Creating New Jobs and Value with Private Equity

Private equity (PE) has been making headlines as a new type of corporate raider. But does the perception match reality? A.T. Kearney’s recent study, Creating New Jobs and Value with Private Equity, brings PE into a whole new light. The negative image of PE might be too simplistic and one-sided.

The Truth About Private Equity

Through an analysis of recent empirical studies, A.T. Kearney is providing a more fact-based perspective to the conventional view of PE backed firms. Rather than sacrificing employment and companies to short-term returns, PE investors create more jobs and foster growth at a higher rate than traditionally financed firms. Among the findings:

• PE created one million new jobs in EU countries from 2000 to 2004, and 600,000 in the United States from 2000 to 2003.
• The gap between PE-driven and non-PE driven employment ranged from 3 percent in a U.S. sample to roughly 18 percent in a Spanish sample. In the United Kingdom, the number of people employed by PE-backed companies increased on average 14 percent annually—against a national private sector employment rate of just 0.3 percent in the same period.
• Rather than simply using companies as part of an elaborate financial scheme, PE made significant investments to improve performance.

Three Strategies PE Firms Use To Generate Value

How does PE improve job creation and value? PE investors employ the following three strategies and go after them more persistently than other firms:

Improve performance. This is the genesis of the “first 100 days” programs launched right after an ownership transfer. But unlike in the past, when firms improved performance through well-known and basic financial engineering strategies, today’s improvements require a wider range of programs. Crucial levers for improving performance include: operational excellence, salary or tariff restructuring, strategic sourcing, general and administrative costs consolidation, production network optimization and inventory management.

Regroup and focus. PE firms reengineer an existing business by reducing complexity and concentrating on core competencies. This strategy can be used at various levels of the firm: on a business level, by separating and divesting or integrating with other firms, on a value chain level by outsourcing noncompetitive processes, and on a product level by pushing successful products while discontinuing weaker ones.

Buy and build. PE identifies add-ons—such as mergers and acquisitions, innovation and sales alliances—and expands on these often neglected resources. The key to a successful buy and build strategy is to enhance margins by improving competitive position and harnessing the scale effects in internal operations. Buy and build initiatives also involve more risk, which can be mitigated through improved planning and management.

Learning from Private Equity

The strategies highlighted in this paper can be applied to all firms, whether financed by PE or not. Both traditional and PE firms can generate even more value and employment by persistently developing and implementing value generation strategies. In the end, it is the rigor and persistence of execution combined with an entrepreneurial spirit that account for the success of a PE-run business. And every company can learn from that.

Consulting Author

For more information about the study findings, see www.atkearney.com or contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it .