Snakes or ladders?

Snakes or ladders?

Does private equity backing help or hinder the careers of portfolio-company employees? New research takes a look at this question and comes up with some surprising results. By Vicky Meek.

The 2012 US presidential campaign of Mitt Romney, co-founder of Bain Capital, is likely to be remembered as much for the criticism it brought the private equity industry as the policies he espoused. While Romney claimed his firm had created tens of thousands of jobs during his time there, his political opponents waded in with counter-claims of job losses. 

Academics have long sought to determine which of these arguments is true, with studies showing through the years that PE either destroys or creates jobs. More recently, research has come up with more nuanced findings, such as PE’s “creative destruction” effect, where less productive units are closed to concentrate on more profitable areas, thereby both destroying and creating jobs during the investment period (Private Equity and Employment, Davis, Haltiwanger, Jarmin, Lerner and Miranda – see 'Angels or Demons?', Private Equity Findings, issue 2).

Until recently, however, few had considered the longer-term effects of PE on portfolio-company employees. This is what Ashwini Agrawal and Prasanna Tambe sought to examine in their paper, Private Equity and Workers’ Career Paths: The Role of Technological Change. “The focus to date had been on the cost of PE in terms of lay-offs or net job creation,” explains Agrawal. “We wanted to see what happened to individual workers following their involvement in a PE-backed company.”

Using the data from CVs posted on a US online job-search platform, the academics compared the length of time staff of PE-backed companies remained in employment over their careers against that of people with similar profiles that had not worked in PE-backed companies (the control group). The overall finding is that those who have worked in a PE-backed company are employed for longer over the course of their careers than the control group. “We were very surprised that many people in the PE sample group seemed to be better off than the others whose companies hadn’t been bought out,” says Agrawal. “We really weren’t expecting this.”

Stepping up

This finding suggests that people who have worked in a PE-backed environment are somehow more employable. But why? “We had to find a reason for this,” says Agrawal. “What changes were happening in these companies? If these individuals were more attractive employees, they had to be learning new skills.”

Drawing on existing academic research that PE-acquired companies were subject to operational upgrades and therefore new practices and that these new practices were often brought about by IT improvements, the authors looked at the level of IT investment by PE backers. They discovered that IT investment increased following an LBO, in particular for those deals completed since 2003, and that the effect on employment durations for the PE-backed sample was strongest for workers in companies acquired from 2003 onwards. This suggests that it is PE’s investment in IT that helps many workers upgrade their skills.

It’s certainly the case that many PE firms – especially at the larger end – have increased their focus on IT over recent years. Warburg Pincus, for example, provides support to portfolio companies through its Information Technology Strategy and Assessment group. The firm assigns a partner and other senior team members to help advise on where improvements can be made. And while IT has been an important element of value creation for Warburg Pincus for some time now, an insider suggests that this has become more formalised over recent years.

Agrawal is confident that there is a PE effect on employees and that this is linked to technology investment. “Many studies look at big phenomena in PE, such as a government action or whatever, by comparing those who are affected with those who are not,” he explains. “However, because we look at the longer-term effects and we match PE-backed workers with similar non-PE-backed workers to determine whether there is a difference in outcome, we have established a counterfactual: we can see what might have happened to PE-backed workers if they hadn’t been employed in a PE-backed company – their employment prospects are actually limited by exposure to outdated working practices.”

Agents of change

Having worked for the past 20 years as CEO, COO and CFO of PE-backed companies, Adrian Lamb has a bird’s-eye view of how PE firms operate across a number of different strategies – from turnarounds and buy-and-builds through to providing expansion capital. His view is that technology may drive some of the results. “If we look at the period after 2003, technology has moved on considerably,” he says. “The advent of the cloud, big data and the significantly reduced cost of computing for both hardware and storage shortens the payback period of an investment in IT considerably. Clearly, that applies to the corporate world as well as the PE portfolio-company world, but the difference is that corporates will often have legacy systems to deal with, where portfolio companies often won’t; a corporate will often follow a zig-zag path to improvement, while a PE spin-out tends to be able to start from scratch and so follow a straighter line. It’s also true that the PE firm may inject capital to invest in these systems, while a corporate may not have the cash available.”

Yet IT investment by itself is unlikely to create value, says James Markham, partner, portfolio management, at Graphite Capital. “At our end of the market – that is, investing in businesses with an enterprise value of up to £150m – IT investment can be, but is not always, important,” he says. “We have found over the years that upgrading IT can be very costly and difficult. It can go wrong in many cases, largely because of insufficient planning and a lack of buy-in among staff. There’s little point in spending money on a new CRM [customer relationship management] system if you don’t have the sales staff on board or use it the way it’s intended. Too often, IT is used as a sticking plaster, when in fact it can only be value-accretive if there is proper planning and execution.”

