The Global Economic Impact of Private Equity Report 2008 - World ...

Figure 6C compares the actual employment level ofprivate equity transactions pre- and post-transaction withthe implied employment of these targets had they grownat the same rate as the controls. 16 This exercise permitsevaluating the cumulative impact of the differences in netgrowth rates between targets and controls. To conduct thiscounterfactual exercise, the employment level of the controlsis normalized to be exactly equal to that of the targets in thetransaction year. The pattern for the controls shows thecounterfactual level of employment that would have emergedfor targets if the targets had exhibited the same pre- and posttransactionemployment growth rates as the controls. Figure6C shows that, five years after the transaction, the targetshave a level of employment that is 10.3% lower than it wouldbe if targets had exhibited the same growth rates as controls. 17In interpreting the results from Figures 6A to 6C, it is importantto emphasize that the observed net changes may stem fromseveral margins of adjustment. The recent literature on firmand establishment dynamics has emphasized the large grossflows relative to net changes that underlie employmentdynamics (see, for example, Davis, Haltiwanger and Schuh1996). Figures 7A and 7B show the underlying gross jobcreation and destruction rates for targets and controls. It isapparent from Figures 7A and 7B that the rates of grosschanges for both targets and controls are large relative to thenet changes observed in Figure 6. Both targets and controlshave higher job creation rates prior to the transaction thanafter and have higher destruction rates subsequently thanbeforehand. As discussed above, this pattern reflects thenature of the sample construction process.While the overall patterns are similar, there are some interestingdifferences in the patterns of the gross flows between targetsand controls. Figures 8A and 8B show the differences betweencreation and destruction rates, respectively, between targetsand controls. Prior to the transaction, there is no systematicpattern of differences between the private equity-backed targetsand the controls in terms of creation and destruction rates,except for the decline in job creation by the targets in theyear before the private equity transaction. Subsequent tothe transaction, the targets tend to have substantially higherdestruction rates in the first three years after the transaction– though this rapidly drops off thereafter – and about thesame creation rates as the controls.One implication is that the net differences exhibited inFigure 6A after the transaction year are associated with thejob destruction margin. An interesting suggested implicationis that private equity transactions trigger a period ofaccelerated creative destruction relative to controls that ismost evident in the first three years after the transaction.Given its relevance to the net employment pattern, the jobdestruction margin can be explored further in terms of thepatterns of establishment exit. Figure 9A shows theemployment-weighted exit rate (or put another way, the jobdestruction from exit) for the targets and the controls. Bothsets of establishments exhibit substantial exit rates after thetransaction, reflecting that establishment exit is a commonfeature of the dynamics of US businesses. The targets exhibithigher exit rates in the first three years after the transactionrelative to controls. The difference in the exit rates is reportedin Figure 9B. For example, in the second year after thetransaction, private equity transactions have a twopercentage point higher exit rate than controls. In the fourthand fifth years, the exit rate of the targets is actually lowerthan that of the controls.B. Changes in sub-samples of transactionsThe results presented in Section 5.A reflect the resultsfrom pooling across all private equity transactions over the1980–2000 period. The controls account for differences inthe net growth patterns along many dimensions, but wehave not examined whether the patterns differ by observablecharacteristics of the private equity transactions. In thissection we consider a number of simple classifications.To begin, we consider differences in the net growth patternsbetween private equity transactions and controls by timeperiods, industry, establishment age and establishment size.Figure 10 shows the equivalent of Figure 6A for differentsub-periods of transactions. The pattern in the overall dataon employment is more pronounced for the transactionsthat occurred from 1995 onwards. Since the number oftransactions accelerated rapidly over the post-1995 period,it is not surprising that much of the overall employmenteffects depicted in Figure 6C are during this time period.Figure 11 shows how the patterns vary by broad sector. Wefocus on three of the broad sectors where most of the privateequity transactions are concentrated. Within manufacturing, wefind relatively little systematic difference in net growth patternsbetween private equity transactions and controls. We find thatthe level of employment for private equity transactions five yearsafterwards is about the same as if the targets had grown at thesame rate as the controls. (More specifically, the targets are2.4% lower at the end of five years.) Manufacturing is a sectorwhere a large fraction of private equity transactions areconcentrated and in this sector at least, there are fewdifferences between targets and controls.We know, however, from Figure 6A that there are non-trivialdifferences between private equity transactions and controlsin the pooled data. Figure 11 shows that for establishmentsin Retail Trade and Services, we see more pronounced butvolatile differences between targets and controls. While thepatterns are volatile and differ across these sectors, thecumulative reduction in employment for the private equitytransactions compared with the controls is large in both16The sum of employment for targets across all years reported in Figure 6C is about 3.3 million workers. This represents the sum of employmentin the transaction years for targeted establishments over the 1980–2000 period.17The 10.3 percentage point calculation derives from the difference in the level between private equity transactions and controls in year five(about 34,000 employees) divided by the initial base in year zero.50 Large-sample studies: EmploymentThe Global Economic Impact of Private Equity Report 2008