Private Equity, HRM and Employment - Balancing the debate
Discussions concerning private equity practices are often highly-charged – with proponents arguing that private equity deals create value, and critics characterising private equity firms as ‘sharks’ looking for quick profits at the expense of workers.
Mike Wright (Imperial College Business School and Ghent University), Nick Bacon (Cass Business School), Rod Ball (Imperial College Business School and Ghent University), and Miguel Meuleman (Vlerick Business School and CMBOR) offer a more balanced, systematic view of what private equity is all about with regard to employment relations.
Drawing on empirical evidence from various countries and institutional contexts, these authors have analysed the global impact of private equity backed leveraged buy-outs (LBOs) on employment and wages, HRM practices, and industrial relations.
They focus on these aspects because the impact of private equity LBOs on labour management and workers’ interests continues to inform debates concerning the appropriate regulatory framework in which the private equity industry operates. The authors maintain that, unless a cost-benefit analysis informs this regulatory framework, poorly-designed legislation may favour potentially less efficient organisational forms and, ultimately, fail to protect workers’ interests while hindering economic recovery and growth.
Considering the context
Mike Wright: “When you look at the systematic evidence, the effects of private equity are more nuanced than critics would claim. Regarding employment effects, it’s important to recognise the conditions under which certain types of private equity buy-outs take place. This can involve restructuring businesses that were perhaps no longer viable or were seriously under-performing – and that, without the restructuring, these businesses might have failed completely. So the business continues in a reduced form, but it continues as a viable business.”
Miguel Meuleman: “There seems to be a link between the background and expertise of the private equity firm and the extent to which it focuses on long-term growth or purely short-term efficiency in the transaction. In general, the players in the industry seek a match between the private equity firm’s skills and the way in which the business in question is under-performing.”
Mike Wright: “Another type of buy-out can actually bring growth-potential – for example, consider a firm that is part of a larger group but that has become neglected (these are often called ‘corporate orphans’). The firm does indeed have growth potential, but within the group structure it hasn’t had the opportunity to grow. In these cases, the business shows significant growth after the buy-out.”
Different types of private equity LBOs
The authors find that it depends on the type of buy-out involved – whether it is growth-oriented or restructuring-oriented, for example – and the time scale of the deal (short-term vs. long-term).
Highlighting the impact of creating value through short-term versus long-term ownership, and strategies emphasising increased efficiency or growth, the authors have developed a framework of four different types of private equity LBOs (see Figure 1) in order to analyse and assess their labour management aspects.
In suggesting that private equity LBOs have negative implications for worker’s interests, most critics concentrate on the buy-outs that involve short-term ownership and a focus on improving efficiencies (Quadrant 1 in Figure 1). The authors’ analysis of the employment, wages, HRM and industrial relations consequences indicates that most private equity LBOs are not of this type but fall into the other quadrants in Figure 1. On average, the types of private equity LBOs most likely to fall within Quadrant 1 appear to be management buy-ins and investor-led buyouts of listed corporations (usually because of performance difficulties). Still, some deals of this type may also fall within the other quadrants.
The authors report that long-term employment growth differs little in private equity LBOs compared to other firms in the private sector. ‘Creative destruction’ in private equity LBOs involves the rapid process of divesting non-core businesses and acquiring and developing new businesses. There is little evidence that the bankruptcy rate of private equity LBOs is greater than that for other comparable firms, particularly in the recent recessionary period. Private equity LBOs appear to be an effective mechanism for sorting establishments and workers to more efficient uses.
They have also found no overall evidence of negative effects on wages after private equity LBOs. However, they emphasise the importance of recognising the heterogeneity of LBO types, with the employment and wage effects being generally more positive in management buy-outs than in management buy-ins.
Studies conducted in Europe, the US, and Asia generally show positive effects of private equity LBOs on employment and wages, and that private equity LBOs are better managed than firms under other alternative forms of ownership. However, country and institutional contexts appear to matter, with employment and wage effects appearing to be more positive outside the US and the UK.
More regulation is not necessarily better
Comparisons with control groups of firms under alternative forms of ownership provide insights into the possible consequences of regulations to discourage the private equity business model. Appreciating the different types of private equity LBOs enabled a better understanding of the impact of new organizational forms and financial markets on labour management.
On the basis of these findings, the authors conclude that effects may vary between buyout types, and that it is inappropriate to regard most private equity LBOs as resembling a zero-sum game with value transferred to shareholders at the workers’ expense. Comparing private equity LBOs with other alternative forms of ownership does not suggest that increased regulation of private equity ownership will necessarily further workers’ interests.
Source: “Private equity, HRM and employment” by Miguel Meuleman (Vlerick Business School) together with Nick Bacon (Cass Business School), Mike Wright (Imperial College Business School, Ghent University) and Rod Ball (Imperial College Business School, Ghent University). Published in Academy of Management Perspectives.