The Impact of Private Equity Investments on Portfolio Companies

Table of Content

Abbreviations

Figures

Tables

Formulas

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

Bibliography

Abstract

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.

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.

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.

Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

Figures

FIGURE 1: PRIVATE EQUITY OPERATING MODEL

FIGURE 2: OVERVIEW OF PRIVATE EQUITY AND VENTURE CAPITAL STYLES

FIGURE 3: RELATIVE DISTRIBUTION OF REVIEWED AUTHORS CONCERNING NUMBER OF EMPLOYEES

FIGURE 4: RELATIVE DISTRIBUTION OF REVIEWED AUTHORS CONCERNING AVERAGE WAGES

FIGURE 5: DISTRIBUTION OF BUYOUT TYPE OF PORTFOLIO SELECTION

FIGURE 6: SELECTED TIME SERIES FOR ANALYSIS

Tables

TABLE 1: AUTHORS OBSERVING A POSITIVE IMPACT ON THE NUMBERS OF EMPLOYEES

TABLE 2: AUTHORS OBSERVING A POSITIVE IMPACT ON THE AVERAGE WAGES OF EMPLOYEES

TABLE 3: AUTHORS OBSERVING A NEGATIVE IMPACT ON THE NUMBERS OF EMPLOYEES

TABLE 4: AUTHORS OBSERVING A NEGATIVE IMPACT ON THE AVERAGE WAGES OF EMPLOYEES

TABLE 5: AUTHORS OBSERVING A DIFFERENTIATED IMPACT ON THE NUMBERS OF EMPLOYEES

TABLE 6: AUTHORS OBSERVING A DIFFERENTIATED IMPACT ON THE AVERAGE WAGES OF EMPLOYEES

TABLE 7: INVESTMENT TYPE PER PORTFOLIO COMPANY

TABLE 8: OVERVIEW OF PORTFOLIO AND PRIVATE EQUITY COMPANIES INCL. ORIGIN OF PRIVATE EQUITY HOUSE

TABLE 9: OVERVIEW OF PORTFOLIO AND PRIVATE EQUITY COMPANIES INCL. INVESTMENT SIZE AND DATE

TABLE 10: INDUSTRY OF PRIVATE EQUITY PORTFOLIO COMPANIES

TABLE 11: PRIVATE EQUITY PORTFOLIO COMPANIES & THEIR GERMAN COMPETITORS

TABLE 12: TOTAL NUMBER OF EMPLOYEES

TABLE 13: EVOLUTION OF RELATIVE NUMBER OF EMPLOYEES

TABLE 14: TOTAL PERSONNEL EXPENDITURES

TABLE 15: EVOLUTION OF RELATIVE PERSONNEL EXPENDITURES

TABLE 16: TOTAL AVERAGE WAGES

TABLE 17: EVOLUTION OF RELATIVE AVERAGE WAGES

TABLE 18: TOTAL REVENUES PER EMPLOYEE

TABLE 19: EVOLUTION OF RELATIVE REVENUES PER EMPLOYEE

TABLE 20: TOTAL PROFIT PER EMPLOYEE

TABLE 21: EVOLUTION OF RELATIVE PROFIT PER EMPLOYEE

TABLE 22: T-TEST ON NUMBER OF EMPLOYEES T-2 TO T+

TABLE 23: T-TEST ON NUMBER OF EMPLOYEES T-1 TO T+

TABLE 24: T-TEST ON NUMBER OF EMPLOYEES T0 TO T+

TABLE 25: T-TEST ON WAGES T-2 TO T+

TABLE 26: T-TEST ON WAGES T-1 TO T+

TABLE 27: T-TEST ON WAGES T0 TO T+

TABLE 28: T-TEST ON REVENUES PER EMPLOYEE T-2 TO T+

TABLE 29: T-TEST ON REVENUES PER EMPLOYEE T-1 TO T+

TABLE 30: T-TEST ON REVENUES PER EMPLOYEE T0 TO T+

TABLE 31: T-TEST ON PROFIT PER EMPLOYEE T-2 TO T+

TABLE 32: T-TEST ON PROFIT PER EMPLOYEE T-1 TO T+

TABLE 33: T-TEST ON PROFIT PER EMPLOYEE T0 TO T+3

Formulas

FORMULA 1: PROFIT PER EMPLOYEE

FORMULA 2: PERSONNEL EXPENDITURES PER EMPLOYEE

FORMULA 3: REVENUES PER EMPLOYEE

FORMULA 4: MATHEMATICAL HYPOTHESIS FOR THE STUDENT T-TEST

FORMULA 5: DISTRIBUTION OF RANDOM SAMPLE PARAMETERS

FORMULA 6: STUDENT-T-TEST

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). Focusing on the European market confirms the global trend. In Europe, 1,431 buyout transactions with a total volume of 140.7 billion EUR were performed. Both the volume (+22.3%) as well as the number of deals (+10.5%) increased significantly in 2017 compared to 2016 and now values higher than prior the financial crisis in 2008 (PwC, 2018). Interestingly, this strong performance is already a market trend as the compound annual growth rate in the European private equity market ranges at 9.2% between 2012 and 2017. In 2017 one market characteristic was the closing of 30 deals with values above 1 billion EUR which represents the best year since the financial crisis. Solely the ten biggest European deals in 2017 account for 45.5 billion EUR of transaction volume. The most important deal, if focusing on the size, was closed by Kohlberg Kravis Roberts (KKR) when they spent 6.8 billion EUR for Unilever’s global spreads unit (PwC, 2018).

