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

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one that we plan to pursue in future research. In addition,the speculation above about reorganizations vs firm exitsfor targets and controls requires further research.These difficult conceptual and measurement issuesassociated with sample selection bias make it difficultto derive a “bottom line” number about the impact onemployment from private equity transactions. We cansay with confidence that the net impact on existingestablishments is negative and substantial. We can alsosay with confidence that for a sample of surviving firms,we observe more greenfield entry, more acquisitions,divestitures and establishment shut-downs, and a negativenet impact on employment that is substantial but smallerthan that from the establishment-level results that ignoregreenfield entry. The computation of a “bottom line” overallnet number, however, requires further research exploring thedynamics of the firms and establishments that are in theestablishment-level sample but not in the firm-level sample.6. Conclusions and future areasof investigationThis paper examines the question of employment outcomes atthe targets of private equity transactions at a far more granularlevel than earlier studies. We focus on 300,000 US privateequity-backed establishments in the period from 1980 to2005. Among the most interesting results that emerge are:1. The establishments of target firms that exist at the timeof the transaction exhibit lower rates of net employmentgrowth in the years before, of, and immediately after aprivate equity transaction, when compared with a groupof similar control establishments.2. In the second and third years after such transactions,these targets have considerably lower net job growththan control establishments.7. In like fashion, we find that target firms have both higheracquisition and divestiture rates (on an employmentweightedbasis) relative to controls. Combined with theresults on entry and exit, target firms have a much higheroverall rate of change in establishments owned than controls.The LBD and related micro datasets contain a rich arrayof information beyond simply information on employmentlevels. These include information on the composition andcompensation of employees, labour and total factorproductivity. We intend to explore these consequences ofprivate equity transaction in subsequent papers using thesedata. These efforts are particularly relevant, given that theformulation of policy recommendations regarding privateequity must consider not just changes in employment levels,but a wide variety of other considerations.Also in future work, we plan to examine the employmentand productivity outcomes for corporations that sell toprivate equity groups. Many divisional buyouts consist ofdivestitures of underperforming units that may be consumingmanagement attention. Schoar (2002) documented thatacquisitions may lead managers to neglect core business,a pattern she called the “new toy” effect. It will be interestingto observe whether the same pattern exists in reverse forthe sellers in divisional buyouts.Finally, we highlight the need to focus on the experienceoutside the US. While the US has the oldest and largestprivate equity industry, the industry elsewhere is experiencingrapid growth (Strömberg 2008) and in many cases, evolvingin different ways. Understanding whether the dynamics ofprivate equity and employment are similar or different in thesemarkets is an important challenge.3. By the fourth and fifth years, job growth of the targetfirms is slightly above that of the controls.4. Target establishments seem to create roughly as many jobsas similar control establishments. The lower net job growthof about 10% over the five years after the transactionappears to be generated via higher gross job destructionas the new private equity-backed owners shed presumablyunprofitable segments of the target firms.5. These patterns are exclusively confined to Retail Trade,Services and Financial Services: there is little difference in thepost-transaction growth of the target firms in Manufacturing.6. When we examine greenfield entry, the target firms havea substantially higher job creation rate (as a share ofemployment) through the opening of new greenfieldfacilities in the two years after the transaction than thecontrols. However, target firms also exhibit a much highercumulative job destruction rate from establishment exitsrelative to controls.54 Large-sample studies: EmploymentThe Global Economic Impact of Private Equity Report 2008
FIguresFigure 1: Matches of private equity targets to LBD(US Census Bureau Longitudinal Business Database)Number of US target events: targets matched and totalFigure 2: Value of private equity targets(total and matches)Value of targets, matched and total by year ($ million)$ million (’000)90080070060050040030020010001601401201008060402001980198119821983198419851986198719881989199019911992199319941995199619971998199920002001200220032004200519801981198219831984198519861987198819891990199119921993199419951996199719981999200020012002200320042005MatchedTotalMatched valueTotal valueFigure 3: Employment of matched targets(level and % of LBD total)Employment under private equity targets: by year andas a % of economyFigure 4:Figure 4A: Industry distribution: targets vs LBD [1980–2001](employment weighted)%35%2.5250030252.01.51.0200015001000Thousands201510500.50.01980198119821983198419851986198719881989199019911992199319941995199619971998% of LBD employment1999200020012002200320042005500Target employment (right axis)0Agricultural servicesMiningConstructionManufacturingTransportation,communication and utilitiesWholesaleRetailFinance, insurance,real estateServicesLBDTargetsThe Global Economic Impact of Private Equity Report 2008 Large-sample studies: Employment 55
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The Globalization of Alternative In
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ContributorsCo-editorsAnuradha Guru
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PrefaceKevin SteinbergChief Operati
