Business is booming.

Private equity’s strange effect on workplace inequality

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How would you like to work at a company whose profits go up while its gender pay gap falls?

What if the pay gap between young and older workers plunges even further, while the number of employees rises?

As it turns out, it is getting a lot easier to find such an employer. Timely research suggests that these cheering signs of improved wage equality emerge after a company falls into the hands of the booming private equity industry.

This is indeed the same private equity sector famed for loading companies with debt and laying off workers in shadowy deals that line the pockets of billionaires while leaving a destructive path of corporate collapse and social harm.

The broader story is more complex, says Lily Fang, a professor of finance at France’s Insead business school.

She is a co-author of an unpublished study of nearly 20 years worth of leveraged buyout data from more than 800 companies in France, where it can be easier to obtain statistics on employees’ gender and pay 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 industry’s social consequences.

Fang’s study found that after a buyout, as higher-paid (often male) workers departed and cheaper ones were hired, the average pay gap between men and women fell by 6.5 per cent. The wage difference between young and older workers shrank by an even more impressive 18 per cent.

In keeping with private equity’s remorseless quest for efficiency, profitability rose, but so did headcount.

There are some important caveats. The study only covered companies in France, many of which were privately owned and relatively small, with an average of 180 staff.

Still, this type of business accounts for a sizeable 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, the research matters at a time when private equity’s influence on the workforce is surging.

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

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

It would be nice to think this is unalloyed good news for workers, especially underpaid women in smaller, poorly managed companies where pay is not routinely based on performance.

But of course it is not that simple.

It is one thing to tackle inequality with a “levelling up” agenda but I’m not sure that is the same as the workplace “levelling down” that private equity may be unleashing.

Even if it were, it is inadvertent. As Fang says, the private equity groups in her study did not actively set out to cut wage gaps. “They were just optimising their labour force,” she says. Pay differences fell as a byproduct.

Other recent studies suggest workers at private equity-backed companies face a mixed outlook. Some end up in safer workplaces with better managers and training. But those in poorer health pre-buyout may be more likely to lose their job while overall employment numbers do not always rise.

Moreover, when you examine workers on the receiving end of a leveraged buyout deal you are likely to find what another recent study describes as a “large and significant” decline in employee satisfaction at many of them.

Lay-offs, cost-cutting and general uncertainty cause worries, and the effect can be especially pronounced after a buyout of a company that used to be publicly traded.

The bottom line, says one co-author of that paper, is that there is no escaping the nature of the leveraged buyout beast.

“Private equity is capitalism on steroids,” says Oxford university’s Professor Ludovic Phalippou, who has spent 20 years studying the industry.

Its intense focus on profit means it offers the best that capitalism can deliver. But no one should be under any illusion that it can’t also offer the worst.

pilita.clark@ft.com



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