Concerning the German private equity market, the previous trends get confirmed as well. 8.94 billion EUR of buyouts in 2017 which were invested in 150 transactions lead to a significant increase in the deal value compared to the 5.02 billion EUR of 2016 (for 119 transactions). Overall, private equity has a strong presence in Germany. When considering all varieties of private equity (buyout, venture capital etc.), there are more than 1,000 companies which receive private equity finance per year. Combined, these companies employ approximately 960,000 employees and are therefore an important economic driver (BvK, 2018). Germany is and will remain to be an interesting market for private equity investors according to a PwC study which shows that 71% of the interviewed private equity firms find Germany more attractive compared to other countries (PwC, 2018).

Nevertheless, private equity, especially in Germany, has not always been recognized positively. In 2005 former SPD chairman Franz Müntefering started a discussion around private equity as he considered them as locusts. On April 5th, 2015, he said during an interview in a German newspaper: “some financial investors do not spend one single thought on the people and their jobs they destroy – they stay anonymous, don’t show their face, come upon companies like a swarm of locusts, graze them and move away. We are fighting against this kind of capitalism” (Müntefering, 2005) (translated from the German original interview). With his statement, he referred back to companies like KKR. They, together with Goldman Sachs, took over the German electronic and ATM manufacturer Siemens-Nixdorf in 1999 and went public with it in 2004. Out of the 350 million EUR which were raised during the IPO, only 125 million EUR stayed in the company. The remaining sum of 225 million EUR went to KKR et al. Additionally, in the years between 1999 and 2004, KKR and Goldman Sachs received payments of 160 million EUR. A return of 20-30%. Another example is Tenovis which was a manufacturer of communication products and which was due for restructuring to that time. KKR was also invested in this company. In the end of 2002, the employees were asked to waive 12.5% of their salary to save their jobs for at least one year. However, half a year later, approximately 50% of the staff lost their jobs and the company got restructured with complex financial products and millions of EUR fees for KKR advisors. These are only two examples, Müntefering was referring to. Not only KKR but also Apax, Advent, BC Partners, Blackstone, Carlyle, CVC, Permira, WCM and other private equity investors were negatively mentioned by Müntefering as they used similar tactics after investing in target companies. In Müntefering’s view, private equity companies mainly invest in attractive companies, split them up by closing or selling unattractive corporate divisions and afterwards sell the remaining assets or bring them public by an IPO (Stern, 2005).