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Letter on behalf of the Advisory Bo
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Executive summaryJosh lernerHarvard
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• Private equity-backed companies
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C. Indian casesThe two India cases,
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Part 1Large-sample studiesThe Globa
Page 21 and 22: The new demography of private equit
Page 23 and 24: among US publicly traded firms, it
Page 25 and 26: should be fairly complete. While th
Page 27 and 28: according to Moody’s (Hamilton et
Page 29 and 30: draining public markets of firms. I
Page 31 and 32: FIguresFigure 1A: LBO transactions
Page 33 and 34: TablesTable 1: Capital IQ 1980s cov
Page 35 and 36: Table 2: Magnitude and growth of LB
Page 37 and 38: Table 4: Exits of individual LBO tr
Page 39 and 40: Table 6: Determinants of exit succe
Page 41 and 42: Table 7: Ultimate staying power of
Page 43 and 44: Appendix 1: Imputed enterprise valu
Page 45 and 46: Private equity and long-run investm
Page 47 and 48: alternative names associated with t
Page 49 and 50: 4. Finally, we explore whether firm
Page 51 and 52: When we estimate these regressions,
Page 53 and 54: cutting back on the number of filin
Page 55 and 56: Table 1: Summary statisticsPanel D:
Page 57 and 58: Table 4: Relative citation intensit
Page 59 and 60: figuresFigure 1: Number of private
Page 61 and 62: Private equity and employment*steve
Page 63 and 64: Especially when taken together, our
Page 65 and 66: centred on the transaction year ide
Page 67 and 68: and Vartia 1985.) Aggregate employm
Page 69 and 70: sectors. In Retail Trade, the cumul
Page 71: employment-weighted acquisition rat
Page 75 and 76: Figure 6:Figure 6A: Comparison of n
Page 77 and 78: Figure 8:Figure 8A: Comparison of j
Page 79 and 80: Figure 11: Variation in impact in e
Page 81 and 82: Figure 12: Differences in impact on
Page 83 and 84: Private equity and corporate govern
Page 85 and 86: et al (2007) track the evolution of
Page 87 and 88: groups aim to improve firm performa
Page 89 and 90: distribution of the LBO sponsors, m
Page 91 and 92: the most difficult cases. This stor
Page 93 and 94: to see whether these changes of CEO
Page 95 and 96: Figure 3:This figure represents the
Page 97 and 98: TablesTable 1: Company size descrip
Page 99 and 100: Table 5: Changes in the board size,
Page 101 and 102: Table 7: Board turnoverPanel A: Siz
Page 103 and 104: Part 2Case studiesThe Global Econom
Page 105 and 106: European private equity cases: intr
Page 107 and 108: Exhibit 1: Private equity fund size
Page 109 and 110: Messer Griesheimann-kristin achleit
Page 111 and 112: ealized it was not possible to grow
Page 113 and 114: The deal with Allianz Capital partn
Page 115 and 116: the deal, the private equity invest
Page 117 and 118: Exhibit 1: The Messer Griesheim dea
Page 119 and 120: Exhibit 5: Post buyout structureMes
Page 121 and 122: New Lookann-kristin achleitnerTechn
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feet. This restricted store space w
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institutional investors why this in
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Although a public listing did not a
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Exhibit 5: Employment development a
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Chinese private equity cases: intro
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Hony Capital and China Glass Holdin
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Hony’s Chinese name means ambitio
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Establishing early agreement on pos
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Executing the IPOEach of the initia
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Exhibit 1A: Summary of Hony Capital
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Exhibit 4: Members of the China Gla
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Exhibit 6A: China Glass post‐acqu
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Exhibit 8: China Glass stock price
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3i Group plc and Little Sheep*Lily
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y an aggressive franchise strategy,
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soul” of the business. But there
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Exhibit 1: Summary information on 3
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Exhibit 6: An excerpt from the 180-
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Indian private equity cases: introd
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ICICI Venture and Subhiksha *Lily F
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investment,” recalled Deshpande.
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2005 - 2007: Moderator, protector a
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Exhibit 3: Subhiksha’s board comp
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Warburg Pincus and Bharti Tele‐Ve
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founded two companies at this time
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By 2003 this restructuring task was
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Exhibit 1C: Private equity investme
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Exhibit 4B: Bharti cellular footpri
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Exhibit 6: Summary of Bharti’s fi
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Exhibit 7: Bharti’s board structu
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In the 1993‐94 academic year, he
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consumer products. She was also a R
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AcknowledgementsJosh LernerHarvard
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The World Economic Forum is an inde
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