From Prof Geoffrey Wood, Prof Marc Goergen and Prof Noel O’Sullivan.
Sir, The argument from Alex Barr in “Private equity adds value to investors as well as businesses” (FT Money, June 15) that private equity adds value to companies is unjustified according to our research; and his assertion that its reputation for job-slashing is undeserved again does not hold up under scrutiny.
Mr Barr, manager of the Aberdeen Private Equity Fund, quotes our research in his article, which found that a large section of private equity – institutional buyouts – actually harm a company’s performance while shedding a great deal of jobs in the first year of their acquisition. This is an independent, scientific study and the first statistical analysis of its kind.
Usually, private equity’s marketing machine lumps all the different kinds of buyouts into one big private equity bag. They argue it is all good, but our research found not all of it is. We looked at one type, institutional buyouts, from 1997 to 2006 and they made up nearly half of the public-to-private buyouts in that period.
When we compared 105 publicly listed companies that went through a buyout between 1997 and 2006 to two control groups, one of their industry rivals and one of companies with similar pre-acquisition performance, the IBO companies fell further behind after the takeover. The study found that, four years after the buyout, the productivity gap between the target companies and the group of companies with similar pre-acquisition performance had tripled, from £29,000 – as measured by turnover per employee – to £89,000.
Mr Barr says that the research is flawed because the period covers the financial crash; well, that has no effect on the results, because we are comparing the bought-out companies with two control groups, which have experienced exactly the same economic environment.
Mr Barr then goes on to state the study’s “biggest flaw is reinforcing a misconception that private equity is all about curbing excessive labour costs”. We are not reinforcing it, that is what our research found; it is there in the figures. When we looked at job losses, 59 per cent of the private equity IBO companies reduced the size of their workforce in the first year compared with 32 per cent in the control groups, and that was after adjusting for differences in wage costs and productivity.
Geoffrey Wood, Warwick Business School, University of Warwick
Marc Goergen, Cardiff Business School, Cardiff University
Noel O’Sullivan, Loughborough University Business School