Private Equity and Labour in Europe: Did the Crisis Change the Perception and Role of Private Equity’

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Project on behalf of the Hans-Böckler-Stiftung

FINAL REPORT

Jakob Haves (Wilke, Maack und Partner), Peter Wilke (Wilke, Maack und Part- ner), Marie Meixner (Syndex), Emmanuel Reich (Syndex), and Sigurt Vitols (Wissenschaftszentrum Berlin)

With the support of – Howard Gospel (Kings College University of London and Said Business School Oxford), Andrew Pendleton (University of York), Ewald Engelen (University of Amsterdam), Tomas Korpi (University of Stockholm), and Bruno Cattero (University Piemonte Orientale).

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Content

1. INTRODUCTION ...... 1 2. DEVELOPMENT OF THE EUROPEAN PE MARKET FROM 2002 TO 2012 – GROWTH, CRISIS AND RECOVER 4 2.1. OVERVIEW ON STATISTICAL EVIDENCE (10 YEARS OF PE IN EUROPE ) ...... 4 2.2. STRUCTURE AND RELEVANCE /ROLE OF THE PE SECTOR IN THE DIFFERENT COUNTRIES ...... 5 2.3. THE IMPACT OF THE CRISIS ON THE PE INDUSTRY AND ITS IMAGE ...... 10 2.4. KEY CHALLENGES FOR PE INVESTMENTS IN THE LAST TEN YEARS ...... 12 2.5. CHANGES /DEVELOPMENTS OF THE PE INVESTMENT MODEL DURING THE LAST TEN YEARS ...... 12 2.6. CHANGES IN REGULATION OF PE IN EUROPE IN THE LAST TEN YEARS ...... 14 2.7. OUTLOOK AND FUTURE PERSPECTIVES ...... 15 3. COUNTRY REPORTS ...... 16 3.1 FRANCE ...... 16 3.1.1. INTRODUCTION ...... 16 3.1.2. PE IN FRANCE BEFORE AND DURING THE CRISIS ...... 17 3.1.3. THE LEGAL AND POLITICAL FRAMEWORK OF PE IN FRANCE ...... 25 3.1.4. INDUSTRIAL RELATIONS , EMPLOYMENT AND WORKING CONDITIONS IN PE MANAGED COMPANIES : EVIDENCE FROM THE LITERATURE ...... 28 3.1.5. THE IMPACT OF PE FUNDS ON THEIR PORTFOLIO COMPANIES IN FRANCE BEFORE AND DURING THE CRISIS : CASE - STUDY EVIDENCE ...... 32 3.1.6. CONCLUSIONS AND OUTLOOK ...... 36 3.2 GERMANY ...... 39 3.2.1. THE DEVELOPMENT OF THE GERMAN PE MARKET ...... 39 3.2.2. OVERALL CONDITIONS FOR PE INVESTMENTS IN GERMANY ...... 46 3.2.3. THE INFLUENCE OF PE ON COMPANIES AND THEIR EMPLOYEES - RESEARCH FINDINGS ...... 49 3.2.4. THE INFLUENCE OF CHANGED ECONOMIC CIRCUMSTANCES ON THE BEHAVIOUR AND IMPORTANCE OF PE IN GERMANY DURING THE CRISIS ...... 57 3.2.5. CONCLUSIONS AND OUTLOOK ...... 60 3.3 EVIDENCE FROM OTHER EUROPEAN COUNTRIES – GB, NL, ITALY , SWEDEN ...... 62 4. CONCLUSIONS AND RECOMMENDATIONS ...... 80 5. REFERENCES ...... 85

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

1. Introduction

BACKGROUND CONTEXT The growth of new investments funds in recent years is a phenomenon closely connected with the fundamental changes in the financial markets in the context of globalisation. Private Equity (PE) companies first were founded in the US and started an unprecedented success story. Using financial strategies of leveraged buyouts this part of the “financial industry” attracted a rising number of investors. The practice of PE in the US during the 1980s to acquire companies by a hostile takeover with asset stripping, major layoffs and significant corporate restructuring activities soon gave a "corporate raid" label to many PE investments.

The growth story of PE was heavily interrupted in 2008/2009 when the financial markets “closed” due to the collapse of the subprime market and the related consequences. It became difficult for PE funds to obtain funding, which is the necessary precondition for their business model. Investors became more reluctant to invest money in risky investment strategies and banks were no longer willing to provide PE funds with large means to realize their multi-billion leverage buyouts. As a result, the number and size of PE deals and buyouts decreased strongly.

