
PE jobs debate returns after Amdega collapse

The impact of private equity on job creation in the wider economy has always led to heated debates, being both hard to evaluate properly and politically sensitive. Recent news might revive the argument. Greg Gille reports
Private equity made the headlines again at the beginning of the week - although not in a way that will endear it to the public and politicians. The 200 employees of UK-based conservatory maker Amdega - a portfolio company of turnaround firm Endless - were greeted by administrators and told they had lost their jobs as the company went under. This sparked much anger locally, with Darlington MP Jenny Chapman fuming over the issue: "I think it is far too easy for companies like Endless to throw the towel in and walk away from their responsibilities [...] For Darlington to have 200 people suddenly entering the jobs market is of great concern."
On the other hand, Lion Capital and Goode Partners stepped in at the end of April to acquire struggling retailer AllSaints, previously owned by failed Icelandic banks Kaupthing and Glitnir. The £105m deal will prevent the business from going into administration - securing up to 2,000 jobs, at least for the time being.
These contrasting news stories sum up the argument about the impact of private equity on jobs in a nutshell: the industry's detractors are prompt to point the finger when a deal goes awry and the workforce is left to face the consequences, while its champions will insist that PE overall creates more jobs than it destroys.
PE-backed businesses do occasionally shed jobs - to improve efficiency, because they are affected by adverse trading conditions, or in the worst case scenario because they simply cannot survive. And while particularly bad cases - admittedly rare given the number of portfolio companies throughout Europe - are likelier to make the headlines, the industry is not without its success stories.
For instance, Barclays Private Equity backed the spinoff of French engineering group Converteam in 2005; the business was then losing around €20m a year and had 3,200 employees. Six years, a secondary buyout and a subsequent €3.2bn trade sale later, Converteam vastly improved its financials and currently employs 5,300 people. And Endless, although unable to turn Amdega around, was much more successful with books retailer The Works: having bought the company from administrators in 2008, it turned a £4.7m loss into a £3m profit in just one year, saving close to 2,000 jobs in the process.
Individual cases aside, a number of reports have tried to evaluate the overall impact of private equity on job creation over the years. A 2009 study from Ernst & Young and BVCA looking at larger PE-owned businesses in the UK (therefore not taking into account the effects of venture and growth capital) assessed that their organic employment declined by 1.6% between 2008 and 2009. However, the same metric was down by 2.8% for the UK economy as a whole.
Another study conducted by French association AFIC and Ernst & Young in 2009 took a look at a sample of 220 French PE-backed companies - this time also encompassing venture and growth capital investments. Organic employment in those businesses declined by 1.8% between 2008 and 2009 - it was down by 2% for the wider economy and by 2.8% for CAC 40 companies.
Older research conducted by the Center for Entrepreneurial and Financial Studies on behalf of EVCA studied employment growth in PE-backed companies across Europe between 2000 and 2004. One million new jobs were created during that period, equating to a 5.4% annual growth rate - eight times the overall average employment growth rate of the EU 25 (0.7%). Of those one million jobs, around 630,000 were created in venture-backed companies, with the remaining 420,000 jobs created in buyout-financed businesses.
Even though critics will be keen to point out they were conducted by industry participants, the findings from these studies are quite clear: in tough economic times, private equity will not magically create jobs across all of the companies it supports. The industry is however likely to drive job growth over an extended period of time - and it is crucially better at preserving employment levels than other companies, including publicly-listed corporations.
Despite existing empirical and anecdotal evidence, the impact on employment remains a major chip on the industry's shoulder. This might stem in part from the media's appetite for "deals gone wrong" stories. But it may also be the case of a rather secretive industry who has failed to explain what it does to build better businesses, and to highlight the many success stories it helped create over the years.
Fortunately, more and more industry participants are aware of this public image deficit. Trade bodies BVCA and AFIC for instance have recently expressed their will to better highlight private equity's credentials in terms of its social impact. As AFIC chairman Hervé Schricke put it during his closing speech at the association's recent annual conference in Paris: "Let us focus on portfolio companies rather than ourselves. Let us not talk too much about money; let us talk about jobs and our overall contribution to the economy instead."
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