As Dan Primack wrote in his newsletter today, a couple of researchers released a report via the Rock Center for Corporate Governance at Stanford University last week on the “operational consequences of Private Equity buyouts”.
The paper’s abstract has some nice findings:
Do private equity buyouts disrupt company operations to maximize short-term goals? We document significant operational changes in 103 restaurant chain buyouts between 2002 and 2012 using health inspection records for over 50,000 stores in Florida. Store-level operational practices improve after private equity buyout, as restaurants become cleaner, safer, and better maintained. Supporting a causal interpretation, this effect is stronger in chain-owned stores than in franchised locations — “twin restaurants” over which private equity owners have limited control. Private equity targets also reduce employee headcount, lower menu prices, and experience a lower likelihood of store closures — a proxy for poor financial performance. These changes to store-level operations require monitoring, training, and better alignment of worker incentives, suggesting PE firms improve management practices throughout the organization.
As everyone would agree, that’s a good thing.
In fact, one presumes that such “operational consequences” are probably seen across various other industries too, whenever struggling companies are acquired by PE firms and made healthier away from the scrutiny of public markets. And that would make PE firms pretty valuable in a capitalistic society.
Still, they get a bad rap for a handful of deals where financial (over)engineering caused ruin and bankruptcy. Not sure that’s fair.