Based on the enormous political discussions, which were partly started by Müntefering around private equity, new laws came into force. In Germany, one of them is the “Risikobegrenzungsgesetz” in 2008 which inter alia regulates that listed companies have to publish if investors own more than 10% and they now have to declare the intend behind this holding (Bundesrat, 2008). However, this law is not directly focusing on private equity but also helps to identify hostile takeovers. Nevertheless, it not remained with this single law. In recent years, there were increasing regulations directly focusing on private equity also due to the regulatory pressure coming from the G-20 group as well as the Rasmussen and Lehne report. Since 2011, there has been a European wide regulation for alternative investment funds (AIF) which also encompasses private equity funds. This Alternative Investment Fund Manager (AIFM) regulation extends prior regulations, which were relatively divided, and not holistically applicable (e.g. the UBGG in Germany which is more focused on tax related topics or the WKBG which only concentrates on a minor part of private equity). The AIMF now shows some specific regulations which are solely applicable for private equity funds. In detail, the ad-hoc-, publication- and communication requirements are specified. Additionally, the EU regulation prohibits some specific tactics / measures which harm the existence of the company such as the split-off and sale for 24 months past the investment date. Especially with this limitation, the EU wants to avoid short-term investments with the aim to afterwards slice the company in small profitable buckets to sell them directly without paying emphasis on the employees. However, there is still a gap in the AIMF regulation as companies who hold assets below 100 million EUR (with credit leverage) or 500 million EUR (without credit leverage and a minimum duration of five years) are excluded from the regulation. Especially in the venture capital area which is a subset of the private equity industry, these simplifications often can be applied (Journal of the European Union, 2011 & BAI, 2017). Nevertheless, despite all the regulations and negative media, private equity can be beneficial for companies, especially for German medium sized enterprises (i.e. “Mittelstand”) as it opens new sources of financing. In the traditional corporate finance environment, companies get their funds from banks by debt financing. Private equity offers these companies the possibilities to not increase their debt but equity volumes. This is especially beneficial when it comes to regulatory topics such as the BASEL regulation as the debt ratio has an impact on the rating of the company and therefore on the interest rates on credits etc. High amounts of debt financing could lead to a low rating and therefore to higher interest rates on credits which subsequently leads to higher payments. An effect that is disadvantageous for the company’s cash-flow (König, 2014). To increase the equity of a company, the corporation could also go public. However, private equity offers a few advantages, compared to an IPO. The first one is flexibility. Having a private equity investor on-board allows to better structure the transaction and financial portfolio of the company to make or keep it successful. Additionally, Moore et al. (2008) assume that a private equity investment gives the company more time to react and restructure as shareholder interests do not need to be considered all the time (e.g. short-term behavior to meet the published targets for the next quarterly meeting which is common at listed companies). With a private equity investment, the company can be reorganized and optimized smoother and more silently without publishing all relevant changes immediately to the often widely spread shareholders (as far as allowed by the ad-hoc publication requirements). The second advantage of private equity is immediacy. In case a company needs funds (e.g. there are liquidity issues or the entrepreneur / owner wants to sell), private equity can be much faster compared to going public and getting listed on a stock exchange. Therefore, private equity could add value through fast operations and actions (Moore, et al., 2008). Another aspect which favors private equity investments, especially in Germany, is the fact that many medium sized companies do not have a successor for their business in case the existing management/owner retires. Private equity can also add value by bringing not only capital but also knowledge and management into existing companies (König, 2014). Hence, especially the German market might become increasingly interesting for private equity investors as approximately 100,000 small and medium sized entities in Germany need to solve their company succession issue until 2022 (Schwartz, 2018).

In summary, there is a diverse picture around private equity as there are positive and negative aspects. Despite regulation has already increased, the public opinion on private equity is still not in favor of this investment vehicle due to negative experiences in the past, especially with regard to the impact on the employees of the portfolio companies.

Therefore, this dissertation takes up the private equity topic and deep dives into the human relations aspect of it by identifying the impacts of a private equity investment on the employees. The question is if the positive or negative effects outweigh. The results can be used to either confirm the relatively negative reputation of private equity concerning the employees of the portfolio companies or reject it. In case the negative assumptions can be rejected and private equity investments are favorable for the companies and their employees, this dissertation could help to build up the reputation of the private equity industry, especially in Germany. Therefore, this research-paper also encompasses an ethical aspect.

Within this research paper, the German private equity market is analyzed in more detail and compared to the non-private equity industry.

