July 03, 2012
A New York Times blog article recently claimed that, while public equity firms have received media backlash in the past year, Moody’s data reveals that they do more to save jobs of workers at struggling companies. Private equity investor Federico Garza-Bueron is delighted by this development in his industry.
According to Richard Farley, a partner in the corporate practice of Paul Hastings and a blogger for the New York Times, the accepted view that private equity firms slash jobs during times of economic trouble is largely erroneous. According to a report by Moody’s Investors Service last week, workers are actually better off choosing to work for companies owned by private equity.
The data shows that these companies are far less likely to face liquidation during economic strife. Private equity, in fact, does more to save jobs at struggling companies than other types of owners.
The study reviewed over 1,000 situations from 1988 through the present where companies defaulted on their debt. Two hundred of these companies had undergone leveraged buyouts, while the other 800 had not.
This research also indicated that default rates among companies with similar credit ratings were nearly the same for all companies in the study. Additionally, lenders recovered nearly the same amount on their debt in private equity-owned companies and non-private equity-owned companies; 54 percent and 55 percent, respectively.
Finally, the report found that if a private equity-owned company defaults on its debt, it is half as likely to be liquidated as a non-private equity-owned company. The Moody’s says that “a much higher percentage of bankrupt LBOs were acquired or emerged from bankruptcy instead of being liquidated.” This means, according to Farley, that when companies are acquired or emerge from bankruptcy, jobs are much more likely to be preserved than when the enterprise is liquidated.
Federico Garza-Bueron, private equity investor and Event Chairperson for the Private Equity Committee at Columbia Business School, has long believed in the firm foundation of his business. He acknowledges that several private equity firms have made mistakes that have marred the face of the business, as Farley also reports. However, the article shows that private equity firms may not have earned their reputation as heartless job-slashers.
Federico Garza-Bueron received his MBA from Columbia Business School, and is its Event Chairperson for the Private Equity Committee. He is also an active member of the Family Firm Institute, which provides interdisciplinary education and networking services for family businesses, consultants, educators, and researchers.