The Downside of Private Equity

There has not been nearly enough Canadian discussion of this hot issue, especially given the spate of  activity in Canada.

Here’s info from  a recent critical UK report (with thanks to Joel Harden).

On 26 March the UK-based Work Foundation released a report on the social impact of private equity investment in the UK: “Inside the dark box:
shedding light on private equity”. Making a distinction between MBOs (transactions in which the incumbent management stays in place) and MBIs (new management comes in), the findings include:
* Under MBO workers are £83.70 a year worse off than other private sector workers because wages grow more slowly.
* Under MBI employment falls on average by just under a fifth (18.25%) over a six-year period. And workers are on average £231 a year worse off than other private sector workers.
* Private equity firms tend to introduce strict new performance management systems such as performance and merit pay, regular performance appraisal, and new human resource management systems.
* Some 40 per cent of managers in PE firms say they are hostile to trade unions. Just one in 10 said they were positive about the role of unions.
Press release:
http://www.theworkfoundation.com/aboutus/media/pressreleases/privateequity.aspx
Full report:
http://www.theworkfoundation.com/Assets/PDFs/private_equity.pdf
(see also Independent online article copied pasted below)

Workers ‘worse off under private equity’
By James Daley
Published: 26 March 2007
http://news.independent.co.uk/business/news/article2393297.ece

Companies that are taken over by private equity firms leave their employees demoralised and financially worse off, according to a new report by The Work Foundation published today.

Where private equity groups bring in their own executives – so-called management buy-ins – around a fifth of jobs are cut within six years of the deal, while the remaining staff end up an average of £231 worse off than other private-sector workers.

The record of management buyouts, where the existing executives remain in place, is slightly better, with the overall workforce usually expanded after a round of initial job cuts. Nevertheless, workers are still on average £84 worse off each year compared to other private-sector employees.

The report said private equity takeovers also often destroy relations between management and their staff. Just one in 10 managers in private equity- owned firms said they were positive about the role of trade unions in the workplace, while some 40 per cent said they were “hostile” towards unions.

The Work Foundation, an independent think tank, concludes its report by calling on the Government to tighten workplace regulations to provide more protection for employees in the event of takeovers. The report also calls for tighter tax rules to prevent private equity firms from offsetting large portions of their debt interest against tax, and demands that the private equity industry becomes more transparent.

Will Hutton, chief executive of The Work Foundation, said: “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. 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.”

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