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BVCA Response to Warwick Business School Report

Publish Date 6 Jun 2013
Categories Research

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.

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.

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.

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.

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.

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.

Further Reading
  • Wright, Amess and Bacon, 2013. What are the wage and employment consequences of leveraged buyouts, private equity and acquisitions in the UK?

  • Bloom, N., Sadun, R., and J., Van Reenen, 2009. Do private equity -owned firms have better management practices. Centre for Economic Performance occasional papers, CEPOP24. Centre for Economic Performance, London School of Economics and Political Science, London, UK.

  • Cressy, R., C., Munari, F., and A., Malipiero, 2007. Playing to their Strengths? Evidence that Specialization in the Private Equity Industry Confers Competitive Advantage.

  • Further studies are also referenced in the ICAEW's 'Private Equity demystified: 2012 update' by John Gilligan and Mike Wright, specifically on p 61-62.

  • [1] BVCA Reports on Investment Activity, 1997-2006

  • [2] 'Private Equity Portfolio Company Performance Over Time', 2012, Wilson, Wright, et al