Do Wall Street Wheeler-Dealers Ever Create Jobs?
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.
The evidence, the World Economic Forum study went on to conclude, "supports neither the apocalyptic claims of extensive job destruction nor arguments that private equity funds create huge amounts of domestic employment."
Most press reports on the World Economic Forum research centered their coverage around that conclusion. Announced the New York Times: "Study Says Private Equity Isn't Big Job Killer."
But the study data, upon closer examination, hardly exonerate the world's private equity wheeler-dealers. In fact, the data show some striking job changes -- at the establishment level -- in companies that undergo private equity "makeovers."
By "establishments," researchers mean "the specific factories, offices, retail outlets, and other distinct physical locations where business takes place." Any private equity group that takes over a company inherits an assortment of different establishments.
In companies that experience private equity takeovers, the World Economic Forum researchers found, the total number of jobs at inherited establishments drops substantially. These workplaces experience 7 percent more job loss than comparable workplaces at companies not involved in private equity transactions.
The jobs private equity firms do create, the researchers found, all seem to come from the new establishments they start up in the companies they take over. The private equity chieftains, the World Economic Forum study notes, create 6 percent more jobs at new establishments than other companies.
The study researchers take a somewhat rosy view of this overall process. Private equity groups, they contend, "act as catalysts for creative destruction." They may destroy jobs at the factories and offices they buy up, but they also open up new factories and offices.
So should we all stop worrying? Probably not. What the World Economic Forum folks call "creative" may actually be simple profiteering, the transfer of good-paying jobs at union-organized workplaces to new workplaces purposefully situated in communities where unions have no historic foothold.
The World Economic Forum researchers, to their credit, acknowledge that their analysis "has significant limitations." A "full evaluation" of the impact of private equity firms on our contemporary economic life, they note, would have to consider "a broader range of outcomes and issues" -- including the compensation for the jobs private equity groups create and destroy.
The researchers are promising to address that "broader range," in future reports. Stephen Lerner, the director of the labor movement's most active private equity watchdog project, is hoping future studies really do start looking seriously at how private equity firms are impacting workers and their communities. But he's not holding his breath.
"Until the buyout industry opens its books and discloses comprehensive information about jobs, wages, and benefits at the companies it buys and sells," says Lerner, "its claims about job creation will remain suspect."
Still, he adds, we don't need more research to recognize what by now ought to be obvious.
"When all the studies are said and done," Lerner sums up, "the buyout business remains at its core a vehicle for the spectacular accumulation of wealth by the few without regard for the impact on others."