But not only the sheer number of buyouts and the amount of invested money changed, there is evidence that also today’s investment strategies of PE seem to be different from the pre-crisis era. PE investments are becoming more specialized, i.e. the investment companies focus more on specific sectors or industries with which they are conversant. At the moment, times seem to be over where PE companies could acquire a company notwithstanding if they were familiar with the specific challenges of the branch but however could realize high returns due to the use of leverage effects. Addi- tionally, the investment period of PE seems to be prolonging. On the one hand this is because due to the crisis it became nearly impossible for PE to exit its investments due to the overall difficult market situation. But on the other hand the lack of cheap money is resulting in a situation where PE funds have to implement a much more sustainable strategy towards their target companies to make them more profitable for the expected exit.

Facing the development of PE and the impact of the financial and economic crisis the question arises whether the current situation will lead to a substantially changing model of PE? Or will the PE industry recover as it did in the 1990s while the memories of the industry’s cyclical nature will fade resulting in the return of extensive fundraising and aggressive investment behaviour?

OBJECTIVES OF THE REPORT The impact of PE on employment, industrial relations, and restructuring practices has attracted substantial attention from policy-makers, media commentators, and academics over the last years. 1 There have been active and often acrimonious and polarized debates about the effects of PE. Em- ployee representatives and some political actors have argued that these new forms of investment

1 Lutz, E./Achleitner, A-K: Angels or Demons? Evidence on the Impact of Private Equity Firms on Employment, Zeitschrift für Betriebswirtschaft (ZfB), Sonderheft Entrepreneurial Finance, No. 5, pp. 53-81, 2009. 1

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

secure returns at the expense of labour. By contrast, those managing these funds have claimed that they play a valuable role in rejuvenating under-performing companies, thereby contributing to long- term employment growth.

However, the research findings of the published research projects on the impact of PE on labour, i.e. employment development, wages, working conditions, and social dialogue remain controversial. The effects of PE on employment levels and other issues related to the employees in target firms are probably the most controversial issue of the debate on the impact of investment funds. PE tends to be associated with a high degree of restructuring activity due to its typical acquisition of a majority stake and its objective of gains over the medium-run based at least in part through operational efficiencies. Such restructuring activities often lead to turbulence in employment and job transfers.

Against this background this study will present the results of a project, which brought together researchers from several European countries to assess the effects of investment funds on labour outcomes and to compare the situation and experiences with PE investments made in the current financial crisis in six European countries. The main focus is on Germany and France. However, the experiences in these two countries are compared with the situation Sweden, the UK, the Netherlands and Italy.

The project has a number of objectives and research questions. The first is to clarify the development of PE investments during the financial crisis. The second is to consider the possible relationship between the crisis effects and changing investment behaviour of PE in different national contexts. This includes the question whether the crisis has changed the labour outcomes of PE investments and if the crisis changed the perception and role of PE.

METHODOLOGICAL REMARKS For the six country analyses the national experts have used different methodological approaches to research the labour outcomes of PE investments in the course of the latest financial crisis. First, the existing literature on investment fund activity has been reviewed, both generally and more specifically as it affects employment and labour. This has included a consideration of various reports by gov- ernments, intergovernmental agencies, the social partners, and industry bodies. It has also involved a review of the academic research literature, including both individual case studies and larger statistical studies. Second, within each country at least two company case studies have been carried out, involving situations where funds have invested in companies. For some of these company case studies the research team has conducted face-to-face interviews with company representatives, social partner’s organisations and representatives of the fund industry.

However, a number of methodological reservations should be registered. First, the available data varies considerably in quantity and quality for the PE markets, countries and company cases. Second, even where data exists and even where appropriate statistical techniques can be used there are still problems of interpretation. There are difficulties relating cause and effect, identifying suitable ‘control cases’, and dealing with the counterfactual (i.e. what might have happened to an acquired company in the absence of intervention by an investment fund). Furthermore, due to the fact that the crisis in many parts of Europe is still ongoing, measurable data about the labour outcomes of PE investments are difficult to obtain. Due to this, evidence is mainly based on the conducted case stud- 2

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

ies, expert interviews, press articles and a review of academic literature and other relevant publications.

