Private Equity and Employment

STEVEN DAVIS, University of Chicago and NBERJOHN HALTIWANGER, University of Maryland and NBER

RON JARMIN, Bureau of the CensusJOSHUA 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

0

50

100

150

200

OtherBuyoutVenture

Billions of 2002 $s Source: Venture Economics and Asset Alternatives.

New buyout fund commitments as % of stock market, 1980-2006

0.00%

0.25%

0.50%

0.75%

1.00%

1.25%

1980 1985 1990 1995 2000 2005

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.

Number of US Target Events: Targets Matched and Total

0

100

200

300

400

500

600

700

800

900

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

matched total

Employment under Private Equity Targets: By Year and as a Percent of Economy

0

0.5

1

1.5

2

2.5

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

0

500

1000

1500

2000

2500

Th

ou

san

ds

Percent of LBD Employment Target Employment (right axes)

Industry Distribution: Targets vs LBD, 1980-2001Employment Weighted

0

5

10

15

20

25

30

35

Pe

rce

nt

LBD Targets

Industry Distribution: Targets vs LBD, 2002-2005Employment Weighted

0

5

10

15

20

25

30

Pe

rce

nt

LBD Targets

Establishment Age Distribution: Matched Targets and LBD(Employment Weighted)

0

10

20

30

40

50

60

a. 0-4 b. 5-9 c. 10+

Per

cen

t

Targets

LBD

Establishment Size Distribution: Matched Targets and LBD(Employment Weighted)

0

5

10

15

20

25

30

35

40

45

50

a. lower 1/3rd of sizedistribution

b. middle 1/3rd of sizedistribution

c. top 1/3rd of sizedistribution

Per

cen

t

Targets

LBD

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 -- Targets less ControlsBefore and After Event

-8.00

-3.00

2.00

7.00

-5 -4 -3 -2 -1 0 1 2 3 4 5

Comparison of Net Growth Rates – Buyouts vs. Controls

Net Job Creation Rates: Targets vs ControlsBefore and After Event

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

-5 -4 -3 -2 -1 0 1 2 3 4 5

Targets Controls

Employment: Targets vs Normalized ControlsBefore and After Event

2,000,000

2,200,000

2,400,000

2,600,000

2,800,000

3,000,000

3,200,000

3,400,000

-5 -4 -3 -2 -1 0 1 2 3 4 5

Targets Controls

Comparison of Job Creation Rates: Targets less ControlsBefore and After Event

-4.00

-2.00

0.00

2.00

4.00

6.00

-5 -4 -3 -2 -1 0 1 2 3 4 5

Comparison of Job Destruction Rates: Targets less ControlsBefore and After Event

-4.00

-2.00

0.00

2.00

4.00

6.00

-5 -4 -3 -2 -1 0 1 2 3 4 5

Comparison of Establishment Exit Rates : Targets less Controls After Event

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

1 2 3 4 5

Comparison of Net Growth Rates -- Targets less ControlsBefore and After Event, Public to Private

-10.00

-6.00

-2.00

2.00

6.00

10.00

-5 -4 -3 -2 -1 0 1 2 3 4 5

Comparison of Net Growth Rates -- Targets less ControlsBefore and After Event, Independent Private/No Seller

-10.00

-6.00

-2.00

2.00

6.00

10.00

-5 -4 -3 -2 -1 0 1 2 3 4 5

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.

Table 1: Employment and Establishment Growth Rates: Target Firms relative to Controls (Deals through 2003)

Dependent Variable: Employment Growth Rate Establishment Growth Rate

Target Dummy -0.036 0.009 (0.002) (0.002)

R-squared 0.134 0.09 Number of Observations 675,640 675,640 Notes: Regressions based on sample of Target and Control firms with growth rates calculated over two year horizon from event year t to t+2. All specifications include fully interacted industry, year, firm age, firm size, and Single Unit/Multi-Unit effects. All specifications are employment-weighted. Omitted group are non-Target firms.

Table 2: Employment and Establishment Growth Rates: Target Firms relative to Controls: By Deal Type (Deals through 2003)

Dependent Variable: Employment Growth Rate Establishment Growth Rate

LBO Type: Public to Private -0.161 -0.065

(0.005) (0.005) Independent private/no seller -0.028 0.082

(0.004) (0.004) Divisional/Non-financial Corporate Seller 0.048 -0.002

(0.003) (0.003) Secondary/Financial Firm Seller -0.235 -0.053

(0.007) (0.007) All other LBO types 0.015 0.003

(0.025) (0.023) R-squared 0.137 0.091 Number of Observations 675,640 675,640 Notes: Regressions based on sample of Target and Control firms with growth rates calculated over two year horizon from event year t to t+2. All specifications include fully interacted industry, year, firm age, firm size, and Single Unit/Multi-Unit effects. All specifications are employment-weighted. Omitted group are non-Target firms.

Table 3: Greenfield Entry, Establishment Exit, Acquisitions and Divestitures (Two Year Employment Weighted Rates)

Targets Controls

Greenfield Entry Rate 14.9 9.0

Establishment Exit Rate -16.7 -8.1

Establishment Acquisition Rate 7.4 4.7

Establishment Divestiture Rate -5.8 -2.9

Continuing Establishment Net Growth Rate -1.7 -0.1

Weighted Two Year Growth Rate -1.9 2.6

Reported are Employment-Weighted Means of Rates as Percent of Average of Firm Employment in Event Year and Event Year + 2.

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