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Last Updated: Saturday, 26 January 2008, 16:10 GMT
Private equity defends job record
By Tim Weber
Business editor, BBC News website, in Davos

David Rubenstein, Carlyle Group
Carlyle's David Rubenstein says private equity firms deliver results
Companies bought by private equity firms do not destroy jobs on a large scale, a study suggests.

The private equity industry has been accused of "quick flips" - stripping company assets and axing jobs before selling firms or closing them down.

But research for the World Economic Forum suggests that private equity tends to stay invested for five years.

And compared to rivals, firms owned by private equity axe more old and create more new jobs, but rarely go bankrupt.

Private equity firms are investment funds that tend to focus on buying companies that are undervalued or poorly managed, in order to turn them around and sell at a profit.

To do that, they combine their own capital with borrowed money, which has to be paid back out of the cashflow of the acquired company.

Bad rep

They have come under fire during the past two or three years because of the high returns they generate for their investors, and the fact that their managers tend to earn huge amounts of money while being very successful at avoiding high tax bills.

The biggest criticism, though, has been the notion that they run companies with little consideration for their staff and the communities they operate in.

Josh Lerner, Harvard Business School
Josh Lerner says private equity firms invest for longer than expected

The research, conducted by Josh Lerner of Harvard Business School, does away with some of the myths surrounding private equity.

For starters, the time that private equity firms hold on to their investments is growing, and currently stands at a bit more than five years.

Their management changes seem to be making an impact. In the United States, every year just 1.2% of private equity-owned firms are being forced into bankruptcy.

In contrast, about 1.6% of firms issuing bonds go bankrupt. It is worse for troubled firms that have to issue so-called junk bonds; 4.7% of them tend to fail.

Job destruction - and creation

The picture gets a bit murkier when it comes to jobs, the research suggests. In the two years before being taken private, companies tend to lose 4% more jobs than their peers - an indication that these firms are in serious trouble to start with.

In the two years after the takeover, these companies cut 7% more jobs than rivals. After that, employment levels are comparable.

However, the sharper job cuts are partially offset by the fact that private equity-owned firms are growing faster and create 6% more jobs at new factories than their rivals.

More importantly though, these figures do not take account of the jobs saved because private equity-controlled firms are less likely to go bankrupt.

Campaigners like War on Greed say the numbers prove that "the buyout business is bad for American workers", and call on politicians to ask themselves if private equity firms "contribute to exacerbating the country's economic woes".

Acceptable profits

Such arguments carry little weight with the private equity bosses in Davos.

Martin Halusa, Apax Partners
Martin Halusa of Apax Partners calls for transparency

David Rubenstein is the co-founder of the Carlyle Group, which manages investments worth $75bn. He acknowledges his industry did not engage with the public and local communities "as we should".

"We talked only to investors and told them how great our returns are... People are giving us their money not because we are so charming or good-looking, but because we are giving spectacular rates of return, delivered consistently over five, 10, 15 years."

The big job losses in the US had not happened in companies run by private equity, but industries like steel and car-making.

"We get criticised if we make too much money," said Mr Rubenstein, "and if things [in an acquired company] don't work out we get criticised as well... there seems to be a level of profit that's acceptable, but I'm not sure what that is."

According to Donald Gogel, boss of Clayton, Dubilier & Rice, the "transitional ownership" model of private equity was simply better.

It "allows intense focus on a handful of key issues in areas that a normal CEO won't be able to focus on in his daily work," he said.

'Under the radar'

Dr Martin Halusa, in charge of UK private equity firm Apax Partners, blamed a European "malaise about Anglo-Saxon-type capitalism", which sees private equity as having only shareholder value in mind, "and does not regard social consensus in Europe and has no roots in the local community".

Private equity, said Dr Halusa, had "acted as a lightning rod" for such general fears.

The industry, however, was also to blame: "For a long time we did not engage with the media, so we need more information and transparency."

In the UK, a review of the industry by Morgan Stanley's ex-boss Sir David Walker would provide a voluntary code of conduct that would help to address that, promised Dr Halusa.

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