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Private-equity buyouts don’t tell a simple story

/ May 15, 2020

Published originally on Chicago Booth Review.

Proponents of private-equity investment say it can unlock a company’s value and improve efficiency. Critics charge that private-equity buyouts can hurt performance, employment, and wages at target companies. 

But the effects are more complex than either of these views suggests, according to Chicago Booth’s Steven J. Davis, University of Maryland’s John Haltiwanger, University of Michigan’s Kyle Handley and UMichigan PhD candidate Ben Lipsius, Harvard’s Josh Lerner, and the Census Bureau’s Javier Miranda

In the past four decades, private-equity operations have reshaped thousands of American companies, affecting millions of workers and acquiring a reputation as business enhancers or destroyers—or both. As the researchers point out, some policy makers are pushing regulation. The European Union imposed the Alternative Investment Fund Managers Directive to prevent “asset stripping” in acquisitions. Massachusetts Senator Elizabeth Warren, a leading Democratic candidate for president, proposed a measure she calls the Stop Wall Street Looting Act of 2019 to broadly regulate private equity.

Davis and his colleagues find that the outcomes of private-equity deals differ greatly by type of buyout and with the broad economic environment during and after the deal. In some cases, employment at target companies plummets after a private-equity investment. In others, there’s a surge in both employment and productivity. 

Starting with data on almost 10,000 transactions involving US companies from 1980 to 2013, the researchers focused on 3,600 buyouts that they could track over time. Deals included private-to-private and publicly-traded-to-private buyouts, divisional sales, and secondary sales made between private-equity groups. Using Census data, the researchers estimated the effects of buyouts on target company employment, productivity, and wages over the two years following a transaction, as compared with similar businesses not subject to buyouts. Overall, at the time of the buyouts, close to 7 million US workers were employed by the target businesses in the study.

In the case of public-to-private buyouts, which often attract heavy media attention, the researchers find that employment fell 13 percent over two years following a buyout. This adds fuel to critics’ contention that buyouts harm target companies and their workers. 

In contrast, the researchers find, employment rose 13 percent when the target enterprise was privately owned. In the case of secondary buyouts, employment increased 10 percent. 

Snapshot of the aftermath of private-equity deals

Changes in employment and job reallocations have differed depending on the type of company targeted in the deal.

Changes at US companies two years after private-equity buyouts
Percentage change relative to similar companies (1980–2013)


Divisional buyouts created the biggest employment effect, with a plunge of 16 percent, largely reflecting facility closings. Intracompany job reallocation rose for all buyout types, in line with the view that buyouts act as a catalyst for the reorganization of target companies.

Private-equity buyouts caused overall employment at target companies to decline more than 4 percent, after accounting for postbuyout acquisitions and divestitures.  

In perhaps the study’s most important finding, productivity rose an average of 8 percent over the two years postbuyout compared with similar companies. These large gains are especially remarkable, the researchers say, because target companies are typically older businesses in mature industries such as manufacturing, food service, or information technology.

Productivity gains were highest when deals happened amid tight credit conditions. In an easy-credit environment, the researchers suggest, private-equity groups may structure buyouts with an emphasis on maximizing private returns through financial engineering rather than through making operational improvements. Additionally, their results indicate that a postbuyout slowdown in economic growth or a widening of credit spreads curbs productivity gains.

Average compensation per employee fell almost 2 percent at target companies relative to similar companies, largely erasing a prebuyout wage premium at targets. The direction and magnitude of the wage changes associated with buyouts also differed greatly by deal type. In private-to-private deals, for instance, wages fell 6 percent on average. In divisional deals, on the other hand, compensation rose 11 percent. 

Given the range of outcomes after buyouts, a one-size-fits-all policy intended to regulate private equity is not likely to be efficient, the researchers say. While politicians might focus on minimizing job losses related to private equity, the researchers argue that there is a keen need to better understand the link between private-equity buyouts and productivity gains.

Rebecca Stropoli for Chicago Booth Review