Thursday, September 27, 2007

Private-Equity Firms: Job Creation Machines?

Deal Journal -
September 27, 2007, 10:48 am
Posted by Stephen Grocer
Do private-equity firms create jobs? It’s an essential point as the buyout kings get deeper into the economy and the U.S. Congress gets more eager to tax their pay.
The answer — at least for the most succesful private-equity owned firms — is yes. Accountancy Ernst & Young conducted the new study, examining 100 biggest sales of private-equity portfolio companies in the U.S. and Western Europe in 2006.
Ernst & Young found that the average enterprise value of the companies studied in both Europe and U.S. jumped more than 80% from the time they were acquired. The growth in enterprise value was driven in part by the fact that private-equity-owned companies achieved faster profit growth, two-thirds of which came from business expansion — while a third in Europe — and 23% came from cost reductions.
What does that mean for jobs? The study found that employment was at the same or higher level at the time of exit in 80% of U.S. buyouts and 60% of European buyouts. In the United Kingdom, France and Germany, where fears that the industry will slash jobs has spurred strong opposition and scathing criticism, employment at businesses owned by private-equity firms rose 5% annually. That compares to 3% for equivalent publicly traded companies.
And the performance of the company remains strong after private-equity exits the business.
The study could be used to challenge arguments by private-equity opponents: namely that buyout firms slice up companies and slash jobs all to fatten the wallets of their limited partners. Of course, the study is highly self-selecting, as it identifies what are essentially the most successful deals, not the ones that fail.
Still, the conclusions do get to an interesting point: Whether private-equity firms are better managers than others.
“I think it has been proven that IPOs of private-equity-backed companies perform better post-IPO than comparable companies not backed by private equity,” says John O’Neill, America’s director of private equity with Ernst & Young. “That’s because of their laser-like focus on improving the business and working very closely with management and the board that allows them to jump on things very quickly and make the business better.”

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