Into the Belly of the Beast: Employees under Private Equity Rule
Imagine the relief when, after months of uncertainty and rumours circulating of a buy-out, a savior strides in — deep pockets, a shiny private equity (PE) badge and promises of growth, sustainability, and job security. Fast forward a few months or years later, the honeymoon is over, your coworkers are being laid off, counterproductive cost-cutting measures introduced, and the business is staggering under a mountain of debt. Welcome to the reality of many employees when private equity moves in.
The Pre-Acquisition Promise
Private equity firms often appear as gallant knights charging in to salvage troubled businesses. Their entry typically features promises of injection of the much-needed capital, restructuring of operations, and employment protection. However, as many have discovered, these declarations can resemble carefully spun tales meant to entice and comfort, with delivery that falls shockingly short.
The Private Equity Playbook
PE firms specialize in high-stake financial chicanery. They use debt-heavy financing to strike their deal (known as leverage buyouts), effectively transferring the risk onto the company being purchased. To generate swift returns for their investors, they resort to drastic cost-cutting measures, often leading to mass layoffs and aggressive restructuring. Failing to meet these high expectations can thrust the company – once a beloved hometown staple – into bankruptcy and closure.
The Hard, Cold Stats
A 2019 study by the National Bureau of Economic Research disclosed that private-equity buyouts are more likely to lead to job losses. The paper estimates that employment shrinks by 3.3% over two years in private-equity buyouts of publicly traded companies. But the damage goes beyond just job loss; those who stay face wage cuts, reductions in benefits and pensions, and significant changes in their job structure.
Storied Casualties: Toys R Us & Sears
Perhaps two of the most iconic instances of private equity heists turned disasters are Toys R Us and Sears. Both were bought in leveraged buyouts by PE firms, loaded with unsustainable debt, and subjected to radical operational shifts. Subsequent bankruptcy and collapse left tens of thousands unemployed while the private equity firms walked away, pockets lined with management and transaction fees.
Thoughts to Walk Away With
This is not to paint all private equity firms with the same defamatory brush. Some acquisitions do turn around businesses and breathe new life into them. It’s just a shame they’re more the exception than the rule. As employees and stakeholders, it’s worth remembering that PE firms are primarily beholden to their investors, not to the businesses they acquire or the employees they oversee. It’s high time we critically assess the disruption concealed beneath the sheen of private equity’s rescue missions and start asking, who are they really saving?