All trained up

What’s implied by the research, however, is that PE investment in IT is usually backed up by sufficient training, and this is where practitioners tend to agree that PE focuses heavily on employee development. Yet this training is across a range of areas rather than specific to IT, they argue. “Board members tend to get little training – the expectation is that they are the final article already,” says Lamb. “However, below that, training can be seen as a good investment for PE backers,” he adds. “Their three- to five-year investment period means they can take a long-term and more consistent view and will invest in training if they believe there is value in it; in the corporate world, where quarterly/half-yearly reporting often leads to a more short-term view, training budgets tend to be switched on and off according to how the company is doing.”

Markham agrees, saying that his firm focuses on training in many of its portfolio businesses, but especially where there are control risks, such as in healthcare and the care sector, and that this may lead to employees enhancing their employment prospects over the longer term. 

However, he also makes the point that PE ownership by its very nature can improve employees’ skills. “PE firms tend to implement a whole range of initiatives,” he says. “And the rate of change is such that employees update their skills by being involved in a fast-paced environment. IT may be a facilitator in this, but I don’t think it’s the number-one factor.”

Another seasoned PE executive puts it this way: “I can think of a number of other reasons why employees of PE-backed businesses may fare better in their careers. Generally, PE brings a whole series of disciplines and skills that benefit employee skillsets, such as operating in a leveraged environment, or in one in which there is a clear set of value-adding objectives generally.”

Halo effect?

There may even be a “halo effect” created by PE when it comes to portfolio-company employees. “In my experience, employers tend to view people who have worked in the fast-paced environment of a PE-backed company as more resilient and commercially focused,” says Helen Roberts, partner at Skillcapital. “I also think that the performance-driven culture in portfolio companies means that employees can demonstrate specific results to future employers, and that can make them attractive new hires.”

Overall, practitioners – unsurprisingly – agree that there is a positive effect of PE on human capital, but the precise source of this positive effect appears to be subject to debate. Nevertheless, Agrawal does point out that the effect is not evenly spread. 

“We see greater employment durations for functions that are related to IT in our research,” he says. “Nevertheless, technology has changed the mix of tasks performed by many individuals. For example, people used to spend a lot of time in meetings rather than with customers or suppliers. The advent of email removed the need for so many meetings. It has also changed the importance of different tasks, with processing information and analysing data to reach decisions becoming much more a part of daily work life than before. 

“Workers who perform these types of role acquire more new skills when technology is updated than, for example, workers whose main job is to guide subordinates,” he explains. “Technology has allowed some types of worker to become more autonomous.”

It is an area that Agrawal would like to study further. “I’d like to look at what needs to be in place to ensure the diffusion of technology,” he says. “And I’d like to ask the question: how does the organisational form of companies change when new technology is introduced? How does this affect, for example, reporting structures? And, finally, how is the nature of work changing for PE-backed companies versus those firms not backed by PE?”


In Private Equity and Workers’ Career Paths: The Role of Technological Change, Ashwini Agrawal and Prasanna Tambe, both of New York University’s Stern School of Business (Agrawal has since moved to the London School of Economics), sought to examine how PE ownership affects employees’ careers. They did this by tracking the employment histories of more than 5,600 workers who had been employed by PE-backed companies and comparing the results with more than 196,000 similar workers who had not been employed in PE-backed companies (the control group). 

They found that, on average, the employment spells in the PE-backed sample were 6-9% longer than in the control group; in effect, these workers are more employable. In addition, the research found that the longer an employee remains at the PE-backed company, the longer their employment spells. Those who stayed at the company for at least 1.3 years after PE investment were more able to find employment quickly at other companies.

The research then looked into why this might be. The authors worked on the hypothesis that PE firms make significant investments in IT at portfolio companies, which results in many employees acquiring new, transferable skills. They find that, over the entire period, IT labour flows (a measure of IT investment) increase by 3-7% following a PE acquisition, and that the increase is at the higher end of this scale for LBOs completed post-2003. This helps to explain the effect of IT investment – for workers in companies acquired after 2003, there is a significant increase in employment duration (12.1%), while those in companies acquired before this date are not employed for significantly longer than those in the control group.

Overall, the research suggests that significant IT-related investment by PE firms in their portfolio companies results in many workers updating their skillsets, making them more attractive employees over the long term and lengthening the amount of time they are employed. PE therefore appears to enhance many individuals’ career paths.