Melvin: What People Are Getting Wrong About The Private Equity Buyout Study

https://dailyalts.com/wp-content/uploads/2019/10/54e0d742495ab114a6d98074cf213576083edbe253577548722c7f_640.jpg

The headlines all talk about adverse effects… what did the study actually say?

The Economic Effects of Private Equity Buyouts is a study generating a lot of headlines. These headlines would suggest that private equity has negative impacts on the companies they buy, especially the workforce. But just how accurate are those takeaways?

The Economic Effects of Private Equity Buyouts

If we actually look at what the study says we find: “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.”

The study’s authors are Steven J. Davis University of Chicago, Hoover Institution, Kyle Handley and Ben Lipsius of the University of Michigan, Josh Lerner from Harvard Business School, John Haltiwanger University of Maryland, and Javier Miranda U.S. Bureau of the Census. The professors looked at 9,800 PE buyouts of U.S. firms between 1980 and 2013.

When looking at productivity they found: “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.”

Other Findings in the Report

They also find that the condition of the economy and the credit markets at any given moment in time greatly impact productivity improvements.

The study notes: “Our evidence that buyouts executed amidst easy credit conditions bring smaller productivity gains suggests that PE groups exercise some latitude in how they create value for their investors. When credit is cheap and easy, PE groups may select buyouts, or structure them, to deliver private returns via financial engineering rather than operating improvements. Many PE groups were founded and seeded by investment bankers that historically relied on financial engineering to create private value, employing strategies such as repeatedly re-leveraging firms and ‘dividending’ out excess cash (Gompers, Kaplan, and Mukharlyamov, 2016). In this light, it is unsurprising if PE groups place less emphasis on operating improvements when leverage and dividends deliver high private returns.”

In spite of the headlines that seem critical of Private Equity, the study makes no final declaration on the evil of private equity buyouts.

Instead in their conclusion, the authors note: “Our study takes up that challenge for private equity buyouts, a major financial enterprise that critics see as dominated by rent-seeking activities with little in the way of societal benefits. We find that the real-side effects of buyouts on target firms and their workers vary greatly by deal type and market conditions.”

Private equity has faced a significant amount of criticism from political candidates, mainly Elizabeth Warren. The Democratic frontrunner has proposed a new law that would significantly curb buyout practices. Some argue that the law would effectively end private equity as we know it.

– Tim Melvin

Free Industry News

Subscribe to our free newsletter for updates and news about alternatives investments.

  • This field is for validation purposes and should be left unchanged.


Shape

Latest Alternative Investment News

https://dailyalts.com/wp-content/uploads/2021/01/dragon-872933_640.jpg
FinTech: China Tightens Antitrust Regulatory Screws On Fintechs
January 22, 2021     FinTech, Latest News, News, Regulations

The People’s Bank of China published a draft set of rules on Wednesday for anti-trust regulation of the non-bank payment providers in the fintech sector. The draft is in the…

https://dailyalts.com/wp-content/uploads/2021/01/bitcoin-4353069_640.jpg
Digital Assets: BlackRock Dips Its Toes In Bitcoin Waters
January 22, 2021     Digital Assets, Latest News, News

Filings out Wednesday show that the BlackRock Strategic Income Opportunities Portfolio and BlackRock Global Allocation Fund may invest in cash-settled bitcoin futures, among other assets. BlackRock (NYSE: BLK), the world’s…

https://dailyalts.com/wp-content/uploads/2021/01/summer-169643_640.jpg
Artificial Intelligence: AI Helping Manage Wind Farms By Forecasting Wind Conditions
January 22, 2021     Artificial Intelligence, News

AI is playing an increasingly bigger role in the management of wind energy, wind farms, and the maintenance of wind turbines through machine condition monitoring systems. Google (NASDAQ: GOOGL) predicts…

https://dailyalts.com/wp-content/uploads/2021/01/electric-car-2783573_640.jpg
Alternative Investments/ESG: Harvest Portfolios Launches The Harvest Clean Energy ETF

Harvest Portfolios Group Inc. completed last week the initial offering of Class A Units of the Harvest Clean Energy ETF (TSE: HCLN). The units of the ETF commenced trading on…