Updated: The most persistent private equity myth is that the industry makes money by acquiring companies and then selling them off piecemeal. For example, Frank Gaskins of IPOdesktop.com said the following last Friday when we both were on CNBC to discuss the possibility of a Blackstone Group IPO: “[Blackstone’s] basic business is to buy to strip and sell, to destroy the balance sheet.”
I objected, in large part because Blackstone has credibly claimed to have created tens of thousands of jobs at its portfolio companies. But still…
Now there is a new study that supports my objection. Consulting firm A.T. Kearney has analyzed empirical data from multiple studies in the U.S. and in Europe, and concluded the following: “PE investors often create a significant number of new jobs – one million over the past four years in Europe and 600,000 in the United States. And PE-financed firms, on average, generate employment at a much faster pace than comparable, traditionally-financed firms.”
For example, A.T. Kearney found that the average rate of employment growth at PE-backed companies in Europe between 2000 and 2004 was 5.4%, compared to a 2.9% rate at “traditionally” financed companies. In the U.S. that figure was 2.3% compared to -0.7 percent. The study also examined job creation/loss accross 10 industry sectors, and learned that jobs are generally created in eight of them post-PE financing. The only exceptions were software (1% job loss) and semiconductors (10% job loss).
It is important to note, however, that I have two significant questions about this study that I’m still awaiting answers on — and likely will have to wait until tomorrow since the study’s authors are in Europe:
- The study does not say if the new job figures of 1 million and 600,000 are net or gross. This is important given the perception that PE firms are eager to lay off existing employees following a turnover. I’m assuming it’s net, but you know what they say about those who assume…
- The study defines “private equity” as everything from early-stage venture capital to mega-leveraged buyouts (as do I), but I want to know how much of the job creation growth percentages are based on VC deals as opposed to buyout deals. After all, the very nature of early-stage financing is that it will create jobs — as there are rarely any to lose in the first place. Much different situation when you’re discussing buyouts of established companies with large employee rosters.
Download study here: Private_Equity_Jobs1.pdf
Update: The original version of the jobs study (Employment.pdf) was conducted for the European Venture Capital Association, and Sabine of the EVCA answers my above questions. She writes:
“The one million additional jobs created in Europe is net, i.e. any reductions are accounted for. This is for PE overall (hence VC and BO), but we also have a split for VC and BO (i.e. 420,000 jobs created by BO financed companies and 630,000 by VC – please se page 6 of the report)
Regarding the growth rate (again for Europe), the 5.4% is for PE overall. The split is however 2.4% annually for BOs and 30.5% for VC (see page 7). In the study, you also have a chapter on growth by BO background (showing that family businesses are strong employment creators, while turnarounds have as one would suggest, have a rather negative employment effect – page 18). There are also some growth rates by company size, sector, etc.