In Tough Times, Private Equity Saves Jobs
Richard Farley, Lawyer, TCG Member, OPINION - If you asked a random sampling of people with jobs whether or not they would work for a company owned by a private equity firm during financially difficult times, I’d be shocked if the results weren’t overwhelmingly against the private equity firm, given the relentless beating private equity has received this year, principally as a result of Mitt Romney’s presidential candidacy and his former affiliation with Bain Capital.
But is the commonly accepted view that private equity firms slash jobs at the first sign of trouble supported by the evidence? According to a report by Moody’s Investors Service last week, workers would be wise to choose the private equity-owned company.
Moody’s data shows that private equity-owned companies are much less likely to be liquidated when the going gets tough. It turns out that private equity does more to save the jobs of workers at struggling companies than other types of owners do.
The Moody’s study reviewed more than a thousand situations going back to 1988 where companies defaulted on their debt. Two hundred involved companies that had undergone private equity-backed leveraged buyouts; the others had not. The results of this exhaustive study repudiate the “conventional wisdom” of the anti-Wall Street crowd that leveraged buyouts destroy companies and jobs.
First, the research indicates that default rates among companies with similar credit ratings were virtually the same for all companies, whether or not they were owned by private equity. Second, as a whole, lenders recovered virtually the same amount on their debt in private equity-owned companies (54 percent) and non-private equity-owned companies (55 percent).
Most surprisingly, if a private equity-owned company defaults on its debt, it is half as likely to be liquidated as its counterparts. The Moody’s report notes that “a much higher percentage of bankrupt LBOs were acquired or emerged from bankruptcy instead of being liquidated.” When companies are acquired or emerge from bankruptcy, jobs are much more likely to be preserved than when the enterprise is liquidated.
Read the rest of this article at the NY Times [here]