The new study sponsored by World Economic Forum finds that target firms of private equity transactions experience an intensification of job creation and destruction activity, establishment entry and exit, and establishment acquisition and divestiture.
“On net, we find that this intensification of reallocation yields a substantial productivity growth differential (about 2%) within two years following the transaction. About two-thirds of this differential is due to improved productivity among continuing establishments of the firm (including the effects of improved allocation among continuing establishments of the firm) and about one-third due to the contribution of net entry. The contribution of net entry is dominated by our finding that target firms are much more likely to close underperforming establishments than comparable firms. The resulting effect on real output for target firms is large” added Josh Lerner, a professor at Harvard Business School and one of the editors of the study.
 ”We estimate that private equity transactions completed between 1980 and 2005 yielded as much as US$ 15 billion of extra output in 2007 at target manufacturing firms. We find similar patterns for earnings per worker, although we find less of a positive impact on earnings per worker from continuing establishments of the target firms. We do find that the correlation between the growth in productivity and earnings per worker after private equity transactions is higher at target firms than at comparable firms”.
“Our analysis focuses on private equity transactions from 1980 to 2005. As such, our analysis sample does not include transactions and activity during the current financial crisis (in 2008). While we cannot yet address this question directly, we examine fluctuations in credit market conditions, for example the deterioration in credit conditions in the early 1990s, over the course of the 1980 to 2005 period to get a sense of how the current crisis might affect private equity targets”.
“Interestingly, we find evidence that the relative productivity gains at targets from the restructuring of continuing establishments, as well as the productivity gains from shutting down poorly performing establishments, actually increase in credit market crunches. These findings suggest that private equity firms are better than comparable firms in making the difficult choices of restructuring and shutting down poorly performing establishments in times of economic downturns”.
New studies sponsored by the World Economic Forum contain both good news and bad news for private equity. The studies find that PE-backed companies are more productive than other similar companies, especially in times of crisis. But that doesn’t translate into higher wages for employees.
