In this election season, with the GOP’s presumptive nominee having from a background in private equity, the industry is surely going to take some shots from commentators, the President and his campaign team, and others. So far, private equity has been painted as a job-destroying, highly leveraged embodiment of Gordon Gecko in Wall Street.
Richard Farley, a partner in the corporate practice of Paul Hastings and is based in the firm’s New York office, seeks to pour some cold water on that perception with a op-ed piece in NY Times’ Deal Book. He argues, relying on a report from Moody’s Investment Services, that private equity does more to save jobs in a bad economy that non-private equity owned firms and that private equity portfolio companies are less likely to be liquidated in tough times.
Moody’sdata shows that such companies are much less likely to be liquidated when the going gets tough. It turns out that private equity does more to save the jobs of workers at struggling companies than other types of owners do.
The Moody’s study reviewed more than a thousand situations going back to 1988 where companies defaulted on their debt. Two hundred involved companies that had undergone leveraged buyouts backed by private equity; the others had not. The results of this exhaustive study repudiate the “conventional wisdom” of the anti-Wall Street crowd that leveraged buyouts destroy companies and jobs.
First, the research indicates that default rates among companies with similar credit ratings were virtually the same for all companies, whether or not they were owned by private equity. Second, as a whole, lenders recovered virtually the same amount on their debt in private equity-owned companies (54 percent) and non-private equity-owned companies (55 percent).
Most surprising, if a private equity-owned company defaults on its debt, it is half as likely to be liquidated as its counterparts. The Moody’s report notes that “a much higher percentage of bankrupt LBOs were acquired or emerged from bankruptcy instead of being liquidated.” When companies are acquired or emerge from bankruptcy, jobs are much more likely to be preserved than when the enterprise is liquidated.
Tags: Private Equity Jobs, Private Equity Job creation, private equity job cutting, private equity job, private equity portfolio company jobs, private equity investment jobs, private equity job Moody’s