With battles over taxes and registration still looming in Congress, and with potshots still being flung at private equity by journalists, union leaders and others, the Association for Corporate Growth has decided to show naysayers that buyout firms can be a source of job creation and economic good for the country.
While the industry needs to answer its critics, I’m not convinced a strategy that centers on jobs growth will pay dividends.
Most buyout firms are first and foremost about generating high returns for investors through the buying and selling of cash-flow-positive companies. (Imagine a GP in a road show pitch: “So Ms. LP, how about we skip over the investment multiple and net IRR and just get right to the jobs growth!”) Job creation is often the happy consequence of the LBO strategy; the times when it’s not will continue to provide fodder for industry critics.
Gary LaBranche, president and CEO of ACG, which held its annual InterGrowth conference last week in San Diego, told me that the organization has created the Middle Market Private Capital Leadership Forum to spearhead the work to produce a better image for sponsors, and to explain the role of lenders, intermediaries and others orbiting the private equity solar system. Of the nearly 14,000 individual members in ACG, about 3,300 come from private equity, said LaBranche.
Ten firms have signed on to the forum, including
The effort promises to produce fresh research—at least some of it generated through a collaboration with Harvard professor Josh Lerner, whose earlier study of job creation by buyout shops showed a mixed track record. The forum will also spread the word to policymakers, government officials, think tanks, academics, journalists and others that mid-market buyout shops routinely grow companies, create jobs and enhance their local tax bases. ACG has launched a website at “middlemarketgrowth.org.”
The stakes continue to be high. Hendrickson herself played a part this month in a desperate bid by mid-market firms to reverse a Dodd-Frank financial reform law requirement that buyout shops with $150 million or more in assets under management register as investment advisers with the Securities and Exchange Commission. During a hearing hosted Wednesday, Hendrickson touted the financial support PE firms provide to small businesses. Meantime, a representative of the AFL-CIO, also testifying at the hearing, would have none of it. Calling the repeal efforts “cynical,” he accused buyout firms of costing Americans “tens of thousands” of jobs in recent years.
It’s hard to argue with a strategy of promoting the buyout industry as a source of job creation. Both the National Venture Capital Association and the Real Estate Roundtable, which represents local real estate limited partnerships, have had success emphasizing job and economic growth by their members in their fight against higher taxes on carried interest. It’s made them crucial allies to buyout shops on the issue. (One NVCA press release was titled: “House of Representatives Penalizes Job Creators to Pay for Year End Tax Extensions.”)
In fact, unlike buyout firms, venture capitalists managed to wangle an exemption from the SEC registration requirement in the Dodd-Frank law. In retrospect, the fact that Congress made a distinction between venture capitalists (“job creators”) and buyout firms (accused this week of axing “tens of thousands” of jobs) boded poorly for the latter.
Will promoting job creation more heavily work for buyout shops, too? Earlier research by Lerner and a team of academics, sponsored by the World Economic Forum, found that targets of private equity transactions from 1980 to 2005 simply didn’t produce more net job growth than other, comparable companies. In fact, according to the study, “employment declines more rapidly in target establishments than in control establishments in the wake of private equity transactions.”
The battle to generate positive statistics simply can’t be won at this point. The best the industry can hope for will be to add to the stalemate. And parties on both sides of the debate can always, at will, produce examples to “prove” their point.
Hendrickson told me this week that employment rose 6 percent across Riverside’s U.S. portfolio over the past three years. It’s an impressive achievement in a poor economy. But a reporter like Josh Kosman of the New York Post can still, at any time, pick out several of a firm’s worst deals to argue that the sponsor is a job-killer. Look no further than his recent story on the founder of
LaBranche said that ACG is prepared to dig in for a long, multi-year battle to demonstrate the industry’s virtues, and to draw a distinction between mid-market firms and the rest of the field. He said the new research would focus on the middle market, where results could prove more favorable.
But I see the PR battle over PE-induced job creation as no longer winnable, if it ever was.