Analyzing Private Equity

Researchers and alums discuss controversial model within context of volatile economy
Thursday, December 18, 2014

"Private Equity at Work: When Wall Street Manages Main Street," authored by Eileen Appelbaum and Rosemary Batt, evaluates the effects of private equity on business and workers through in-depth research.

On Dec. 10, ILR Alumni Affairs and Development hosted "Private Equity at Work," an event that brought the authors together with alumni from across the labor, law and financial spectrums for a presentation and discussion based on the study's conclusions. Perspectives were provided by ILR alumni with financial sector experience.

"We are here to consider private equity, but against a backdrop of rapidly changing economy and labor market," said Linda Barrington. She is executive director for ILR's Institute for Compensation Studies, which coordinated the event with support from ILR's Worker Institute.

"Certainly we are in the throes of a new industrial, or this time, technological revolution that is changing how work gets done and who receives what return for their labor and financial capital," she said to more than 50 attendees at the ILR Conference Center in Manhattan.

Clearly, private equity is a significant player within the financial world, impacting workers across the country, according to analysis in "Private Equity at Work."

"Private equity is large and powerful where 2,797 PE firms own 17,744 U.S. companies," said Batt, Alice Hanson Cook Professor of Women and Work at the ILR School and professor of Human Resource Studies and International and Comparative Labor.

"More than seven million workers have been employed in private equity owned companies over the last decade, which is about the same level of workers in unions today."

Within the study, based on research into original case studies, interviews, legal documents, bankruptcy proceedings, media coverage and existing academic scholarship, Appelbaum and Batt provide insights into the private equity model, and its impact on companies. Their book, they said, is the first comprehensive study of the polarizing and contested business model.

"Private equity firms often improve operations of middle market companies they acquire or restructure distressed companies and help them become sustainable enterprises, expanding the economic pie and creating jobs," said Appelbaum, senior economist at the Center for Economic Policy and Research and visiting professor in the Management Department of the University of Leicester.

"These opportunities are largely lacking when private equity acquires large, successful companies with an enterprise value of $500 million or more," she continued. "Financial engineering is more common in the latter case, and may result in layoffs or downsizing to increase cash flow and service debt."

"The best econometric research by finance economists finds that, overall, employment grows more slowly in PE-owned establishments and firms than in comparable publicly traded companies."

Based on their research, Appelbaum and Batt suggest changes to public policy that encourage private equity firms and the investment funds they sponsor to be responsible employers who manage acquired companies. Recommendations include greater transparency, limits on debt leverage, discouraging financial engineering, closing tax loopholes and being accountable to employees.

Steven Berkenfeld '81, managing director in the Investment Banking Division of Barclays, and Joshua Cherry-Seto '97, chief financial officer at Blue World Capital Partners, provided reflections and perspectives focused on labor relations within the private equity model. They based their remarks on their experiences in the financial sector working directly with private equity.

"Cutting costs means cutting people, closing plants, reducing benefits, which are concerns for leveraged buyouts, but also an issue with how public companies are managed," Berkenfeld said.

"We're discussing it in the context of private equity, but these practices are also now prompting greater discussion regarding the role of the public corporation, how it should balance competing interests."

He asked, "Is a corporation just about maximizing profits for shareholders, or are objectives such as creating the best product for your customers or taking care of your employees also important?"

The discussion provided insight into labor relations with boards of directors and how ILR graduates are well-positioned through their education to understand issues and view these relationships differently.

"In the U.S., private equity tends to be more predatory and adversarial in part because, unlike in countries like Germany, there are no works councils that afford a place for workers in the boardroom – here, labor has no seat at the table," Cherry-Seto said. "Though labor is often a willing participant necessary company restructuring, they often lack a credible negotiating partner."

"It's no surprise to me that roughly 20 percent of recent ILR grads have found their way into the finance field, including roles in HR and management," he continued.

"The ILR School, with its holistic approach to the world of work, including issues of human capital and organizational behavior and development, prepares students for affecting and leading business transformation much better than standard corporate finance programs that speak mostly to numbers and spreadsheets."