NEW YORK ( TheStreet) -- The creation of new private sector jobs is dependent on highly leveraged buyout firms that take an ownership position in a company and don't necessarily have an economic incentive to build the U.S. workforce. The question of whether private equity buyouts create or destroy jobs is important because the 20 largest private equity firms employed nearly 6 million workers in the companies they controlled, roughly 5% of today's overall employment, according to data compiled by the Service Employees International Union (SEIU) in April 2007. But with loads of debt on their books, companies controlled by private equity firms may be holding back their hiring as a result of resources constrained by debt. In a back of the envelope calculation using employment levels of companies involved in the biggest buyouts included in the 2007 SEIU report -- compared with employment levels at those companies in the most recent calendar year -- evidence shows private equity firms were a significant job killer. In 8 of 10 the biggest buyouts from the SEIU's biggest buyout list, excluding Equity Office Properties and Albertsons
comparable employment data wasn't easily available , employment fell over 7% since the buyouts occurred. At Hertz ( HTZ), Clear Channel and Harrah's now called Caesars , employment levels fell nearly 20%. Overall employment levels during that period, roughly 2005-to-present is not nearly as negative. There are two narratives about private equity's jobs impact: One rosy and one grim. Gordon Gekko acolytes argue that private equity investors are an agent of corporate evolution. By buying companies as investments for themselves and their limited partners, buyout firms take resources money, plant and even employees from underperforming businesses and invest them into better returning opportunities, causing companies and the wider economy to grow and become more productive. That's all great -- say buyout skeptics -- if it were true. Like Gordon Gekko in the 1987 Oscar winner Wall Street, skeptics would argue buyout artists don't grow companies, instead they break them for a quick buck. They would also say leverage, the piling of tax-saving debt onto a company to pay, or overpay, for an acquisition causes once healthy companies filled with stable jobs to reel toward bankruptcy -- making cuts or closures all but a fact of life.
The private equity/jobs debate has even made it into the national political debate. In a Sept 7th debate of Republican presidential hopefuls at the Reagan Library in Simi Valley, California moderator Brian Williams of NBC confronted frontrunner Mitt Romney, a former CEO of buyout titan Bain Capital, about whether his private equity experience makes him a job killer. "Bain Capital, a company you helped to form, among other things, often buys up companies, strips 'em down, gets 'em ready, and resells them at a net job loss to American workers," said Williams. Romney's response was a typical private equity chorus, "The idea that somehow you can strip things down and
that makes them more valuable is not a real effective investment strategy. We tried to make these businesses more successful. By the way, they didn't all work. When it was all said and done, we added tens of thousands of jobs to the businesses we helped support." While that may have been true three years ago, times have changed. At the 2008 World Economic Forum, a time when deal makers were stamping their final buys in a bumper run for private equity takeovers, the industry had a public relations coup when a major study showed buyouts didn't plunder jobs as bad as might be expected. A 2008 paper called Private Equity and Employment written by top finance professors and economists at the Census Bureau and displayed at Davos, showed that five years after a buyout, employment at private-equity owned companies falls 10% on average relative to non-PE controlled firms, but buyout targets were job losers prior to a takeover and more likely to do hiring afterwards -a not so catastrophic finding for the financiers congregating at the Swiss mountain resort. In an interview with TheStreet, Steven Davis, a professor at the University of Chicago's Booth School of Business and visiting scholar at the American Enterprise Institute who worked on the study said about its results, "we certainly did find evidence that if you look at the existing jobs at the time a private equity buyout occurs, those jobs at a target firms do come under increasing risk." According to Davis, it did corroborate the anti-private equity world view. But he added, "Private equity buyouts appear to accelerate both jobs destruction and creation activity. In that sense it's sort of an amplified version of what happens in a free enterprise market environment. There is a huge amount of creation and destruction activity going on at all times in the economy, you can see this going on all the time in Bureau of Labor Statistics employment data."
For the Mitt Romney's of the world, Davis and his colleagues' findings may show that for U.S. corporations and employees tangled under the control of a buyout doyen, "Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit." In his personal view, Davis says, "You can think of
private equity buyouts as one of many different technological forces and competitive forces and organizational forces in a market environment that creates opportunity by which productivity increases over time in the economy." What's frustrating about the debate on private equity's impact on jobs is how out of date it is. Williams, Romney or any another contender at the September Rebublican debate wouldn't have been able to point to any conclusive new findings about the role of buyouts on employment that accounts for the recent recession, which was the worst since the Great Depression. The freeze of credit markets drove many debt-laden private equity and non-PE-owned companies into bankruptcy, partly accounting for the dramatic increase in the unemployment rate, which has hovered at 9% for a disturbingly long time. If Davis were going to redo the study in present day, he'd want to examine the impact that the leverage in private equity buyouts has on companies and their employees. Did leverage force companies to evolve faster? Additionally, he'd want to know how well levered companies during the most recent buyout boom survived the recession, and if potential findings like an increase in the frequency of bankruptcies affected overall company employment levels. Right now, those in the camp that say's private equity buyouts are a jobs killer have the upper hand. We'll all eagerly await new data that shows what happened to employment levels at private equity owned companies during and after the recession. -- Written by Antoine Gara in New York