AIC Blog: Offering More Context on the New Harvard-University of Chicago Study
A new report by researchers at Harvard University and the University of Chicago affirms just how essential private equity investments are to countless businesses that are looking to grow. According to the study, employment grew by 13 percent when private equity investors bought a privately-owned company and by 10 percent when one private equity fund bought a company previously owned by another private equity fund.
Just as importantly, private equity often helps businesses achieve productivity gains for their workers, meaning the business and its employees get more out of every hour they work. On average, labor productivity grew by 8 percent at firms acquired by private equity investors, according to the Harvard-University of Chicago study. Productivity is one of those terms economists toss around that might not resonate with most people, but it is the measurement of how efficient a business or worker is at generating value. So, these improvements are incredibly important for the individual businesses, as well as the economy as a whole, and private equity has proven to be exceptionally adept at generating those operational improvements to increase productivity in the businesses they back and help run.
This data illustrates just how instrumental these outside investments are for business owners looking to scale up, grow their footprint or offer new products or services. And private equity managers continue to prove they offer these firms the right recipe of managerial expertise and financing to help businesses grow and succeed.
The study did find publicly traded companies often see a slight employment dip in the two years after they are acquired by private equity investors, but this fact demands some context. For starters, private equity investors often buy public companies that are struggling and, therefore, need major change. The researchers found that many of these businesses suffered from poor corporate governance or other management problems that hindered their financial performance before private equity acquired them. Many of these companies faced intense pressure to cut costs before private equity investors took the reins and those private equity investors were forced to make the hard choices their predecessors did not confront.
The other key piece of context is that the study ends in 2013, meaning it covers the immediate fallout of the Great Recession but not the entire economic recovery that followed. That means the report does not capture the extent of the job growth realized by private equity investments made during and after the financial crisis. That was a period of tremendous upheaval in which many public companies faced grave challenges. Private equity’s long-term investment strategy enabled many of these companies to survive and emerge stronger. Many of those gains are not reflected in this data.
Private-equity helps these publicly traded firms regain their financial footing by taking the often-painful steps necessary to achieve those gains. This may include spinning off or closing certain divisions that no longer fit inside broader company. These steps are occasionally painful, but over the long-term, they make the business stronger. And that is a good thing for the workers who remain and those who are subsequently hired by the stronger business.
Moreover, these investments account for just 10 percent of private equity deals. In other words, they are not as representative of the industry as those acquisitions of private companies, and we have already seen how private equity investors add value and jobs to those privately held companies.
This distinction between public and private acquisitions led the researchers to an important conclusion: It “cast doubts on the efficacy of ‘one-size-fits-all’ policy prescriptions for private equity,” they said. That is an important observation at a time when politicians are offering a range of misguided proposals to limit or impede these investments. “This mix of consequences presents serious challenges for policy design, particularly in an era of slow productivity growth (which ultimately drives living standards) and concerns about economic inequality,” the researchers said, according to Politico.
Private equity continues to invest in America, and those investments continue to support millions of jobs.
