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With Recession Looming, Expect PE Owners to Start Firing People Again

Massive layoffs have become less common in companies acquired by private equity firms, but tactics will likely change in a prolonged downturn.

For years private equity firms have been moving from financial engineering to expanding and improving the companies they own. While that has often meant fewer rounds of layoffs, the trend isn’t likely to persist as global economic conditions continue to deteriorate. 

“You are not really seeing a lot of reorganization deals and layoffs [right now] because firms are still struggling to get workers back. But that might change very quickly,” Joacim Tåg, an economics professor at Sweden’s Hanken School of Economics, told II in an interview. Tåg has been studying the impact of private equity buyouts on employment for over a decade. When he was conducting research for a related paper in 2017, he found that private equity firms are most likely to lay off workers during recessionary periods. The finding is still applicable to today’s PE market, he argued. 

Tåg categorizes private equity transactions as either “growth” or “reorganization” deals. In a growth-oriented deal, the PE firm usually makes few structural changes and tends to keep the existing management team. As the company expands, the demand for labor also increases, which benefits workers who have long been with the company. Reorganizations are more focused on modernizing the business. With reorgs, PE is more likely to replace part of the existing workforce with better technology or offshore labor. Workers who are laid off in this type of deal tend to stay unemployed for a long time because their skills are outdated, according to Tåg.

“The world is currently transitioning from a period of ample financing and sustained growth to a world in which financing is harder to find and growth is slowing,” Tåg said. “My take is that what we will see is growth getting replaced by reorganization.” 

Peter Kahn, senior partner at private equity consultant West Monroe, said not all firms behave alike. While some companies focus more on financials, others will hold on to value creation during recessionary times. In addition, not all PE firms are oriented around the short-term possibility of a recession. “When good times come back, [firms focused on value creation] are in a better position to flourish,” he said.

Tåg’s findings are based on employer-employee data in Sweden, where employment details after PE transactions are available to the public. Tåg believes Sweden represents a good sample because many global PE firms either started or still have operations in the country.

In the past decade, massive layoffs have been relatively rare at companies acquired by PE firms. According to Tåg, that’s because PE firms can avoid making hard choices during expansionary periods. They can drive up profits using tactics other than reducing head count, such as using money borrowed at low rates. “That makes [PE] firms complacent,” he said. The professor added that PE firms that didn’t fire people in the last decade may have been avoiding layoffs that were ultimately necessary to make a company more efficient.

“But when recessions come, it becomes more important to generate revenue [without] financiers.” 

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