Private equity buyouts and their effects
Steven Davis, John Haltiwanger, Kyle Handley, Ben Lipsius, Josh Lerner, Javier Miranda 22 October 2019
Private equity buyouts arouse intense interest among investors and business owners, on the one hand, and policymakers and politicians on the other. Assessing the effects of buyouts is hard, partly because it is hard to assemble the data needed for a systematic evaluation. As a result, most discussions in the media, in national capitals, and among public intellectuals (e.g. Foroohar 2016) revolve around a few high-profile cases such as the US retailer Toys R Us or the Danish telecommunications provider TDC. Individual cases are interesting and potentially insightful, but they provide a shaky foundation for broad conclusions.
In our new working paper (Davis et al. 2019), we marshal data for thousands of buyouts sponsored by private equity (PE) groups.1 We then estimate buyout effects on employment, job reallocation, productivity, and worker compensation. To do so, we merge our sample of buyouts to comprehensive Census Bureau records. At the time of the buyouts, these firms operated nearly 180,000 US plants, stores, offices and other facilities and employed nearly seven million people domestically (we just focus on US activity). To carry out our analysis of buyout effects, we examine changes at buyout targets relative to contemporaneous changes in a closely matched set of control firms to facilitate ‘apples-to-apples’ comparisons. Our analysis runs from 1980 to 2011, a period that saw large swings in credit market conditions and macroeconomic performance.
Turning to the results of our statistical analysis, our chief findings pertain to outcomes at buyout targets relative to control firms over the first two years after the buyout.
- First, an overarching result: Buyout effects differ greatly by type of buyout, with credit conditions at the time of buyout, and with the post-buyout evolution of credit conditions and the macroeconomy.
- Consider, for example, the impact on jobs – perhaps the keenest policy concern related to private equity. Relative to contemporaneous developments at control firms, employment at target firms rises by 13% after private-to-private buyouts and by 10% after secondary buyouts. In contrast, target employment falls by 13% after buyouts of publicly listed firms and by 16% after divisional buyouts.
- Large employment differences by type of buyout continue to hold when we net out the role of post-buyout acquisitions and divestitures: jobs are created on net at private-to-private and secondary buyouts, and they are lost on net in other types of buyouts.
- The overall average employment impact of buyouts is a statistically insignificant -1.4% in our sample. Netting out post-buyout acquisitions and divestitures, the overall average employment impact is a statistically significant fall of 4.4%.
- Labour productivity rises by an average of 8% at target firms over two years after the buyout (again, relative to controls). Productivity gains are concentrated in private-to-private and public-to-private buyouts.
- The pace of intra-firm job reallocation at target firms rises relative to control firms post buyout. This pattern holds across all buyout types, and much of it reflects greater acquisition and divestiture activity by target firms.
- Target productivity gains and intra-firm job reallocation increases are larger yet (relative to controls) for deals executed amidst tight credit conditions.
- A post-buyout widening of credit spreads or slowdown in GDP growth lowers employment growth at targets and sharply curtails productivity gains in public-to-private and divisional buyouts.
- Compensation per worker falls by 1.7% at after buyouts, largely erasing a pre-buyout wage premium that these firms enjoyed. Wage effects also differ greatly by buyout type.
What are the implications of these findings?
First, diagnosing the effects of PE buyouts based on a few high-profile cases has much potential to mislead. Many PE buyouts lead to strong job growth and large productivity gains at target firms. Many lead to large job losses and productivity declines. The evidence does not support simple narratives about ‘the’ effects of PE buyouts.
Second, our results cast doubt on the efficacy of ‘one-size-fits-all’ policy prescriptions for private equity. Recent regulations and proposals have sought to regulate buyouts in a broad-brush manner. That our estimated effects differ so greatly by type of buyout, and with external conditions, argues for regulating private equity with policy scalpels rather than hammers.
Third, the effects of buyouts present difficult tradeoffs in policy design and for political leaders. Buyouts trigger job losses and compensation cuts for some incumbent workers. Many politicians, naturally enough, feel impelled to protect these at-risk workers. Buyouts also lead to the creation of new jobs, and they bring sizable productivity gains. In this regard, it is worth stressing that productivity gains drive improvements in average living standards over time.
Finally, we need more research, especially on the real-side consequences of private equity buyouts. Do buyouts cause avoidable job losses? Or are (some) target firms in dire need of restructuring and retrenchment to prevent worse outcomes at a later date? Are job losses and compensation cuts after certain buyouts essential to achieve post-buyout productivity gains and, if so, is the trade-off an acceptable one? How can policy best harness the power of private equity to drive productivity gains?
Our new paper finds that PE buyouts spur both productivity gains and intra-firm job reallocation. That raises another question: Is the extra job reallocation at target firms instrumental in boosting their productivity? The answer is yes for buyouts in the manufacturing sector, according to our earlier study (Davis et al. 2014). There, we find that buyout targets are more aggressive than control firms in shifting jobs from low-productivity to high-productivity plants. They are also more successful in achieving high productivity when they open new manufacturing plants.
