Protecting employment stability through PE tools and strategies
Job creation has always been a harbinger of economic prosperity, with low unemployment rates fueling consumer confidence, along with improved salary expectations and leverage for new hires. Infrastructure development and public sector hiring are among the tools used by governments to influence job creation, while the private sector moves the needle by leaning into innovation and investment. Private equity firms also play a multi-faceted role, and their importance continues to grow.
In this blog post, we review the relationship between job creation and private equity, along with the valuable tools and strategies PE firms use to foster ongoing business and job growth. We also examine the role private equity will play in shaping the workforce of the future, as the global economic and technological landscape evolves.
The importance of job creation
Inflation, stock market indices, interest rates, and other key indicators paint a picture of overall economic growth or contraction, with the interwoven trends and patterns sometimes sending conflicting signals. Job creation, expressed as either a percentage increase/decrease or a raw number, is a metric that businesses and consumers alike can relate to, with a finger directly on the pulse of the regional or global economy. Positive job creation trends are often accompanied by:
- Increased gross domestic product (GDP), reflecting the value of all goods and services
- Higher industrial production levels with factory output matched by demand
- An increased consumer confidence index (CCI) signaling higher perceived levels of job security and consumer spending
Productivity driven by artificial intelligence (AI), automation, robotics, and other innovations make it possible to increase output without job creation, but these results generally lack the consumer buying power, confidence, and competition that make a growing economy beneficial to all.
The traditional role of private equity
The PE employment impact has mirrored the evolution of private equity over the past decade, with wholesale reconstruction strategies giving way to strategic roadmaps and long gestation periods focused on building enduring legacies and cultures. While antiquated PE transactions often balanced job creation in one area with job losses in another, recent trends reveal a consistently positive impact on portfolio company employment, wages, and tax revenue that outpaces overall market trends.
Strategic expansion driven by talent alignment, optimized tools and systems, and carefully crafted business roadmaps have made private equity a reliable contributor to job creation, with successful organizations continuing to add new talent to complement the new products, services, and market segments they enter.
Keys to private equity job creation
No single set of tools and practices can guarantee sustainable job growth, but the goals of operational excellence, enhanced innovation, increased earnings, and market expansion driving portfolio company growth coincide with the creation of new and better jobs, along with enhanced employee morale and retention that make long-term roadmaps and succession plans possible.
Expansion capital
Financial capital in the form of equity or debt financing is the most conventional and commonly understood tool PE firms use to create job opportunities within partner organizations. PE capital allows businesses to build new facilities, expand into new territories, develop new products and services, and fill in gaps in talent and leadership throughout the organization. Realignment towards a unified vision also allows existing workers to explore new roles or move into leadership, while making the company more attractive to prospective employees.
2. Driving innovation
Private equity investments drive innovation by providing the capital, tools, and talent businesses need to support creative solutions and the development of unique products and services. Strategic acquisitions also improve innovation when access to intellectual property (IP), talent, and customers introduces a new set of challenges and opportunities. Innovation is essential for job creation, since it eventually leads to new products, markets, or processes, each requiring a skilled workforce to develop and maintain. Innovation also attracts additional PE investments to perpetuate this positive cycle.
3. Operational efficiency
Private equity firms improve operational efficiency by implementing the tools and systems portfolio organizations need to meet their economic growth objectives with minimal downtime or disruption to ongoing operations. Efficiency can also be gained through the consolidation of key functions, or the initiation of training and other employee development activities designed to improve productivity. Operational efficiency often translates into job creation when margins improve, allowing businesses to re-invest in product development and marketing efforts as they scale.
4. Ripple effects of investment
The investments and growth-oriented strategies of PE firms have a net-positive impact on job creation and economic stability that extends far beyond their portfolio companies. Each business relies on the goods and services of other businesses, so the spoils of portfolio company growth are often shared by dozens of suppliers, consultants, and other entities making up the overall supply chain. Sustained growth, driven by PE investments and strategic expertise, can become a bellwether for key suppliers as they ramp up their own recruiting and hiring to meet the increased demand.
5. Supporting small businesses
Small businesses employ almost half of the US workforce, so the economic factors that impact these companies have a significant impact on job creation and stability. The ongoing health of small businesses is especially important in rural areas with limited access to large employers. Many of these small companies also fill important product or service niches that cannot always be replaced by their larger counterparts.
Private equity backing allows many small (and mid-sized) businesses to weather economic downturns while minimizing the need to reduce headcount or borrow additional funds to stay afloat. Experienced partners also help to build resilience in small businesses through product diversification, intelligent forecasting, and streamlined operations.
The future of private equity in job creation
Private equity will continue to drive job creation and economic stability for millions of workers in the years and decades ahead, with longer holding periods and ambitious expansion plans continuing to support the creation of compelling new roles. Trends impacting the overall economy, including AI integration, sustainable business practices, and globalization, will continue to strengthen this connection, with PE firms providing access to essential training and technology as Industry 4.0 unfolds.
As new investments and sustainable growth strategies create opportunities for workers in all positions and industries, more data scientists, analysts, and other specialists will be employed by PE firms directly, as they work to ensure the latest software and technology is utilized for due diligence, deal sourcing, market forecasting, and other processes where evolving technology is sure to create a competitive edge.
Conclusion
Job creation is among the handful of economic factors that instill confidence in investors and consumers alike, while simultaneously improving incomes, GDP, and buying power. Over time, private equity has become an essential catalyst in this area, with the capital, innovation, expertise, and efficiency provided by PE firms leading to new and better job opportunities for millions of skilled workers around the world. This trend is expected to accelerate in the future, with small business growth, advanced computing and automation technologies, and a renewed emphasis on sustainable practices creating new opportunities while building increased resilience into the economy.