To perform this analysis, existing literature is reviewed with the aim to provide an overview what private equity is and how it works, what the general motivations behind a private equity investments are as well as how the private equity financing impacts the employees of the portfolio companies. When speaking about portfolio companies, the target companies the private equity funds are invested in, are concerned. This dissertation concludes with own research on the German private equity market by testing two hypotheses concerning the number of employees as well as their average wage development. For that reason, five portfolio as well as five peer companies are analyzed in detail. The research paper closes with some limitations of this work and the final conclusion on the performed research.

2. Literature Review

The following literature review provides insights into the private equity world and starts with an explanation and definition of private equity and how it has evolved in general. It concludes with an analysis on the motivations of private equity investors and closes with existing literature around up- and downsides of private equity investments and their impacts on employees. Concerning the employee’s impacts, the number of staff as well as the wage evolution are more closely evaluated.

2.1. Background and History of Private Equity

The following section provides insights into the history of private equity and shows its evolution over the years.

Nowadays, private equity is widely known but still builds its founding story on the leverage buyouts from the 1980s. Famous private equity investors from the past which are still present are KKR, Carlyle or Blackstone (amongst others). The private equity business model was established as a matter of urgency as stock market returns were quite low in that past years. Therefore, corporate raiders and other Leveraged Buyout firms discovered the new market as an opportunity to gain profitable returns (Appelbaum & Batt, 2012).

Having a look on the definition of private equity it becomes evident that this investment class can be seen from different angles, however, they all have the same and following holistic definition in common. Cendrowski et al. (2012) define private equity as investments which are not publicly traded on an exchange with a mid- to long-term investment horizon. This specific is also confirmed by Andreas et al. (2012). Talmor et al. (2011) mention that private equity is an alternative investment class which was established in the United States and goes back to the 1930s when wealthy families provided funds to companies. Appelbaum & Batt (2012) add that Kuwait’s government established the first sovereign wealth fund in 1953 which acted with similar tactics as private equity companies do today. Jensen (1989) refers back to U.S. banks in the early 1930s and 1940s which supported companies (the bank helped to establish) with strategic advice and a governance structure to make their businesses more profitable and growing. However, according to Talmor et al. (2011) the first “real” private equity deals were not performed in the 1930s but in the mid 1970s. The latter is also confirmed by Lowenstein (1985) as he explains that the first U.S. buyout took place during the mid 1970s, after the big stock market crash in 1974. He also adds that until 1979, no big deals with volumes above 100 million USD took place. As per DeAngelo & DeAngelo (1987) the amount of deals and their respective size increased later on in the 1980s. This observation is also confirmed by Kaplan (1991) as well as Kaplan & Strömberg (2008). During the years, the deal sizes increased significantly and had their peaks between 2005 and 2007. This is also the time when the biggest leverage buyout in history took place. In 2007, TXU which was Texas’ largest electricity utility was taken private by Goldman Sachs, KKR and Texas Pacific Group (TPG) for 48 billion USD (Walton, 2018).

2.2. Set-Up and Style of Private Equity

Within this chapter, the construction of private equity funds is explained in more detail. Afterwards, the different forms of private equity are further detailed to better separate them from each other and be familiar with the common abbreviations.

To understand how private equity works, Scheuplein (2018) explains that private equity companies usually use a funds-construct to collect the necessary money for the investments. Fleming (2010), Talmor et al. (2011) and Gilligan & Wright (2014) explain that typically private or institutional investors invest their money in the private equity fund which is managed by the private equity company. In addition, the investment size is usually leveraged with further credits (which are usually provided by banks) to increase the return on investment. The total amount (investments and credits) is used afterwards to partially or completely buy an existing company. When taking over the so-called target or portfolio company, the management is also often taken over by the private equity company. This private equity set-up is also confirmed by Wright et al. (2009) and Scheuplein & Teetz, (2016) who add that often also the private equity company owners invest their own money in the private equity funds. Additionally, they specify that the portfolio company is only taken over for a limited period of time. The following figure is based on the above information and in representation of Scheuplein (2018).

