Private Equity and Employment STEVEN DAVIS, University of ...

Private Equity and Employment STEVEN DAVIS, University of Chicago and NBER JOHN HALTIWANGER, University of Maryland and NBER RON JARMIN, Bureau of the Census JOSHUA LERNER, Harvard University and NBER JAVIER MIRANDA, Bureau of the Census March 14, 2008

Overview
Longstanding interest in impact of ownership changes on productivity and employment:
E.g., Lichtenberg and Siegel (1987), McGuckin and Ngyugen (2001) with mixed results,
Private equity transactions of particular interest:
Dramatic increase in last decade
Question : Are PE transactions associated with employment reductions and establishment shutdowns?
To address this question, we use a large dataset containing thousands of PE transactions matched to the universe of U.S. firms and establishments.

Private equity worldwide
$1.3 trillion allocated to PE funds as of July 2006, including funds not yet committed ( Private Equity Intelligence estimate):
Roughly 2/3 in buy-out funds, 1/3 venture capital.
We’ll be focusing on fomer.
A record year in 2006 with respect to:
Aggregate fundraising
Investment activity by PE funds
Size of individual PE funds
Number of very large transactions

U.S. private equity fundraising, 1969-2006

New buyout fund commitments as % of stock market, 1980-2006 Source: Venture Economics, Asset Alternatives and Datastream .

Evolution of U.S. private equity
Typical buyout transaction is now friendly, not a hostile takeover (as was often the case in 1980s).
Less emphasis on leverage, more attention to target’s operating strategy and performance
Secondary buyouts now eclipse IPOs as exit vehicle
More liquidity in low-grade debt markets, until recently
U.S.-style PE structures are spreading to other countries and new asset classes (e.g., real estate)
Blurring of boundary between private and public equity:
PIPEs.
Blackstone IPO; KKR filing.
SPACs.

Buyout effects on employment
A controversial issue …
Political debates in Europe and increasingly U.S.
In response, variety of high-profile studies, e.g.:
European Venture Capital Association [2005].
British Venture Capital Association [2006].
Financial Times [2007].
Ermst & Young [2007].
Suggest positive view of employment effects.

Major issues with these studies
Mixture of venture and buyout firms.
Reliance on survey responses.
Inability to discern where jobs are being created and destroyed.
“ Despite claims by recent reports that private equity buyouts create jobs, serious problems with the studies’ methodologies, assumptions and conclusions raise significant questions about the reports’ accuracy and reliability.”
Service Employees International Union [2007].

Studies of broad effects of LBOs
Intensive studies of small samples of LBOs:
Kaplan [1989]: 76 large buyouts.
Muscarella and Vetsuypens [1990]: 72 reverse LBOs.
Basic conclusions:
Substantial increase in profitability and market value.
Only modest losses in employment, once firms with asset sales are eliminated.

Studies of buyout effects on productivity and employment
Four studies:
Lichtenberg-Siegel [1990]: 48 US MBOs (Census data).
Amess [2003]: 40 whole-firm UK buyouts (OneSource).
Harris, Siegel and Wright [2005]: 989 UK buyouts (ARD).
Amess and Wright [2007]: 1350 UK buyouts
Consistent conclusions:
Increase in total factor productivity.
L&S also show:
Labor declines after buyout, but at slower rate than beforehand.
Ratio of non-production to production works falls.
Production worker wages rise.
Amess & Wright also show:
No significant impact on employment.
Lower wage growth than at peer firms.

Desirability of a broader look
Growth of private equity market since 1980s:
Many more buyouts and more important impact.
Increased sophistication and operational orientation of industry….
But also more competitive pressures.
Importance of U.S. market.

Data infrastructure
Capital IQ data on private equity transactions yields roughly 5,000 U.S. transactions from 1980-2005.
Integrate with Longitudinal Business Database at Census:
Universe of private, nonfarm business firms and establishments from 1975 to 2005.
Also, integrate with Dealogic and COMPUSTAT.
Integration yields approximately 200,000 establishments that are part of “target” for private equity transactions.

Objective and Methodology
What happens to establishments that are part of target of private equity transaction?
Event study compared to controls – given LBD can generate controls matched by industry, size, age and year (as a start…)
Dynamics of employment and survival

Establishment-level exercises
Start with all buyout events in a given year t.
For all establishments in target with positive activity in buyout event year, track their behavior before and after event.
Compute net growth rate series before and after event and decompose into creation, destruction and entry and exit as relevant
Only establishments with positive activity in event year are used for these calculations (e.g., for now if targeted firm adds an establishment after event we are not including that activity in these calculations)

Comparisons to Control Groups
Patterns need to be contrasted with control groups – i.e., any patterns we detect may be due to industry, time or life cycle patterns for establishments. To explore this, we compare and contrast the patterns for buyouts to control groups:
For every buyout event, match establishments to random sample in same industry, size, age, year cell.
For control group sample, generate same statistics as for buyout establishments
Compute net growth, job creation and destruction patterns
Compute counterfactual employment for buyout cases – what would employment evolution have looked like if buyout had average patterns for industry, size, age and year.
Compare buyout employment to controls counterfactual

Comparison of Net Growth Rates – Buyouts vs. Controls

Taking Stock
For establishments that existed at time of event, there is a pattern of employment loss, job destruction and exit for targets relative to controls
More pronounced for public to private deals
This analysis of obvious interest to those workers at existing establishments but ignores greenfield entry…

Firm-level analysis
Focus on target firms that are trackable from date of event for two years
Induces potential selection bias that is complex since those that cannot be tracked may be truly exiting or undergoing complex reorganizations
This concern is mitigated as we find that a large fraction of employment in our sample of targets is not subject to such selection bias.
Even so, firm growth may be from within establishment changes, changes in number of establishments (establishment entry or exit or acquisition and divestiture)
We can account for each of these separately.

Caution: Need to regression equivalent of Tables 1 and 2

Summing Up
Targeted establishments exhibit net employment contraction, higher job destruction and establishment exit relative to controls.
Targeted firms exhibit higher greenfield entry and more acquisition and divestiture
Patterns differ by type of transaction (e.g. public to private)
But just the beginning – role of private equity transactions in productivity enhancing creative destruction?
Substantial evidence that large fraction of U.S. productivity growth accounted for by creative destruction

Private Equity and Employment STEVEN DAVIS, University of ...

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