This dissertation takes up the private equity topic and analyzes its impact on the employees of the portfolio companies. As there has been no detailed research done so far on the German market, this paper focuses on the impact on German companies which were taken over by a private equity house. It is assumed that the investment of a private equity company leads to an increase in the number of employees (H1) as well as their average wages (H2). These hypotheses are based on the performed literature review which shows a rather diverse picture with a slight trend towards the advantages of private equity investments.
The private equity industry is growing and therefore its importance is increasing as well. However, the reputation of private equity investors is not always positive and some harmful examples confirm this picture in the broader market. The negative history subsequently led to an increasing regulatory environment. Nevertheless, private equity financing has also many advantages for the portfolio companies such as the solution of succession concerns, additional equity financing and added external know-how.
By analyzing five private equity owned companies from different industries in Germany and benchmarking them against their local main competitor as well as testing the results against their statistical significance, interesting results appear. On the one hand, H1 needs to be rejected as in 60% of the analyzed companies the number of staff decreased after the investment of a private equity company. On the other hand, H2 can be confirmed as the average wages of the remaining employees increased in 80% of the observed companies and also evolved better compared to their non-private equity backed peers. Additionally, this dissertation shows that the second year after the takeover (T+2) is rater special and requires further investigation. Due to limitations of this research paper, it is recommended to use all the identified results for a more detailed analysis on the reasons of the observations.
Table of Contents
1. Introduction
2. Literature Review
2.1. Background and History of Private Equity
2.2. Set-Up and Style of Private Equity
2.3. Motivation for Private Equity
2.4. Different Views on Private Equity and the Impact on Employees
3. Theory Development
4. Benefit of the Study
5. Research Design
5.1. Model Description
6. Findings
7. Limitations
8. Conclusion
Objectives & Core Themes
This dissertation investigates the impact of private equity investments on portfolio companies, specifically examining changes in employment levels and average wages. The primary research objective is to bridge the gap in existing literature regarding the German market and to test whether private equity investments yield positive or negative outcomes for employees.
- Analysis of the private equity business model and its motivation.
- Evaluation of human resource impacts in private-equity-backed firms.
- Empirical analysis of five German portfolio companies compared against industry competitors.
- Statistical testing of hypotheses regarding employee count and average wage development using student-t-tests.
- Examination of the short-term effects of financial sponsorship on operational performance.
Excerpt from the Book
1. Introduction
What are the impacts of private equity companies on the employees of the relevant portfolio companies? Do they face a positive or negative future after the investment of a financial investor? – These aspects will be analyzed further and taken up by this dissertation in the following sections.
Before focusing on the main research area of this dissertation, a broader picture and introduction into the private equity world is given.
Private Equity describes investments in companies, which are usually not listed on a stock exchange. These transactions are mostly performed by a fund that directly or indirectly acquires a company (Yates & Hinchliffe, 2010). Market data indicates that the private equity industry is developing well and shows a worldwide buyout size of 440 billion USD which is an increase of 19% from 2016 to 2017. This sum is backed by 3,077 deals which were closed in 2017, an increase of 2%. The numbers are enormous and show the highest value in history (Bain & Company, 2018). Nevertheless, there is also a downside visible which is the limited number of potential targets. This leads to increased multiples which are paid during the deals. Having a more detailed look on the global performed transactions in 2017 shows that for approximately 50% of all deals the multiple was more than eleven times the EBITDA (Bain & Company, 2018).
Summary of Chapters
1. Introduction: Provides an overview of the private equity market, its historical development, and the controversial perception of financial investors, leading to the research questions.
2. Literature Review: Synthesizes existing academic research on private equity, focusing on how different studies interpret the effects of buyouts on employees, workforce numbers, and compensation.
3. Theory Development: Outlines the formation of two specific hypotheses regarding the positive impact of private equity on employee numbers and average wages based on the literature.
4. Benefit of the Study: Argues for the importance of this specific research, highlighting the lack of detailed analysis concerning the German market and the broader societal implications of private equity.
5. Research Design: Details the methodology for identifying portfolio companies, selecting benchmark competitors, and applying statistical models like the student-t-test.
6. Findings: Presents the collected data and comparative analysis, showing the numerical trends for employee levels and wages before and after investment.
7. Limitations: Discusses constraints of the study, including small sample sizes and the challenges of drawing conclusions from aggregated corporate data.
8. Conclusion: Summarizes the results, concluding that while H1 (employment growth) is rejected, H2 (wage growth) is largely confirmed, and suggests directions for future research.
Keywords
Private Equity, Portfolio Companies, Employment Growth, Average Wages, Leveraged Buyout, LBO, German Market, Mittelstand, Human Resources, Statistical Significance, Student-t-test, Corporate Finance, Workforce, Financial Investors, Value Creation.
Frequently Asked Questions
What is the core focus of this research?
The research focuses on the impact of private equity investments on portfolio companies, specifically analyzing the effects on staff numbers and average wages within German firms.
What are the primary themes discussed?
The work covers private equity industry trends, theoretical impacts on human resources, statistical benchmarking, and the potential ethical implications of financial investment.
What is the main objective or research question?
The study aims to determine whether private equity investments have a positive or negative impact on the workforce and wages of the acquired portfolio companies compared to their competitors.
Which scientific methods are applied?
The researcher uses a benchmarking approach, comparing private-equity-owned firms with local competitors and verifying results through a two-sided student-t-test for statistical significance.
What is covered in the main section?
The main section includes a comprehensive literature review, the definition of hypotheses, a detailed description of the research design, and an empirical analysis of findings based on aggregated annual reports.
Which keywords characterize this paper?
The paper is characterized by terms such as Private Equity, Leveraged Buyout, Employment Growth, Wage Evolution, and German Market.
Why is the second year after the investment (T+2) considered "special"?
The study identifies T+2 as a critical period where data often diverges from the general trend, indicating that this specific timeframe requires deeper investigation into internal restructuring activities.
How does this study handle the "locust" critique of private equity?
The study acknowledges the critical reputation of private equity in Germany but tests whether empirical data confirms job destruction or if the reality is more nuanced regarding wage growth and restructuring.
What is the outcome of the two tested hypotheses?
Hypothesis 1 (regarding employment growth) is rejected, while Hypothesis 2 (regarding increased average wages) is largely confirmed by the data collected.
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- Stefan Albust (Autor:in), 2019, The Impact of Private Equity Investments on Portfolio Companies, München, GRIN Verlag, https://www.grin.com/document/468448
