Private Equity and Human Capital Risk

Research Retrieved: December 2017
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In the public debate, considerable uncertainty remains as to whether buyouts accelerate short-term profits at the expense of stakeholder wealth and financial stability. To shed new light on the consequences that buyouts bring about for employees, Antoni, Maug and Obernberger (2015) link buyout records to a detailed dataset on individual career paths, and investigate how LBO activity affects employment and wages.

Key Findings

1. The public debate is frequently concerned with the presumption that buyouts are followed by wage cuts. In fact, the authors show that employees’ average earnings start to decline three years after the buyout, and drop by 11% five years after the deal completion compared to the control group. However, this effect is largely driven by job losses to a lesser extent by actual reductions in wages.

2. The authors do not find support for the claim that the LBOs specifically harm employees in routine jobs, unskilled workers, and workers with lower degrees of education. Much rather, the results suggests that middle management faces the most severe earnings decline. This effect is again largely driven by job losses and to a lesser extent by pay reductions.

3. The results do suggest, though, that older workers and workers with more firm-specific skills are particularly vulnerable. Specifically, these workers are more likely to remain unemployed and appear to have lower chances to find new jobs in the same industry.


Practical Relevance

In the heated and ongoing debate concerning the societal impact of LBOs, the study delivers important causal evidence as to how buyouts impact German employees. The study confirms the presumption that buyouts come along with earnings reductions for the average employee, but cannot support previous findings that LBOs necessarily increase job polarization – on the contrary, Antoni, Maug, and Oberberger (2016) find that German medium-skilled workers benefit from LBOs compared to a closely matched control group.