Do Wall Street Wheeler-Dealers Ever Create Jobs?

By Sam Pizzigati, Too Much: A Commentary on Excess and Inequality. Posted January 29, 2008.

Before last spring, few Americans knew much of anything about private equity, that murky high-finance world where high-powered partnerships -- bankrolled by the super-rich and institutional investors -- borrow billions to take over companies they then make over and sell, at a significant profit. As private partnerships, these private equity groups operate under the radar screen. They don't have to declare, in publicly available annual reports, basic information about how they do business.

One example: Companies that trade their shares publicly on Wall Street must disclose how much they pay their top executives. Private equity companies, by contrast, can keep that information secret, so long as they don't sell their stock to the general public.

Last June, the biggest player on the private equity block, the Blackstone Group, opted to go that public stock route. The Blackstone boys offered the general investing public a chance to buy a minority stake in their wheeling-and-dealing operation. In the process, Blackstone's top five executives had to divulge how many dollars that operation was stuffing into their pockets.

The answer: $770 million over the previous year, a colossal sum that almost immediately thrust the private equity phenomenon onto America's front pages.

The private equity industry has been playing public relations catch-up ever since. Industry flacks have been working feverishly to rebut charges that private equity kingpins owe their astounding windfalls to job, benefit, and pension cuts at the companies they take over.

How feverishly? In 2007, private equity groups started breaking Capitol Hill records for spending on lobbyists.

Two weeks ago, the industry trade association, the Private Equity Council, released a flashy new study designed to show that private equity groups deserve credit, not censure, for their impact on employment. Private equity ownership, the report contended, is creating jobs by the bucketful.

The industry released this report, not so coincidentally, right on the eve of the annual World Economic Forum, the five-day bash that draws the world's financial elite to the Swiss ski resort of Davos. Organizers billed this year's forum, held last week, "as a platform to enrich dialogue and decision-making on public policy governing private equity."

The centerpiece of that dialogue: the release of the World Economic Forum's own report on private equity, an effort "touted as the most comprehensive look at the effects of the buyout business."

That report, entitled The Global Economic Impact of Private Equity, appeared this past Friday. The private equity industry quickly hailed it as "a significant new contribution" that validates "what we've been saying all along."

Actually, the World Economic Forum study -- conducted by an independent research team led by the Harvard Business School's Josh Lerner -- validated nothing of the sort.

The Private Equity Council had claimed, in its own report, an 8.4 percent job increase at companies run by private equity groups. The World Economic Forum study, after scrutinizing 5,000 private equity transactions, far more than the 42 that made up Private Equity Council research sample, came up with significantly different results.

Companies taken over in private equity deals, the World Economic Forum study found, averaged -- five years after getting gobbled up -- 1 percent fewer jobs than comparable companies outside the private equity orbit.

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Sam Pizzigati is the editor of the online weekly Too Much, and an associate fellow at the Institute for Policy Studies.