Steve Forbes: Private equity and job creation - What the liberals conveniently overlook
Good news doesn’t get attention the way bad news does. That sad truth explains most reporters’ knack for spotting the lone cloud on an otherwise bright horizon.
One recent example is a recently released study from professors Josh Lerner and Steve Davis that examines the economic impact of private equity.
2020 presidential hopeful Sen. Elizabeth Warren, a non-stop scold of the investor class, will no doubt seize on some piece of this study to further fuel her crusade for burdensome new regulations that would stifle capital investment in this country. But the authors make a point of cautioning against those knee-jerk liberal conclusions.
The study included a number of favorable data points for the industry, but most of the headlines fixated on a single piece of negative news: Average employment dipped slightly in the first two years after private equity funds bought publicly traded companies.
Most of those same stories noted a few paragraphs later that businesses acquired by private equity funds usually added jobs several years after their acquisition. The same was true for businesses one private equity fund bought from another private equity fund. But those positive takeaways were overshadowed in the news coverage by the employment figures for previously public companies.
Many of the stories also lacked a few important pieces of context.
For starters, private acquisitions dwarf public ones. In other words, private equity funds buy nine privately held businesses for every public company they take over. So, the data for previously private companies is more representative of industry trends than the numbers for previously public companies, which represent just 10 percent of total private equity deals over the period examined in this study.
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Private equity funds are always looking to invest in businesses where they can add value. That imperative frequently steers them to companies that are struggling. This is particularly true of public companies.
Many of these businesses suffered from broader management or financial issues and needed to cut costs to stay viable.
This required PE funds to close or spin off poorly performing divisions and look for other areas to strengthen the business. The resulting business is typically sturdier for those employees who remain, as well as the new hires who eventually join the improved firm.
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Because researchers didn’t examine the years after 2013, the study failed to capture significant portions of the United States’ economic recovery.
Previous research from Shai Bernstein, Josh Lerner and Filippo Mezzanotti examining private equity investments during the financial crisis found private-equity backed companies were better equipped to avoid distress and more likely to gain market share than their non private-equity backed counterparts. Private equity investors are able to do this because they had the capital necessary to invest, and their strategic expertise helped those same businesses regain their footing.
Private equity investors serve two very important purposes for the businesses they acquire: They provide capital to help them grow or get them back on their feet, and they offer management expertise to help them operate more efficiently.
Private equity investors serve two very important purposes for the businesses they acquire: They provide capital to help them grow or get them back on their feet, and they offer management expertise to help them operate more efficiently. The study points out productivity grew by 8 percent at those businesses bought by PE funds, a testament to how much value PE funds can create for the firms they back.
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Indeed, the authors note that their findings “cast doubts on the efficacy of 'one-size-fits-all' policy prescriptions for private equity.”
That, to me, is the headline of this report. As much as Sen. Warren and her populist disciples want to demagogue the industry, their policy “solutions” will only hinder job growth and stifle the economic opportunities they say they want to create.
Steve Forbes is chairman and editor-in-chief of Forbes media.