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Private Equity Operating Model

However, when speaking about private equity, it is important that there is not one single investment style that characterizes this asset class but several ones which need to be distinguished. Gilhully (1999) mentions that the most known investment style is the bootstrapping acquisition, which is widely known as Leveraged Buyout (LBO). As per Talmor, et al. (2012), LBOs are also the founding business model of private equity in the U.S. in the mid 70’s of the last century.

When speaking about private equity, Wood & Wright (2009) define that it includes early stage investments, so called venture capital as well as buyouts which are performed at a later stage for more established companies. Focusing on the latter, Wood & Wright (2009) explain that buyouts can be separated into two groups:

1. Buyouts driven from insiders
2. Buyouts driven from outsiders

Concerning the inside driven ones, usually the existing management takes over the own company, supported by a private equity investor. Well-known inside buyouts are Management Buyouts (MBOs) as well as Management led Employee Buyouts (MEBOs).

Focusing on buyouts driven from outsiders, the expertise does not come from existing stakeholders but from third parties. A popular form is the Investor led Buyout or Institutional Buyout (IBO) where either a division of a huge company group or the entire company are taken over by an investor. The management can be replaced by the private equity firm but it is also common to retain the existing management team (Wood & Wright, 2009). A second type are Management Buyins (MBIs) which are also widely used and comparable to MBOs. As per Robbie et al. (1992), the main differentiator is that key management members are sourced externally and not internally. The last type are hybrid forms of MBOs where MBIs are supported by existing management to lower the information asymmetries. Nevertheless, all forms of a buyout (MBO, MEBO, MBI, IBO) can also be based on a Leveraged Buyout (LBO) when vast amounts of debt come into play to take over the target company (Wood & Wright, 2009).

When focusing on early stage venture capital investments, Wright et al. (2009) explain that these investments take place in very early stages of the company lifecycle and usually do not include much debt, which is a significant differentiator to classical buyouts in the form of a LBO. The main reason for that is because the target companies normally require cash to further fund their growth aspirations and mostly only generate little revenues.

Abbildung in dieser Leseprobe nicht enthalten

Figure 2: Overview of Private Equity and Venture Capital Styles

2.3. Motivation for Private Equity

This section provides an overview of aspects, which motivate private equity houses to invest in the relevant portfolio companies.

The first aspect to consider is the increased management focus. As per Jensen (1989), private equity investments, especially in the 1980s were motivated by inefficient corporate management due to missing monitoring controls and systems. As private equity comes with high volumes of credits, he argues that private equity with its debt forces self-monitoring to not risk failing the whole business model of the portfolio company. He therefore summarizes that private equity investments support to overcome management vs. shareholder conflicts and maximize value. Baker & Wruck (1989) confirm Jensen’s assumption with the analysis of the LBO of O.M. Scott & Sons Company. In their case, high debt volumes and equity ownership by the management supported the respective performance improvement and value maximization.

Another factor for private equity is the increased utilization of assets. As per KKR (1989), the main objective of a buyout is the value creation for the new owners and consequently the increase of profitability. Therefore, capital expenditures always need to be backed with a solid reason to not risk uneconomic decisions. Using credit leverage, with the accompanied risks of bankruptcy, forces to focus on necessary spending and also re-think existing investments. As managers usually also have adjusted incentives, this leads them to divest assets which show low synergies or a certain level of underutilization (Grossman & Hart, 1982).

Thirdly, growth aspirations of the portfolio company are another important motivational aspect besides the cost reduction or increased utilization of assets. An investment from a private equity company usually comes with relatively aggressive business plans to foster internal and external growth strategies. In that case, the management is put under pressure to achieve these plans and therefore, the management standards are increased (Baker & Montgomery, 1994).

Overall, the main motivation for private equity is the value creation out of the existing company. Literature shows that increased management focus supports these aspirations by different means such as cost reduction, increased asset utilization or growth plans.

2.4. Different Views on Private Equity and the Impact on Employees

Within this section, a more detailed analysis of the up- and downsides of private equity transactions is given, focusing on the employee impact (i.e. changes in the number of employees as well as their wages).

