Private equity coming out of the shadows


Private equity firms are often accused of being secretive and having a "slash and burn" mentality. But more often than not they act as a catalyst to create jobs and improve efficiency.

Private equity firms will often cut jobs and depress wages in the first year after taking over a company, but in the longer term their input can be much more positive, raising standards of management and expanding staff numbers.

A study by the British think-tank The Work Foundation has found that, while most management buy-outs (which account for the majority of private equity deals) cut jobs in the first year, after that the numbers hired tends to rise.

On average a private equity-run MBO organisation will expand its workforce by more than a third 36 per cent over six years, the foundation found.

Private equity firms also tended to introduce strict new performance management systems such as performance and merit pay, regular performance appraisals and put in place new human resource management systems.

But in situations where an outside management team was parachuted into an organisation the outlook was less encouraging for workers.

In these scenarios, employment fell on average by just under a fifth over a six-year period and workers found themselves some 231 a year worse off than other private sector workers.

Tighter pay cycles were also a factor after MBOs, with workers on average 83.70 a year worse off than other private sector workers because their wages grew more slowly, said the foundation.

The environment within private equity-run firms was also less friendly to trade unions.

Four out of 10 managers in private equity firms said they were hostile to trade unions, with just one in 10 positive.

Will Hutton, chief executive of The Work Foundation, said: "A sizeable tranche of corporate Britain is falling under private equity, but the industry operates with near zero levels of public accountability.

"Private equity firms pride themselves on their ability to squeeze performance from the organisations they own, and they turn up the pressure on individuals in order to do so," he added.

"When private equity backs an incumbent management team the result can be improved productivity and higher employment.

"But we are concerned that, often, the price that is paid by workers is too high and that levels of trust between workers and managers suffer.

"In some cases, private equity ownership may be inconsistent with the principles of 'good work' fairness, job security, the ability of individuals to have a say over their working life, to manage stress, and to be able to communicate effectively with senior management appear to fall down the list of organisational priorities under PE ownership.

"This seems to be especially true where managers have no prior relationship and few psychological bonds with the company and the workforce.

"There is now an urgent need to ensure private equity firms throw open their books to proper public scrutiny, that they pay appropriate levels of tax, and that the growth of private equity is not exposing the entire British economy to a risk of instability due to the levels of debt the industry takes on as it grows," Hutton concluded.

The foundation has argued that when firms change hands workers should be entitled to some protection concerning their jobs and terms and conditions of employment.

They should have information and consultation rights through representatives about their future and be entitled to know the identity of the company's new owners, it said.

It also recommended that the government explore the possibility of amending the Transfer of Undertakings Regulations (TUPE), which cover and protect the terms and conditions of public sector workers, to include transfers into private through share acquisition.

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The City of the Future

Nic Paton
Nic Paton

Nic Paton is a freelance journalist specialising in writing about workplace and employment issues, business, personal finance, education, health and the catering and hospitality trade.

Curated by our regular contributor, James M. Kerr, the City of the Future is a nine-part series developed with the team at BlumShapiro intended to contribute to the thinking and management theory that underpins the transformational changes already taking shape in across towns and cities around the globe.