Private equity firms use borrowed money to buy companies, restructure them, and try to sell them at a profit. While there’s considerable diversity in how these firms operate, they often have a negative impact on workers (and on other stakeholders). Private equity firms tend to invest in healthy companies with job growth and decent wages. They may sometimes help these companies grow further, but often their business model will involve cutting jobs and wages.
A new book by Eileen Appelbaum en Rosemary Batt explains how private equity operates. Private equity firms create investment funds, raise money from pension funds and rich individuals and use that money in combination with huge bank loans to buy portfolio companies. They may replace the management of these companies and they’ll make sure management has strong incentives to act in the interest of its new owners. The new management will typically write an initial 100-day plan to restructure the company, manage its debt and meet its targets. After 3-5 years, or sometimes longer, the fund will exit the investment, for example by selling the company or taking it public.
Appelbaum and Batt not only discuss how private equity operates; they also analyse how workers and their unions respond. Often, unions try to limit job losses and reductions in wages and benefits through negotiations. These negotiations are more likely to have a degree of success when the workers are specialists who are difficult to replace.
There are also examples of unions that have taken a more offensive approach. An example is Ormet Aluminium, which had a fiercely antiunion CEO and was taken over by private equity in 2004. After steelworkers’ union USWA refused to make the concessions demanded by the employer, the company had the labour contract voided. 1300 workers went on strike; they engaged support from pension funds with investments in the private equity fund; protests were held across the country and road warrior teams showed up at events of the bosses of the company and the private equity. Eventually, the antiunion CEO was replaced and a new contract was signed in 2006.
Appelbaum and Batt also discuss the role of pension funds with investments in private equity. They suggest the managers of these funds should ask themselves some questions, for example:
- Pension fund managers have an obligation to act in the interest of current and future beneficiaries. Can they meet that obligation given the limited transparency of private equity?
- Are investments in private equity funds really that profitable compared to other investments with similar risk profiles?
- And how about the unequal relationship between investors and the private equity firm (which receives high rewards, runs limited risk, and may have incentives not to act in the interests of the investors)?
Eileen Appelbaum en Rosemary Batt (2014), Private Equity at Work: When Wall Street Manages Main Street. Russel Sage Foundation.