The strange effect of private equity on inequality at work

Would you like to work in a company whose profits increase while the gender pay gap decreases?

What if the pay gap between young and old widens further, while the number of employees increases?

It turns out that it becomes much easier to find such an employer. Recent research suggests that these encouraging signs of improving pay equity come after a company falls into the hands of the booming private equity industry.

This is indeed the same private equity sector notorious for over-indebting companies and laying off workers under murky deals that line the pockets of billionaires while leaving a destructive path of corporate collapse and social harm. .

The larger story is more complex, says Lily Fang, professor of finance at French business school Insead.

She is co-author of an unpublished study of nearly 20 years of data on leveraged buyouts of more than 800 companies in France, where it may be easier to obtain statistics on gender and compensation. employees over time.

The work is part of a wave of recent academic papers that have begun to look beyond the financial performance of private equity-backed groups and examine the social consequences of the industry.

Fang’s study found that after a takeover, as better-paid workers (often men) left and cheaper workers were hired, the average gender pay gap decreased by 6 .5%. The pay gap between young and older workers has narrowed by an even more impressive 18%.

In line with private equity’s relentless quest for efficiency, profitability has increased, but so has headcount.

There are a few important caveats. The study only looked at companies in France, many of which were private and relatively small, with an average of 180 employees.

Yet this type of company accounts for a significant share of private equity-backed deals that get less attention than larger ones, especially those such as Toys R Us and Neiman Marcus that end up in bankruptcy courts.

Either way, research is important at a time when the influence of private equity on the workforce is growing.

In Europe alone, private equity-backed companies employed 10.5 million people in 2018, more than the entire workforce of the Netherlands.

In 2021, the industry had its strongest year since records began in 1980, according to financial data group Refinitiv. The number of private equity-backed M&A deals globally rose more than 50% from a year earlier, while the total value of deals jumped to $1.1 billion.

It would be nice to think that this is unmitigated good news for workers, especially underpaid women in small, poorly run businesses where pay is not consistently based on performance.

But of course it’s not that simple.

It’s one thing to tackle inequality with a ‘race to the top’ agenda, but I’m not sure that’s the same as the ‘race to the bottom’ of the workplace that capital- investment can trigger.

Even if it was, it was inadvertent. As Fang says, the private equity groups in his study did not actively seek to reduce wage differentials. “They were just optimizing their workforce,” she says. Wage differences fell as a by-product.

Other recent studies suggest that workers in private equity-backed companies face mixed prospects. Some end up in safer workplaces with better managers and better training. But those who were less healthy before the takeover may be more likely to lose their jobs while the overall number of jobs does not always increase.

Additionally, when you look at workers who benefit from a leveraged buyout agreement, you’re likely to see what another recent study describes as a “significant and significant” drop in employee satisfaction among many of them.

Layoffs, cost cutting and general uncertainty are cause for concern, and the effect can be particularly pronounced after the takeover of a company that was previously publicly traded.

The bottom line, says a co-author of this article, is that there is no escaping the nature of the leveraged redemption beast.

“Private equity is capitalism on steroids,” says Oxford University professor Ludovic Phalippou, who has spent 20 years studying the industry.

Its intense focus on profit means it delivers the best that capitalism has to offer. But no one should have any illusions that he can’t also deliver the worst.

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