In what follows, I and my co-authors respond to criticism voiced by the British Private Equity and Venture Capital Association (BVCA) about a study we conducted. The original BVCA press release can be found here.
A new paper by Geoffrey Wood of Warwick Business School, Marc Goergen of Cardiff University and Noel O'Sullivan of Loughborough University - 'The Employment Consequences of Private Equity Acquisitions: The Case Of Institutional Buy Outs' - looks at the changes to employment and productivity in companies that have been the subject of institutional buyouts (IBOs) compared to matched companies that did not receive such a buyout.
The paper looks at an initial total of 106 IBOs
undertaken over the period 1997 to 2006. This is in the context of 2,200
management buyouts (MBOs) and 500 management buy-ins (MBIs)[1] taking place in the UK over the same time
period.
As it makes explicit, the study focuses
"exclusively on the employment consequences of institutional buyouts
(IBOs), as these are more likely to lend themselves to the type of negative
employee consequences politicians and trade union representatives are most
concerned about".
Rather than ensuring that the report overcomes
the difficulties of recognising the heterogeneity of private equity investment
and providing "greater empirical clarity" to the issue, this simply
means that the report is a partial and unrepresentative look at private equity.
The study concerns itself with a very small subsection of private equity deals
and therefore any claims that this represents the private equity industry as a
whole are erroneous.
We do not
claim that our study is representative of the whole private equity industry; the
focus of our study is institutional buy-outs (IBOs). IBOs are acquisitions by
private equity houses of publicly quoted UK companies. Hence, contrary to some
of the existing studies we do not include relatively small, unquoted private
companies. Some of the companies covered by our study include Debenhams, Pizza
Express and United Biscuits.
It appears that the authors have begged the
question - they have started with the hypothesis that private equity is
damaging to employment, wages and productivity, and sought to examine only
those deals which they believe are most likely to prove this hypothesis.
Our
hypothesis is that one particular type of private equity, i.e. IBOs, is damaging
for employment. In contrast to previous studies, we do not amalgamate very
different types of private equity. Few would disagree that management buy-outs,
which do not involve a change in management, are bad for employment. By
amalgamating MBOs with other types of private equity, one would equally bias
outcomes toward positive employment effects. This is something we have gone out
of our way to avoid.
The fact
that one actitvity has mostly positive effects does not provide a justification
for ignoring the mostly negative effects of certain expressions of that
activity.
Of the 106 IBOs the report claims to examine, by
the time of the first year post-buyout this number has fallen to 68. By year
four, the number is just 56 - an ever smaller sample size than the one
originally stated.
The drop in
our sample is a reflection of the secretiveness of the private equity industry
and the difficulty of tracing target firms after their acquisition. We have
made a colossal effort to trace firms after their acquisition, but in some
cases a lack of disclosure, often combined with a move of the target firm’s
headquarters to tax heavens such as Nassau or Luxembourg, has prevented us from
obtaining data post-acquisition. The cynic would state that some private equity
houses make a huge effort to hide their target firms within a chain a shell
companies. We encourage the BVCA to improve disclosure by the industry so that
studies such as ours can be more representative..
Of further note, the report looks only at the
first four years post-buyout. The average private equity holding periods tend
to be five to seven years. As such, it provides an incomplete view of the
impact of private equity backing. In addition, a significant number of the
companies in the IBO sample (40 of 106) are from 2005 and 2006 - meaning the
performance of both these and the comparator companies is likely to have been
impacted by the global financial crisis and the attended economic uncertainty.
This
criticism is not founded. We adjust for industry-wide as well as
period-specific trends in the data. In any case, our study compares the private
equity targets with two control samples of non-acquired firms. We cannot think
of any reason why the global financial crisis would have hit the private equity
targets, but not the non-acquired control firms of a similar size and operating
in the same industries.
Despite acknowledging the fact that the companies
undergoing an IBO tend to be underperforming (with productivity statistically
significantly lower for the IBO companies), the report fails to acknowledge
that this is likely to lead to restructuring and the divestment of
underperforming segments of the business. The reduction in employment numbers
that the study points towards is therefore unsurprising in this context.
We agree
that restructuring of the target could be beneficial. However, we observe a
statistically significant drop in employment after adjusting for
differences in productivity and labour costs between the private equity targets
and the non-acquired firms. If your argument were correct, we would not find
any differences in employment growth between the target firms and the
non-acquired firms as such differences would be entirely explained by the lower
productivity and the higher wage costs in the target firms.
As indicated above, a more typical form of
private equity investment is via management buyout, in which the existing
management team of a company acquires a controlling equity stake in the
business with private equity support.
Studies in this area are far more encouraging and
find that companies that have been the subject of an MBO outperform comparable
companies that have not. Indeed, Wood et al acknowledge this point in their own
report.
For example, in September 2012 a report by the
Centre for Management Buyouts and the Credit Management Research Centre found
private equity-backed buyouts achieved superior economic and financial
performance over the period 1995 to 2012, which includes the economic downturn,
than comparable non-private equity buyouts and listed companies[2]. This was a far larger study than Wood et
al as it is based on a dataset of 400,299 company-year observations and 30,736
observations of companies that experienced a private equity backed buyout.
Private equity's positive impact on productivity
has been well-established in a number of similar academic reports (a sample of
which can be found below). By looking at such a small section of private equity
activity, the paper produced by Warwick Business School is of minor relevance
to the wider debate about how the private equity industry creates value in the
companies in which it invests.
Again, the authors
of this reply equate private equity with MBOs. The point of our study is that
amalgamating IBOs and MBOs is not justified. While there may be fewer IBOs than
MBOs the former concern large public firms whereas the latter concern smaller,
frequently private held firms. If this makes our study irrelevant then we are
happy to accept this criticism.
Comments
Post a Comment