To cut or not to cut

Two reports on the private equity industry's employment record fail to provide a definitive answer to the job loss vs. job creation conundrum.

Private equity's recent confrontation with the trade unions in Europe has highlighted a tension at the heart of the industry. Since buyout firms pride themselves on running lean, mean companies, does this mean private equity ownership is bad for jobs?

Much of the broader controversy surrounding the industry, particularly in the UK, stemmed from the GMB trade union's confrontation with buyouts firms Permira and 3i Group over alleged job cuts at the two firms' portfolio companies. The debate subsequently spread to encompass the private equity ownership model as a whole.

Many of the European trade bodies ? particularly the BVCA in the UK and more recently AFIC in France ? have consistently pointed towards the industry's record on job creation as a key argument in its favor, suggesting that private equity-backed companies grow faster and create more jobs than the average company. Indeed, Permira head Damon Buffini highlighted his firm's record with retailer New Look and budget chain Travelodge in his first attempt to dispel the GMB's criticisms. ?These are now strong businesses that employ thousands more people,? he said.

One report out this month seems to support this argument. Consultancy AT Kearney's analysis, which was based on a review of a number of studies in the area (albeit some conducted by industry associations with a vested interest in preserving the industry's reputation), found that private equity-backed firms have created more than one million jobs in Europe in the last four years ? including 364,000 in the UK alone. The US saw more than 600,000 new jobs: the report cites examples like KTM, a motorcycle manufacturer backed by BC Partners, which increased employment tenfold under private ownership.

?Private equity has gotten a bad rap,? says the report. Rather than destroying jobs, the industry actually does the reverse: ?Private equity financed firms on average generate employment at a much faster pace than comparable traditionally financed firms.? In some cases, there was a double-digit gap between rates of annual employment growth: in Britain for example, a BVCA survey suggests employment in private equity-backed companies grew at 14 percent between 2001 and 2004, compared with 0.3 percent for the rest of the private sector.

?Private equity firms are not job killers,? AT Kearney concludes. ?In fact, they contribute more to job growth than shrinkage and unemployment.?

But not everyone takes such a rosy view of the industry's employment record. A report out this week from the UK-based Work Foundation, a left-wing think tank, accepts that the majority of buyout firms create jobs. However, it also points out that more than a third cut jobs, while stricter private equity controls have a detrimental effect on wages and morale ? particularly when firms introduce new management teams.

The report found that about 60 percent of private equity-backed companies increase jobs over a six-year period, while 36 percent cut them. However, there are other negative implications for the workforce, it said. Workers in these companies will be, on average, £83.70 ($167.63; €123.40) a year worse off than a comparable worker elsewhere in the private sector. For management buy-ins, where the private equity firms introduce new management teams, this discrepancy is even more pronounced: workers are on average £231 worse off per year.

Stricter performance management may also make the experience more challenging for employees. ?Private equity firms pride themselves on their ability to squeeze performance from the organizations they own, and they turn up the pressure on individuals in order to do so,? says Will Hutton, chief executive of the Work Foundation and a leading UK journalist.

Hutton believes that job creation is not, in itself, the be all and end all. ?In some cases, private equity ownership may be inconsistent with the principles of ?good work? ? fairness, job security, the ability of individuals to have a say over their working life, to manage stress, and to be able to communicate effectively with senior management appear to fall down the list of organizational priorities under private equity ownership. This seems to be especially true where managers have no prior relationship and few psychological bonds with the company and the workforce.?

So private equity creates more jobs than it cuts. But with the possible exception of the management team, it seems unlikely that employees will see much upside to private equity ownership.

Clearly the US Private Equity Council and other industry bodies have their work cut out to convince the skeptics that the industry is good for jobs.