Harvard’s Lerner: No, Private Equity Is Not the Devil

Josh Lerner of the Harvard Business School

Josh Lerner of the Harvard Business School is Poets&Quant’s Professor of the Week for his research on private equity deals

Over the last few years, private equity has become a political target. Progressive firebrand and presidential candidate Sen. Elizabeth Warren (D-Mass) actually introduced the “Stop Wall Street Looting Act” to rein in private equity, among other things. 

In the 2012 presidential campaign, President Barack Obama attacked former Massachusetts Gov. Mitt Romney as a cold-blooded job killer during his tenure at private equity firm Bain Capital.

But recently, Poets&Quants’ Professor of the Week, Josh Lerner of the Harvard Business School, and several co-authors conducted the most comprehensive study to date of thousands of private equity buyouts going back more than 30 years.


They found that private equity is neither the bogeyman of politicians’ caricatures nor the engine of innovation depicted in industry hype. Some private equity deals do kill jobs while others increase productivity and employment. But overall private equity has had little impact on the wages of employees who work for companies involved in PE deals.

Their working paper, published last October, is called “The Economic Effects of Private Equity Buyouts.” It was co-authored by Lerner and Steven J. Davis of the University of Chicago Booth School of Business; John Haltiwanger of the University of Maryland; Kyle Handley of the Ross School of Business at the University of Michigan; Michigan PhD Ben Lipsius, and Javier Miranda of the U.S. Bureau of the Census.

Building on their earlier work, the researchers used the Capital IQ database to identify around 9,800 private equity buyouts between 1980 and 2001. They were able to merge about 6,000 of those deals with Census Bureau data that showed outcomes at the firm and establishment level through the end of 2013. They then estimated the effects of buyouts on employment, labor productivity, and compensation at target firms, and compared the results with similar firms that were not involved in buyouts. 


The results revealed a dramatic split: Buyouts of private firms fared well under certain key metrics, while buyouts of publicly traded firms did worse. “According to our evidence, private-to-private deals exhibit high post-buyout employment growth (largely but not entirely via acquisitions), wage reductions, and large productivity gains,” Lerner and his co-authors write. “Public-to-private deals exhibit large job losses, often through facility closures, and large…productivity gains.”

Employment rose by 12.8% after buyouts of private firms and by nearly 10% after secondary buyouts (the sale from one private equity firm to another), while it shrank 13% following buyouts of public companies, which represented about 10% of the deals the researchers examined (though nearly one-third of the total jobs in bought-out firms). Labor productivity rose 8% on average two years after buyouts of all kinds. Average wages fell by 1.7% at target firms across the board.

And Lerner and his colleagues found that much-criticized financial engineering was not behind the gains in productivity at buyout companies after the deals closed.  “More than 80 percent of the estimated productivity gain reflects greater revenue growth at targets,” they write. “While not all buyouts yield productivity gains, our evidence says that many do.”


The economic conditions when deals closed also make a big difference, particularly when credit conditions tighten. “Public-to-private deals proliferate in advance of credit market tightening, and their targets exhibit large post-buyout employment losses and poor productivity performance during aggregate downturns,” Lerner and his co-authors conclude.

So, not all private equity deals are created equal—buyouts of private companies by private equity firms tend to produce the best results, while those of public companies, particularly those executed at the top of a market cycle, fare worse. Black or white characterizations of private equity don’t hold up; the deal’s the thing.

Lerner, 59, is the Jacob H. Schiff Professor of investment banking and head of the entrepreneurial management unit at Harvard Business School. His research focuses on private equity, venture capital, and policies on innovation. He teaches classes on venture capital and private equity for students in both the MBA and executive education programs, as well as entrepreneurship for doctoral students.

He earned his bachelor’s degree in physics and the history of technology from Yale and a PhD in economics from Harvard. In between he worked at the Brookings Institution, as well as on Capitol Hill. He has taught at HBS since 1992.

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