Is Trying to Show That PE Creates Jobs a Wasted Effort?

With battles over taxes and registration still looming in Congress, and with potshots still being flung at private equity by journalists, union leaders and others, the Association for Corporate Growth has decided to show naysayers that buyout firms can be a source of job creation and economic good for the country.

A waste of time? I’d argue it is.

Most buyout firms are first and foremost about generating high returns for investors through the buying and selling of cash-flow-positive companies. (Imagine a GP in a road show pitch: “So Ms. LP, how about we skip over the investment multiple and net IRR and just get right to the jobs growth!”) Job creation is often the happy consequence of the LBO strategy; the times when it’s not will continue to provide fodder for industry critics.

Gary LaBranche, president and CEO of ACG, which holds its annual InterGrowth conference next week in San Diego, told sister magazine Buyouts that the organization has created the Middle Market Private Capital Leadership Forum to spearhead the work to produce a better image for sponsors, and to explain the role of lenders, intermediaries and others orbiting the private equity solar system. Of the nearly 14,000 individual members in ACG, about 3,300 come from private equity, said LaBranche.

Ten firms have signed on to the forum, including The Riverside Company, according to Pam Hendrickson, chief operating officer at Riverside and a member of the ACG board of directors.

The effort promises to produce fresh research—at least some of it generated through a collaboration with Harvard professor Josh Lerner, whose earlier study of job creation by buyout shops showed a mixed track record. The forum will also spread the word to policymakers, government officials, think tanks, academics, journalists and others that mid-market buyout shops routinely grow companies, create jobs and enhance their local tax bases. ACG has launched a website at “middlemarketgrowth.org.”

The stakes continue to be high. Hendrickson herself played a part this week in a desperate bid by mid-market firms to reverse a Dodd-Frank financial reform law requirement that buyout shops with $150 million or more in assets under management register as investment advisers with the Securities and Exchange Commission. During a hearing hosted Wednesday, Hendrickson touted the financial support PE firms provide to small businesses. Meantime, a representative of the AFL-CIO, also testifying at the hearing, would have none of it. Calling the repeal efforts “cynical,” he accused buyout firms of costing Americans “tens of thousands” of jobs in recent years.

It’s hard to argue with a strategy of promoting the buyout industry as a source of job creation. Both the National Venture Capital Association and the Real Estate Roundtable, which represents local real estate limited partnerships, have had success emphasizing job and economic growth by their members in their fight against higher taxes on carried interest. It’s made them crucial allies to buyout shops on the issue. (One NVCA press release was titled: “House of Representatives Penalizes Job Creators to Pay for Year End Tax Extensions.”)

In fact, unlike buyout firms, venture capitalists managed to wangle an exemption from the SEC registration requirement in the Dodd-Frank law. In retrospect, the fact that Congress made a distinction between venture capitalists (“job creators”) and buyout firms (accused this week of axing “tens of thousands” of jobs) boded poorly for the latter.

Will promoting job creation more heavily work for buyout shops, too? Earlier research by Lerner and a team of academics, sponsored by the World Economic Forum, found that targets of private equity transactions from 1980 to 2005 simply didn’t produce more net job growth than other, comparable companies. In fact, according to the study, “employment declines more rapidly in target establishments than in control establishments in the wake of private equity transactions.”

The battle to generate positive statistics simply can’t be won at this point. The best the industry can hope for will be to add to the stalemate. And parties on both sides of the debate can always, at will, produce examples to “prove” their point.

Hendrickson told me this week that employment rose 6 percent across Riverside’s U.S. portfolio over the past three years. It’s an impressive achievement in a poor economy. But a reporter like Josh Kosman of the New York Post can still, at any time, pick out several of a firm’s worst deals to argue that the sponsor is a job-killer. Look no further than his recent story on the founder of Bain Capital, “Romney’s Past Is More A Working Class Zero.”

LaBranche said that ACG is prepared to dig in for a long, multi-year battle to demonstrate the industry’s virtues, and to draw a distinction between mid-market firms and the rest of the field. He said the new research would focus on the middle market, where results could prove more favorable.

But I see the PR battle over PE-induced job creation as no longer winnable, if it ever was.

David M. Toll is editor-in-charge of Buyouts magazine. The opinions expressed here are his own. Follow him @davidmtoll. Follow Buyouts @buyouts.

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7 Comments

  • I agree with you, if all they present is anecdotal evidence of job creation. ACG’s new group will have to embark on educating relevant sectors in the public and political arenas on all the benefits of private equity (both buyout and later stage growth). The benefits are much more than just jobs. And, their focus on the middle market should clinch the deal (eventually). The US middle market is the envy of many other developed countries. Our ability to transition companies from small, family owned businesses to robust middle market companies and beyond is very unique. But sometimes, when you have something great in your backyard, you don’t realize how great it is until it is at risk.

  • If you want to tackle the question of job creation in private equity, you probably need to start with differences between strategies and size of the transaction. Large buyouts, especially public to private, are arguable job killers. Where else are you going to make the cuts when you buy something that is already a large relatively well run business. On the other hand, injecting growth capital and management talent into a smaller business with the potential to scale by definition will probably give you job growth and they don’t have to wiz-bang tech companies, either.

    Of course, when you start discussing investing in smaller companies you lose a large portion of the private equity investing universe that has moved into inertia investing (re-upping with large funds). Too much work for the consultants to back smaller funds and not enough fees for established GPs to bother.

