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University research says private equity effect on jobs is mixed

Jan. 25, 2008

Employment falls more rapidly at businesses acquired by private equity groups than at comparable businesses without private equity ties, according to a new study by Steven Davis, a professor at the University of Chicago Graduate School of Business. However, businesses backed by private equity also create more new jobs at new facilities than other businesses.

“The employment response to private equity buyouts is mixed. Existing jobs at buyout targets are more likely to disappear, but the buyout targets also create more new jobs at new facilities. This pattern is consistent with the view that private equity groups act as catalysts for change in the economy,” said Davis, the William H. Abbott Professor of International Business and Economics.

The study, “Private Equity and Employment” (.pdf), was released Friday, Jan. 25 at the annual meeting of the World Economic Forum in Davos, Switzerland, as part of “The Global Economic Impact of Private Equity Report 2008.” (.pdf)

The report examines employment outcomes at 5,000 U.S. companies acquired by private equity groups during a 25-year period ending in 2005. These companies operated about 300,000 business establishments at the time of acquisition and employed millions of American workers.

In the first two years after acquisition, employment declined seven percent more at the facilities operated by buyout companies as of the acquisition date than at comparable companies without private equity ties. But that’s only part of the story. “One of our key findings is that firms with private equity backing create more new jobs at new facilities in the first two years after acquisition than comparable firms without private equity ties. Jobs newly created at new facilities over a two-year period post buyout amount to 15 percent of initial employment for firms with private equity backing, compared to 9 percent for firms without private-equity ties.

Private equity targets also engage in more acquisitions and more divestitures than other companies, according to the report. In the two-year period after the private equity transaction, the employment-weighted acquisition rate was 7.3 percent for target firms and 4.7 percent for other firms. The employment-weighted divestiture rate was 5.7 percent for target firms and 2.9 percent for other firms.

In addition to Davis, other authors of the report are John Haltiwanger from the University of Maryland, Ron Jarmin and Javier Miranda from the U.S. Bureau of the Census, and Josh Lerner from Harvard Business School.



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Last modified at 10:43 AM CST on Friday, January 25, 2008

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