STRUCTURE OF THE REPORT In the following chapters, we analyse how the economic and financial crisis changed the market conditions for PE in different national contexts and address the question if the crisis changed the perception and role of PE in Europe. In Chapter 2, we will provide a comparable overview on the latest developments in the European PE markets. This includes a description of the investment activities of PE during the crisis and of the recent political initiatives to regulate the activities of investment funds in Europe. In Chapter 3, we will analyse the developments of PE and its outcomes on labour in different countries. For France and Germany the results of this analysis will be presented in more detail, while the developments in the Netherlands, the UK, Sweden, and Italy will be summarized in one chapter. Here we first describe for each country the overall development of the PE sector before and during the crisis based on relevant statistical key figures and an extended review of existent literature and case studies. Second, we analyse the impact of the crisis on the investment behaviour of PE. The focus is on the behaviour towards the portfolio firms (management, employees) and the question if the behaviour changed during the crisis. Third, we are interested in current challenges for PE like the so called wall of debt and the need to refinance the debt for many companies represents a major issue. Finally, we take a look at the perception of PE among companies, unions, etc. and focus on the question if this perception has changed during the crisis. The complete country studies for the UK, the Netherlands, Sweden and Italy are not included in this report, but can be found in an attachment to this report. We have integrated main findings from the company cases in the country analysis. However, the company case studies as such can also be found in the attachment to this report. The final chapter draws some broad conclusions on the impact of the crisis on PE and its investment behaviour and state some predictions regarding the future development of PE in Europe.

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

2. Development of the European PE market from 2002 to 2012 – Growth, crisis and recovery

The European PE market has undergone massive changes in the past decade. In 2002 the PE industry was in the depths of a crisis following the collapse of the high-tech bubble. A recovery phase during the half decade leading up to 2008 involved a strengthening of the focus on buyouts (many of these in “mature” sectors), a massive increase in fundraising and average deal size, and an expansion of investment activity to countries where PE had previously played a relatively minor role. The peak of activity, which was reached in 2007/2008, was followed by another period of contraction, as the financial crisis affected the ability to raise new funds, acquire debt financing for leveraged deals, and exit from existing investment, particularly through the stock market. Since 2009 there has been a cautious recovery. Compared to the peak level in 2007/2008, fundraising and investment activity is lower, average deal sizes have become somewhat smaller, the use of leverage has decreased, and activity has shifted somewhat to turnaround/distressed and secondary deals.

2.1. Overview on statistical evidence (10 years of PE in Europe) The broadest aggregate measures of PE activity are fundraising, investment and divestment. All three of these measures show the same general trend over the period 2002-2012; recovery from and rapid growth after the bursting of the high-tech bubble (2002-2006/7/8), collapse in activity with the onset of the financial crisis (low point of activity in 2009) and recovery up until now, although not to the levels reached in the mid-2000s. 2

Fundraising. The modalities of fundraising differ between independent and so-called “captive” funds. Independent PE houses (almost all of the largest PE houses are independent) do their fundraising by getting financial commitments from institutional investors, foundations, private individuals, etc. to a specific fund. When the fund is ready to make an actual investment the PE house will call in cash from these commitments. Captive funds generally get commitments directly from their owner, typically a bank, insurance company, or (less frequently) a non-financial company (so-called corporate venture capital). Fundraising thus refers to the total amount of commitments made to new funds in a specific year. Fundraising by European PE houses rose from a level of around €20 billion annually at the beginning of the period to a height of around €80 billion in both of the years 2007 and 2008. In 2009 fundraising fell back to 2002/3/4 levels (€20 billion) before recovering to €40 billion in 2011. Fundraising in 2012 is estimated to be running at about half the level of 2011. 3

2 Data on PE activity in Europe is drawn primarily from data gathered by the European Private Equity and Venture Capital Association (EVCA). Up until 2006 EVCA gathered its data mainly from national private equity associations. Starting in 2007 figures are based on data from PEREP Analytics, a pan-European platform organized by EVCA for gathering information on PE activity directly from PE houses. 3 As full data for 2012 was not yet available at the time of writing of this report, this estimate is based on the EVCA Quarterly Activity Indicator, based on data from a sample of PE houses for the first three quarters of 2012. Source: EVCA Quarterly Activity Indicator: Q1 2007-Q3 2012, available at www.evca.eu

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Figure 1: PE Fundraising, Investment and Divestment in Europe, 2002-2012

50 Fundraising Investment Divestment 40 Amount in billion €

0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Year

Source: www.evca.eu

Investment. Figures on aggregate investment activity gathered by EVCA refer to investments made directly by the PE funds surveyed into portfolio companies during the year in question. As these figures do not include external debt financing used (“leverage”), which frequently makes up between half to three quarters of the value of buyout deals, this is an understatement by at least 50% of the true aggregate level of PE activity.

Investment activity in Europe climbed from around €30 billion at the beginning of the 2000s to a high of €70 billion in 2006 and 2007. Investment activity fell to about €25 billion in 2009, before recovering to somewhat to about €45 billion in 2011. Based on data for the first three quarters of the year, EVCAs Quarterly Activity Indicator shows that investment activity in 2012 most likely were down sharply compared to 2011.

