraging debt and more opportunities for operational improvements than larger companies with values of $500 million and above. These differences suggest that buyouts of small and midsize companies offer more opportunities for job growth than buyouts of large corporations, where use of leverage, financial engineering, and downsizing are more likely.
"With such a varied landscape, what conclusions can we draw about the net effect of private equity on the quality of jobs, employment levels, and labor relations? That is the question we tackle in this chapter. It is a difficult one to assess because portfolio companies that are taken private offer little publicly available information, and private equity firms consider proprietary the strategies they use to manage their workforces and internal operations. The research record on this topic is thin, and the data typically come from the interested parties -- the PE owners themselves. Nonetheless, there are a small number of rigorous econometric studies on the overall impact of PE investment on employment, productivity, and wages in the United States, and we carefully review these studies in the next section. In addition, we draw on a series of original case studies in private equity-owned companies to examine the process and impact of takeovers on the quality of jobs and pay as well as labor relations in union-represented workplaces.
"In general, the most rigorous econometric studies show that job destruction is greater than job creation in PE-owned companies compared to their publicly traded counterparts. Moreover, job destruction is particularly steep for buyouts of public corporations that are taken private. These findings are contrary to the claims of private equity advocates that PE firms often buy up financially distressed companies, turn them around, and are an important source of job growth for the U.S. economy. In fact, the econometric evidence shows that compared to comparable public companies, those acquired by private equity have higher employment growth in the five years prior to acquisition and the acquisition year. And as noted earlier in our book, prior to the 2008 financial crisis, distressed investing accounted for only about 2 percent of PE acquisitions. As in the leveraged buyouts of the 1980s, private equity today targets companies with strong fundamentals. The quantitative research also shows that PE-owned companies have higher productivity than comparable public companies in the acquisition year, and increase productivity primarily through downsizing, plant closings, divestitures and acquisitions, and production shifts to consolidated units-not to improvements in productivity in existing or ''brownfield' sites. Finally, compared to companies not taken over by private equity, wages are higher in the acquisition year in companies purchased by private equity, but post-buyout, wages fall. Thus, the productivity-wage gap increases after private equity acquires a company.
"These findings of higher job and income loss for employees in PE-owned companies indicate that private equity contributes in important ways to the growing inequality in the U.S. economy. Private equity depresses the wages of employed workers, and those who are laid off-particularly blue-collar workers-typically do not find new employment with wages and benefits as high as their prior jobs. But PE partners make outsized returns from these strategies.
"No quantitative data exist to trace the impact of private equity on work intensification and labor relations, so it is not possible to summarize a 'net effect' of private equity in these areas. But similar to the patterns of job growth and destruction in PE companies, our case studies show a range of different labor strategies used by PE firms. We found little evidence that private equity owners are generally more hostile to labor unions and collective bargaining than managers in publicly traded corporations. There are examples of both small and large PE firms that have negotiated contracts in good faith with unions; in other cases, a private equity firm's anti-union animus has led to serious labor law violations. American and foreign-owned publicly traded companies across the board take advantage of the lax labor laws in the United States that give wide girth to managerial prerogative in the hiring, firing, and management of labor. In contrast to their counterparts in Europe, where a thicker web of labor institutions shapes labor-management relations and curbs some excesses, PE owners in the United States face few institutional constraints on their behavior. U.S. unions lack the legal support of codetermination or the works council laws that require new owners in the European context to consult or negotiate with unions over restructuring and the transfer-of-ownership laws that require new owners to abide by prior labor contracts.
"The variety of cases in this chapter reflects this thin institutional landscape -- from instances in which new private equity owners exhibit a high level of hostility toward unions to instances in which they have an explicit commitment to peaceful labor relations as a strategy to make money. The attitudes of private equity investors towards labor vary from hostile to pragmatic to indifferent. Their labor strategies depend in part on the philosophies or strategic assumptions of the PE firm's leaders. In some cases, new PE owners have had the advantage of building a labor relationship from scratch -- in contrast to prior owners mired in a deep legacy of union mistrust and conflict. As our study of the steel industry demonstrates, the new PE owner Wilbur Ross negotiated directly with the steelworkers union on more pragmatic grounds than did the managers of the publicly traded steel companies that preceded him. In this and other cases, PE owners exhibited no particular position on labor: as long as they made their targeted returns, they were agnostic about whether a union was present or not. In the case of Wilbur Ross, his three year investment netted him $4.5 billion -- just equal to what retirees lost in their health and pension plans.
"But this is where private equity owners, because they promise to extract higher-than-average returns in a short time frame, appear to diverge from their public company counterparts. As most union workplaces offer higher wages and benefits than their non-union counterparts, PE owners have sought substantial cuts in jobs, wage levels, benefits, and, especially, pensions -- even in companies that were financially healthy when they were taken over. The need to service the debt drives job cuts and an increase in workloads for remaining workers. In sum, the available case record shows that whether private equity firms negotiate or not with unions, the earnings of PE owners often come at the expense of workers' jobs, income, and retirement savings."