Is Private Equity's Slash-and-Burn Reputation Overblown?

Aligning the data granularly made it easier to compare reorganized firms. When a PE firm acquires a company, the new owners often split it up or create shell companies to transfer debt or assets into new entities.

“Rather than looking at the firm as a whole, because there's so many acquisitions and divestitures, we're really looking at worker-by-worker level, trying to avoid many of those problems,” Lerner says.

Salary cuts, but fairly stable employment

The researchers found that workers lost jobs and wages after buyouts—but not for the reasons they expected, nor to the extent they anticipated.

Employees were only 2% less likely to be employed after three years. While wages shrank by 18% for workers who left the acquired company during that time, employees unable to find new jobs shouldered most of those losses. Among employees who found new jobs within three years, wages shrank only 0.5%.

The authors closely examined “breaches of trust”—the idea that PE firms identify and target workers who have been at a bought-out company for many years or those who earn more than their peers. They looked in particular at the 10% best-paid workers to see if they were more likely to be laid off. They examined managers and scrutinized different subsamples, such as minorities. They found nothing statistically significant, Lerner says.

The criticism that layoffs follow PE takeovers because the investors operate as “monopsonists”—underpaying workers because they dominate a local market—also isn’t supported by the data, says Lerner.

“We're not able to find any real, convincing proof that that's the case,” Lerner says. “And remember, we're talking about millions of observations here. … We're still not able to find anything that has statistical significance.”

Instead, PE firms tend to target staff cuts at less productive plants versus those factories that are more efficient. They also tend to move better-performing employees to more productive plants. The pattern holds true mainly for workers who earn higher wages. These findings suggest that boosting productivity is a top goal for buyout firms when considering how to manage the workforce after the deal, the authors note.

A more nuanced view of PE

The findings may not satisfy anyone’s view of PE firms, Lerner says. Nevertheless, policymakers, investors, and managers should take a step back and allow for a less linear look.

“One just needs to take a much more nuanced view of the PE industry—the industry and its impact, Lerner says. “That’s a tough row to hoe in this day and age where everything seems so polarized.”

Image: HBSWK with asset from AdobeStock.