Shedding light on private equity

by 01 May 2007

WITH PRIVATE equity buyouts on the rise in Australia, recent UK research has found that private equity firms tend to introduce strict new performance management systems such as performance and merit pay, regular performance appraisal and new HR management systems upon buying companies out.

However, in management buyouts, which account for the majority of private equity deals, jobs were cut in the first year, but grew by an average of 36 per cent over six years. Yet workers were £83.70 ($204) a year worse off than other private sector workers because wages grow more slowly.

Furthermore, some 40 per cent of managers in private equity firms said they are hostile to trade unions, while just one in 10 said they were positive about the role of unions.

“Private equity firms pride themselves on their ability to squeeze performance from the organisations they own, and they turn up the pressure on individuals in order to do so,” said Will Hutton, chief executive of The Work Foundation, which released the report.

“When private equity backs an incumbent management team the result can be improved productivity and higher employment. But we are concerned that often, the price that is paid by workers is too high and that levels of trust between workers and managers suffer.”

The report also found that where an outside management team is introduced to an organisation in a management buy-in, employment falls on average by just under a fifth over a six-year period. Workers are on average £231 ($554) a year worse off than other private sector workers.

“In some cases, private equity ownership may be inconsistent with the principles of good work – fairness, job security, the ability of individuals to have a say over their working life, to manage stress, and to be able to communicate effectively with senior management appear to fall down the list of organisational priorities under private equity ownership. This seems to be especially true where managers have no prior relationship and few psychological bonds with the company and the workforce,” Hutton said.

The report concluded that there was an urgent need to ensure private equity firms throw open their books to proper public scrutiny, that they pay appropriate levels of tax, and that the growth of private equity is not exposing economies to a risk of instability due to the levels of debt the industry takes on as it grows.

When firms change hands, workers should be entitled to some protection concerning their jobs and terms and conditions of employment, the report, Inside the dark box: shedding light on private equity, argued.

They should have information and consultation rights through representatives about their future and be entitled to know the identity of the company’s new owners. The government should explore the possibility of amending the Transfer of Undertakings Regulations (TUPE) to include transfers into private through share acquisition, the report said.

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