We cannot analyse the productivity-reallocation connection as directly for non-manufacturing firms because we lack a comprehensive set of productivity measures for individual stores, offices, warehouses and other non-manufacturing facilities. Thus, we are pursuing other approaches. Given the broad slowdown in both US productivity growth and business dynamism since 2000 (Decker et al. 2018), we are keenly interested in how PE buyouts raise productivity and whether their apparent impact on reallocation activity is a key part of the story.
Addressing these questions will not be easy. Buyout transactions are complex. Matching buyouts to databases with rich outcomes measures and suitable controls is hard work. The counterfactual of what would happen absent a buyout is often unclear. Lastly, few studies to date (and that includes our own) provide evidence about the economic effects of buyouts beyond the direct effects on target firms and their workers.
Authors’ note: Haltiwanger was a part-time Schedule A employee at the US Census Bureau during the conduct of this research. Opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the US Census Bureau. Lerner has advised institutional investors in private equity funds, private equity groups, and governments designing policies relevant to private equity. All errors and omissions are our own.
Bain & Company (2019), Global Private Equity Report.
Davis, S J, J C Haltiwanger, K Handley, R S Jarmin, J Lerner and J Miranda (2014), “Private Equity Buyouts, Jobs, and Productivity,” American Economic Review 104: 3956-3990.
Davis, S J, J C Haltiwanger, K Handley, B Lipsius, J Lerner and J Miranda (2019), “The Economic Effects of Private Equity Buyouts,” NBER Working Paper No. 26370.
Decker, R, J C Haltiwanger, R Jarmin and J Miranda (2018), “Changing Business Dynamism and Productivity: Shocks vs. Responsiveness,” NBER Working Paper No. 24236.
Foroohar, R (2016), Makers and Takers: The Rise of Finance and the Fall of American Business, Crown Publishing Company.
Annex: A note about our sample and methodology
As a first step, we identified 9,784 PE buyouts of American companies from 1980 to 2013, tapping multiple sources of information and expending thousands of hours by our research assistants and ourselves. The volume of PE buyouts rose tremendously over this period, as seen in Figure 1. The figure also shows that buyout activity collapsed during the financial crisis and recession of 2007-09. Deal flow recovered after the recession, especially for buyouts of independent privately held firms (private-to-private deals) and the sale of portfolio firms from one private equity group to another (secondary deals). Commercial databases such as Capital IQ and Preqin (Bain & Company 2019) indicate that PE buyout volume continued to grow strongly after 2013.
Figure 1 Quarterly buyout counts by type, 1980 to 2013
Notes: Each panel shows buyout closings sponsored by private equity groups for the indicated deal type in quarter t, overlaid with the contemporaneous credit spread and the log change in real U.S. GDP from t-4 to t. We measure the credit spread as the difference between high-yield U.S. corporate bonds and the one-month U.S. LIBOR in the closing month. There are 9,494 private equity buyouts in our sample. The chart excludes about 300 buyouts that we cannot classify as to deal type. See Davis et al. (2019) for additional information.
Next, we matched about 6,000 buyouts to comprehensive Census Bureau records on individual firms and the plants, stores, offices and other facilities they operate. These Census records contain annual data on revenue, payroll, employment and more for all nonfarm employers in the US private sector. Thus, our analysis of buyout effects considers U.S. domestic activity and excludes activity abroad.
Sometimes, we cannot confidently track a target firm after the buyout. This can happen when the firm is split into many pieces, some or all of which get sold to other firms, or because Census Bureau records are incomplete. We drop these cases from our sample. That leaves about 3,600 buyouts from 1980 to 2011 that we can confidently track for two years after the buyout. Results in our earlier study (Davis et al. 2014) suggest that employment growth patterns in the first two years after buyouts are indicative of employment growth over the first five years as well, so we do not believe that this approach gives a misleadingly positive or negative view.
To carry out our analysis of buyout effects, we examine changes at buyout targets relative to contemporaneous changes in a closely matched set of control firms. Specifically, we match buyout targets to firms in the same control cell defined by industry, firm size, firm age, buyout year, and an indicator for whether the firm operates multiple facilities. Our statistical model includes additional variables to control for pre-buyout growth trajectories at target and control firms. The point of using matched control firms and control variables is to approximate a set of ‘apples-to-apples’ comparisons and to thereby isolate the effects of buyouts on the target firms. Otherwise, our analyses would be distorted by the strong tendency of PE buyouts to concentrate on certain sectors (e.g. manufacturing) and on certain types of firms (e.g. mature firms) with distinctive performance dynamics, even when private equity is not involved.
 We focus on private equity buyouts – not venture capital or growth equity transactions and not management buyouts, all of which differ in important ways. Our choice reflects the intense policy interest in company buyouts sponsored by private equity groups.