An academic study commisioned by a trade union has cast doubt on private equity’s much-vaunted record on job creation, suggesting that the supporting evidence is “worthless” and that the true picture remains obscure.
The study, produced by University of Greenwich academic David Hall but commissioned by the trade union T&G, examined five pieces of research that purported to demonstrate private equity’s positive effect on job creation. It concluded that none of these studies provided any evidence in support of the thesis, since most of the research was completely flawed from a methodological point of view.
Hall’s study is intended to undermine one of the major arguments used by practitioners, national associations and independent bodies to defend the industry against accusations of asset-stripping.
According to Hall, the methodological flaws were largely due to the lack of information available on privately-owned companies, meaning that any research tends to be based on incomplete, self-selected or estimated data. Since companies are asked to provide this information voluntarily, the inevitable consequence is that the better-performing companies “self-select” into the process, while weaker performers opt out – which skews the results accordingly. Even the data that is provided cannot be verified, he added.
However, the BVCA – whose research was singled out for criticism by Hall’s report – believes the objections are self-serving and unreasonable. Chief executive Peter Linthwaite told PEO: “This is a classic union exercise – the T&G is just trying to discredit the report because it doesn’t like its conclusions.” He said the BVCA’s sample was easily big enough to be statistically significant: “Our research was conducted according to standard market research guidelines. If [Hall] criticises its conduct, he criticises the conduct of all market research carried out in the UK.”
Hall’s criticisms were not all related to data quality. He also suggested that research by the national associations painted a misleading picture by blending data from venture capital with data on buyouts, since venture-backed firms that managed to survive were by definition more likely to grow and create jobs. Equally, he said, most of the research failed to provide relevant comparisons – namely with other non-private equity-backed companies in the same sector. Moreover, he added, private equity firms always target fast-growing firms in fast-growing sectors, which distorts the impact of their period of ownership in comparison to average company growth.
Hall also criticised the BVCA’s figure on the proportion of private sector employees working for private equity-backed companies, suggesting that the figure was closer to 5 percent, rather then the 8 percent cited by the BVCA. However, Linthwaite said Hall’s calculations were “entirely wrong” since his figure for private sector employees include the self-employed, members of the armed forces and people on training qualifications.