As per Jensen (2007), private equity supports to overcome the agency problem, provides new sources of funds and reenergizes the employees. The latter is controversially discussed and therefore, the existing literature concerning the impacts on employees is analyzed in more detail.

Appelbaum & Batt (2012) analyze the U.S. private equity market between the years 1980 and 2006. They find that companies with private equity investments show an accelerated job growth compared to companies without these investors. They explain this observation with the fact that the company growth requires additional workforce to support these aspirations. Bacon et al. (2008) add to these findings as they perform an analysis of the UK and Dutch private equity market for the years 1994-1997 based on a survey. They find that private equity investments in general have a positive effect on labor management and high commitment practices. This means that private equity backed companies rather invest in their employees and do not just perform job cutting exercises.

Bacon et. al’s (2008) results get further supported by Scellato & Ughetto (2012) who analyze the European buyout market between the years 1997 and 2004 and focus on 241 private-to- private deals. When concentrating on the year before the investment (T-1) and three years after it (T+3), a significant growth in employment levels gets visible. They conclude that buyouts have a positive impact on employment, especially in the short- and mid-term period after the deal, compared to non-private equity backed companies. However, they do not further explain the reasons for this observation. Moreover, they suggest that private equity investors are not mainly concerned with restructuring strategies and employment reduction. Kaplan (1989) adds to this observation as he performs an analysis of 76 MBOs in the U.S. between the years 1980 and 1986. Unfortunately, only for 42 out of the 76 companies employee data is available and analyzed. Nevertheless, Kaplan (1989) suggests that there are positive effects on the numbers of employed workers of buyout companies. However, he summarizes that the increase in the number of employees is lower compared to the industry standard. Explicit reasons explaining his observations are not made.

Muscarella & Vetsuypens (1990) show a different approach and analyze 72 firms in the U.S. which went public between 1976 and 1987 and previously performed a LBO in their company history. They find that companies going through a LBO do not only reduce the number of employees. In contrary, in case there is no restructuring required (12 out of 72 test companies), they find that there is significant employment growth within these companies. An explanation for the latter observations is the limited asset restructuring activities which are not required in case the company is performing well.

When further focusing on the European market, these initial results get confirmed. Bruining et al. (2005) investigate the Dutch and UK market and find that there is a positive effect on the employees of private equity portfolio companies. During their survey which took place between 1999 and 2001, they have received feedback from 145 UK companies which went through a buyout between 1994 and 1997 as well as 45 Dutch companies performing the same between 1992 and 1998. Bruining et al. (2005) find that private equity backed buyouts positively impact the number of employees as well as the average wages. The effect seems to be stronger in the UK which is less institutionalized compared to the Netherlands. Nevertheless, both countries confirm the positive results. Bruining et al. (2005) speculate that the change in company ownership structure frees and releases existing and potentially old policies which subsequently creates leeway to hire more and motivated staff. Additionally, it allows to invest in new development tactics and creates new incentives for existing and new employees.

Bernstein et al. (2010) add to these optimistic indications as they find that private equity investments have a positive effect on the number of employees as well as the total labor costs. In their analysis, they consider 14,300 buyout transactions between 1986 and 2007, and show that the average growth rate of wages of private equity backed companies is 0.5% to 1.4% higher than in companies without private equity investments. This also holds true for the yearly staff growth rate which is 0.4% to 1.0% higher. Reasons for the observations are not provided. However, they conclude that the negative reputation of private equity concerning employment cannot be confirmed.

A statement, that also Boucly et al. (2011) could confirm. They perform an analysis of the French private equity market by reviewing 839 buyouts between 1994 and 2004. They find that the analyzed companies undergoing a LBO have a significantly higher employment growth compared to companies without a private equity investor. Additionally, they observe that the strongest effect on the employment growth is visible in the first year after the investment. They prove in their analysis that the private equity investment leads to company growth which subsequently positively affects employment.

