Is UK private equity a job slasher or creator?

Private equity has long struggled to shed its reputation as an industry of fat-cat investors keen to make a quick buck through redundancies and cutbacks at portfolio companies. As recently as 2013, a report by the University of Warwick into take-private deals between 1997-2006 said there was "evidence of private equity buyouts reducing the number of workers and squeezing wages, without making firms more efficient." More recently, after the collapse of Better Capital-backed City Link led to more than 2,000 redundancies, a UK trade union leader was widely quoted speaking of "bandit capitalists".

However, two reports in the past year – by lower-mid market firm NVM Private Equity and the Association of Investment Companies (AIC) – have found the UK industry to be more of a job creator than a job cutter at the lower end of the market. NVM surveyed its portfolio companies and found 81% of its businesses had increased their headcounts following the GP's investment. Furthermore, 85% of respondents stated they expected to invest in team expansion in the coming years.

NVM partner Peter Hodson is not wrong when he says the firm's results are "startlingly similar to the findings by the AIC". The 2014 report by the association, which surveyed 257 small and medium enterprises backed by VCTs between 1997-2012, found 80% of companies increased their headcounts following funding. AIC also saw an average of 49 new positions created per company, a scale reflected in NVM's results. "For there to be 36% growth in staff numbers during our ownership is a significant number," says Hodson. "It is a figure that makes a strong statement that our industry is all about growing companies."

It is important to note both reports focus on UK-based SMEs, where growth in headcount would perhaps be more expected than it is at the higher end of the market. "What you don't have at that end of the market is the ability to be very clever about how you structure deals," says Hodson. "Our returns are largely based on our portfolio companies growing. To do that you generally need to increase the number of staff, even though this needs to be done in a commercially viable way."

While this may be the case, recent IPOs for private equity-backed businesses in the UK mid-market and large-cap segments reveal a similar trend. AnaCap's Aldermore and Pollen Street Capital's Shawbrook Group have both grown their teams by more than 1,700%, although this can be attributed to the fact both are banking start-ups incorporated during the fallout from the global financial crash.

Cross-segment trend
However, the trend is also repeated among businesses that floated in the consumer and industrials sectors. When Advent International partially exited DFS Furniture five years after it first invested £500m, the GP was divesting a company with 900 additional staff members and numerous new stores. Similarly, during Exponent's tenure, industrial tools and services supplier HSS Hire saw the company grow its headcount from 2,360 to 2,840. Notably, the only UK private equity-backed company to float in 2015 without having increased its headcount has been Apax Partners' Auto Trader, which employs 3,500 people – as was the case in 2007 when the GP initially took a 49.9% stake in the business.

It certainly appears private equity, as a whole, is not the ruthless job slasher it is often made out to be. "There is a historic perception that private equity is about cleverly restructuring deals, breaking up companies and asset stripping," says Hodson. "That is an outdated perception, especially at the SME end of the spectrum. Our industry woke up to this some time ago and recognised it was incumbent on us to go out there and present a different picture. Now it is a question of perception catching up with reality and, while it is hard to judge, I believe this is now starting to happen."

Interestingly, NVM's report also found that wage increases at portfolio companies outstripped inflation. This is another trend at odds with private equity's reputation for being an industry populated by bean counters. "Wage increases have been better than inflation," Hodson explains, "but we are talking about average rises of 2.8%, not 5% – it is a manageable level. The key factor is that successful businesses need motivated and loyal staff.

"There are periods when a business might be under strain while growing strongly," he continues. "During those times the company can find itself relying on members of staff to push themselves beyond reasonable expectations for their roles. In order to keep people motivated and loyal, pay is certainly an important element, alongside good communication and generally looking after them. ‘Getting away' with not rewarding motivated and loyal people is not right – but it has to be within a manageable framework."

Growing the brand
Perhaps less surprisingly, the jobs created in NVM portfolio companies overwhelmingly fall into three divisions: sales & marketing; management; and support. This makes sense, especially in a segment of the market where businesses tend to still be at an early stage of their development and are often still in the hands of their founders.

"A lot of the companies we are investing in are companies with strong services or products," says Hodson. "The challenge incumbent on the management teams we back is to build a business that can exploit the available market. In order to execute their business plan they will need to grow their operational capability. They will typically need to expand their sales and marketing team and they will often take on people in research and development in order to stay ahead of the competition."

Unarguably, there will always be deals that ultimately lead to redundancies and media backlashes on a spectacular scale. Indeed, unquote" recently looked back on five high-profile European portfolio companies that went south within six months of each other. Yet there also appears to be statistical proof the UK industry is playing its part in the widely publicised declining unemployment figures.

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• Topics
• Performance
• Job creation
• Top story
• NVM Private Equity
• Advent International
• AnaCap Financial Partners
• Better Capital LLP
• Exponent Private Equity
• Apax Partners
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