Private-Equity Buyouts Don’t Tell a Simple Story

Proponents of private-equity investment say it can unlock a company’s value and improve efficiency. Critics charge that private-equity buyouts can hurt performance, employment, and wages at target companies.

But the effects are more complex than either of these views suggests, according to Chicago Booth’s Steven J. Davis, University of Maryland’s John Haltiwanger, University of Michigan’s Kyle Handley and UMichigan PhD candidate Ben Lipsius, Harvard’s Josh Lerner, and the Census Bureau’s Javier Miranda.

In the past four decades, private-equity operations have reshaped thousands of American companies, affecting millions of workers and acquiring a reputation as business enhancers or destroyers—or both. As the researchers point out, some policy makers are pushing regulation. The European Union imposed the Alternative Investment Fund Managers Directive to prevent “asset stripping” in acquisitions. Massachusetts Senator Elizabeth Warren, a leading Democratic candidate for president, proposed a measure she calls the Stop Wall Street Looting Act of 2019 to broadly regulate private equity.

Davis and his colleagues find that the outcomes of private-equity deals differ greatly by type of buyout and with the broad economic environment during and after the deal. In some cases, employment at target companies plummets after a private-equity investment. In others, there’s a surge in both employment and productivity.

Starting with data on almost 10,000 transactions involving US companies from 1980 to 2013, the researchers focused on 3,600 buyouts that they could track over time. Deals included private-to-private and publicly-traded-to-private buyouts, divisional sales, and secondary sales made between private-equity groups. Using Census data, the researchers estimated the effects of buyouts on target company employment, productivity, and wages over the two years following a transaction, as compared with similar businesses not subject to buyouts. Overall, at the time of the buyouts, close to 7 million US workers were employed by the target businesses in the study.

In the case of public-to-private buyouts, which often attract heavy media attention, the researchers find that employment fell 13 percent over two years following a buyout. This adds fuel to critics’ contention that buyouts harm target companies and their workers.

In contrast, the researchers find, employment rose 13 percent when the target enterprise was privately owned. In the case of secondary buyouts, employment increased 10 percent.