When additionally focusing on early stage financing (i.e. VC = Venture Capital), the initial assumptions get confirmed as well. Paglia & Harjoto (2014) focus on the effects of VC and private equity investments on small- and mid-sized entity businesses establishments (i.e. below 100 million USD) in the U.S. between 1995 and 2009. They find that both forms of investment (private equity and VC) have a positive effect on the employment levels. Private equity does not have an impact on the target companies in the year of the investment but is positively affecting employment growth in the following three years after it. In contrary, VC is already positively affecting the employment growth from the date of the investment onwards as it allows to further invest in the company. Engel & Keilbach (2007) support the positive aspect of VC financing. They focus on the German start-up market and analyze the impact of VC investments of companies which were established between 1995 and 1998. Out of 21,541 companies, only 0.66% of these companies show VC financing. However, when comparing VC backed start-ups with non-VC financed ones, Engel & Keilbach (2007) find that VC backed firms show an employment growth rate which is double the rate of non-VC backed companies. They explain this observation with the fact that VC financed companies have more funds to grow which subsequently impacts the number of employees as new hires become relevant. Nevertheless, besides all the positive aspects around private equity investments, there are also contradicting voices, which show that private equity is rather disadvantageous for the employees of the portfolio companies.

Wright (1984) conducts a survey across 111 UK companies, going through a management buyout. He finds that 44% of these companies (i.e. 49 companies in total) show job losses as a reason of the buyout. Wright (1984) summarizes that the main reason for the reductions are redundancies, followed by voluntary agreements or natural fluctuation.

Wright et al. (1988) add to these observations as they conduct an analysis on studies which were performed by the Centre for Management Buyout Research in the UK. They do not only consider the above mentioned 111 buyouts which were completed prior 1983 but further 183 buyouts between the years 1983 and 1985. Concerning the employees, they find that 24.6% of the 183 buyouts reduced the number of staff which is however significantly lower compared to the 111 buyouts (in the period prior to 1983, the reduction rate was 44.1%). Wright et al. (1988) conclude that the higher job reduction rate was driven by a weaker economic situation. However, they still summarize that buyouts in general lead to a reduction in the employment levels. These findings get also confirmed by more recent research as per Folkman et al. (2007). They find that private equity investors mainly focus on short-term profit and wealth maximization and do not consider the interest of other stakeholders, especially those of employees. Cressy et al. (2011) confirm this as they find in their analysis that private equity leads to job losses in the relevant portfolio companies. They base their statement on an analysis of 57 UK based companies which went through a buyout between 1995 and 2000. Despite private equity backed companies do not show a job cut in the year of the buyout, there is a significant effect visible in the following four years compared to a control group of companies without a private equity investor. Cressy et al. (2011) conclude that the aim for high profitability leads to job cuts in the analyzed firms. Goergen et al. (2014) add to this statement as they perform an analysis using objective data as well as company interviews to identify the impacts of private equity investments in existing companies going through an institutional buyout. By comparing the companies with a private equity investor towards a group without such an investment they find that companies owned by private equity houses show lower wages, increased job cuts and lower productivity. They explain their observation with the aim of downsizing the company to make it more profitable.

However, the literature is not only pro and con private equity impacts on their portfolio companies. There is a set of authors who are indifferent regarding this investment vehicles. Lichtenberg & Siegel (1990) perform an extensive analysis of LBOs occurring in the U.S. between 1979 and 1988. They find that the effect of LBOs on employees is different per group. White-collar workers (e.g. administrative staff) are negatively affected by the buyout. On the one hand, the number of staff reduces and on the other hand, the compensation level of this group is significantly lower compared to the period prior the LBO. Nevertheless, interestingly blue-collar workers (e.g. production workers) in contrary show a positive effect as a result of the buyout. The number of staff working in productive departments increases as their average compensation does as well. Unfortunately, Lichtenberg & Siegel (1990) do not have the relevant data available to come to concrete conclusions for their observations. Nevertheless, Opler (1992) adds to this separated analysis but more from a timely perspective as he focusses on 44 U.S. companies during 1985 and 1989 which went private through a LBO. He concentrates on an analysis one year prior to (T-1) as well as two years after (T+2) the LBO. Based on the data available it becomes evident that the number of employees declines in the first year after the LBO, but increases again in T+2. However, also in T+2 the number stays behind T-1. Nevertheless, Opler (1992) concludes that the decline in the first year is not significant and positively affected by an increase in the second year.

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