  • I disagree, David. I don’t believe the PR battle is unwinnable; it’s just that there never was an effort to show what PE firms CAN do with their portfolio companies (in terms of job creation, creating value, streamlining operations, etc.).

    It’s moreso the “something is better than nothing” approach.

    At this point, when the general public thinks of PE, they think of the heavily-levered LBO days of yore and NOT more cautious approaches (especially from mid-market and lower-mid-market firms, which are the future of the industry).

    Here are more of my thoughts: http://thepereader.blogspot.com/2011/03/industry-thoughts-acg-and-lobbying-part.html

  • I completely disagree. If a PE owned firm lays off works it is to maximize the efficiency of the business as a whole. More efficient firms are the ones that survive and grow. They are the ones that can compete successfully in an increasingly global economy.

    Take as the converse your typical overpaid, bloated auto workforce. It is safe to say their wages are higher than comparable jobs at other companies and also that there are far more workers than you need because of work rules (I used to be a UAW member and it was disgusting). This is pretty much the opposite of a lean clean PE run firm. Yes wages and employment are higher in the short term. This could go on for potentially decades in the case of the auto industry where a foreign country also has to develop supplier industries that supply the stamping tools, bolts, various forms, sealants and adhesives. What happens though is that the inefficient companies eventually see their position compromised, they are less profitable, and the begin the walk of losing market share.

    Efficient companies that create tons of cash are what create jobs, reinvestment in local economies and businesses, and help maintain lifestyle for US workers. That said, we have to fix our trade and budget deficits so that US people/entities remain the owners of these valuable assets but that’s another story…

  • David, while I agree that private equity has sometimes been cast in an unfavorable light, it is fair to note that politicians’ perceptions of the PE world are likely based on clippings & quotes related to a small segment of the industry (when the applicable universe is measured by the total number of PE firms as opposed to dollars under management). More specifically, there are many, many lower middle market PE funds with long track records of fostering portfolio company growth that ultimately leads to job creation. Effecting growth as well as operational improvements is a must in the small deal world as the financial engineering component of dealmaking in this segment has become increasingly muted. A GP may lead with IRRs and multiples of capital in a meeting with an LP, but strong returns are typically a by-product of growth in sales & profits. The aforementioned growth can generate multiple arbitrage, debt reduction and, yes, more dollars for payroll. In pitching an LP, a GP will most certainly also reference the catalysts for this growth as being the GP’s value-add and competitive differentiation. As a Partner in a lower middle market PE fund and a former ACG Global Board Member, I applaud the efforts of ACG and the Middle Market Private Capital Leadership Forum to educate our lawmakers on the intricacies and full breadth of our industry. Finally, I don’t see these efforts as a waste of time since a daunting task is not neccesarily an insurmountable task…….just ask 13th seeded Morehead State if they played hard last against a (much) higher seeded opponent in the NCAA Tournament.

    Anyway, thanks for stating your position and getting me motivated enough to respond…….my first time to do so. Keep up the good work.

  • Thanks for joining the debate everyone, and all the thoughtful responses. I know that many portfolio companies grow, and sometimes rapidly, under PE ownership–we will be honoring one such company as a “Mid Market Deal of the Year” in about 45 minutes (via Twitter @Buyouts). As I noted in my column, I’ve also seen how effective promoting job-creation can be in lobbying Congress (by the NVCA and the Real Estate Roundtable). But I’m not convinced that, in general, the buyout strategy is about job creation–partly due to the borrowing imposed on my portfolio companies to pay for their acquisitions, partly due to the inefficiencies of many targets pre-acquisition (and the need to trim the fat), and partly because that’s what past research has shown. A PR strategy that centers on job growth arguably makes the industry an even bigger target for critics who feel they can prove buyout firms are about job cutbacks. All that said, the industry needs to do a better job of answering its critics and of getting a better shake on the Hill–I see that. One of my earlier columns had a headline that went something like this: “Is the industry going to accept SEC registration without a fight?” I meant it as a call to action. Perhaps it is a little unfair to criticize ACG for now acting. But I also don’t want to see the industry do anything that’s counterproductive.

  • Thanks for joining the debate everyone, and all the thoughtful responses. I know that many portfolio companies grow, and sometimes rapidly, under PE ownership–we will be honoring one such company as a “Mid Market Deal of the Year” in about 45 minutes (via Twitter @Buyouts). As I noted in my column, I’ve also seen how effective promoting job-creation can be in lobbying Congress (by the NVCA and the Real Estate Roundtable). But I’m not convinced that, in general, the buyout strategy is about job creation–partly due to the borrowing imposed on my portfolio companies to pay for their acquisitions, partly due to the inefficiencies of many targets pre-acquisition (and the need to trim the fat), and partly because that’s what past research has shown. A PR strategy that centers on job growth arguably makes the industry an even bigger target for critics who feel they can prove buyout firms are about job cutbacks. All that said, the industry needs to do a better job of answering its critics and of getting a better shake on the Hill–I see that. One of my earlier columns had a headline that went something like this: “Is the industry going to accept SEC registration without a fight?” I meant it as a call to action. Perhaps it is a little unfair to criticize ACG for now acting. But I also don’t want to see the industry do anything that’s counterproductive.

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