Divestment. As PE is a growing industry, aggregate divestment activity (that is, value of sales of portfolio companies) is much lower than fundraising or investment activity. PE investments last on average 4-5 years. Divestment activity in Europe increased from about €10 billion in 2002 to somewhat over €30 billion in 2006. In 2009 it was back down to €10 billion, but recovered to €30 billion in 2011. Interestingly enough, this is almost the level of peak divestment activity reached just before the financial crisis hit. The EVCA Quarterly Activity Indicator suggests that divestment activity was also sharply down in 2012 compared with 2011.

2.2. Structure and relevance/role of the PE sector in the different countries The absolute and relative importance of the PE sector varies widely across European countries for which EVCA data is available.

In terms of fundraising, the UK by far dominates the other countries, however its relative importance has been decreasing in the past five years (down from 58% of European fundraising in 2007 to 41% in 5

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

2011). France is the second most important European country in terms of fundraising, and its relative position has increased from 9% in 2007 to 15% in 2011. Interestingly, despite its relatively small size, Sweden comes in third place over the period, fluctuating between 4-14% of total European fundraising. Germany comes in fourth place, but the Netherlands are not far behind.

Table 1: PE fundraising activity in different European countries 2007 2008 2009 2010 2011 Amounts in € Amount % Amount % Amount % Amount % Amount % million Country Austria 675 0.8 247 0.3 286 1.6 208 1.0 249 0.6 Baltic coun- 63 0.1 8 0.0 0 0.0 86 0.4 0 0.0 tries Belgium 195 0.2 708 0.9 355 2.0 732 3.3 232 0.6 Bulgaria 13 0.0 28 0.0 0 0.0 0 0.0 0 0.0 Czech Republic 1 0.0 2 0.0 48 0.3 10 0.0 8 0.0 Denmark 773 1.0 278 0.3 289 1.6 284 1.3 761 1.9 Finland 1,188 1.5 881 1.1 315 1.8 335 1.5 419 1.1 France 6,853 8.6 8,776 11.0 2,216 12.5 4,465 20.4 6,054 15.2 Germany 4,641 5.8 2,508 3.1 1,071 6.0 1,222 5.6 3,115 7.8 Greece 370 0.5 44 0.1 200 1.1 0 0.0 0 0.0 Hungary 0 0.0 100 0.1 35 0.2 110 0.5 0 0.0 Ireland 327 0.4 155 0.2 124 0.7 94 0.4 10 0.0 Italy 1,785 2.2 1,513 1.9 2,311 13.0 702 3.2 841 2.1 Luxembourg 657 0.8 244 0.3 213 1.2 508 2.3 92 0.2 Netherlands 3,198 4.0 1,907 2.4 1,046 5.9 1,247 5.7 2,197 5.5 Norway 1,057 1.3 1,766 2.2 17 0.1 490 2.2 1,378 3.5 Other CEE* 43 0.1 103 0.1 43 0.2 18 0.1 248 0.6 Poland 815 1.0 760 1.0 135 0.8 115 0.5 443 1.1 Portugal 509 0.6 15 0.0 1,001 5.6 142 0.6 502 1.3 Romania 0 0.0 0 0.0 0 0.0 94 0.4 0 0.0 Spain 3,746 4.7 2,253 2.8 691 3.9 478 2.2 402 1.0 Sweden 4,588 5.7 6,786 8.5 827 4.7 803 3.7 5,624 14.1 Switzerland 1,865 2.3 3,327 4.2 907 5.1 695 3.2 737 1.9 Ukraine 258 0.3 259 0.3 0 0.0 35 0.2 0 0.0 United King- 46,251 57.9 47,231 59.1 5,635 31.7 9,039 41.3 16,471 41.4 dom European 79,872 100.0 79,899 100.0 17,765 100.0 21,910 100.0 39,783 100.0 total Source: www.evca.eu *Other CEE consists of Ex-Yugoslavia & Slovakia

In terms of investment activity, the differences between countries are somewhat less accentuated, since the UK (and to some extent the other top fundraising countries) “export” some of the PE funds they have raised by investing in other countries. On this basis, about one quarter of PE investment goes into UK companies (see Table 2). France is in second place with between 13-21% of investment activity annually. Germany comes in third place with between 11-17% of annual PE investment activity.

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Table 2: PE investment activity in different countries 2007 2008 2009 2010 2011 Amounts in Amount % Amount % Amount % Amount % Amount % € millions Country Austria 908 1.2 326 0.6 186 0.8 699 1.6 322 0.7 Baltic coun- 217 0.3 88 0.2 7 0.0 33 0.1 53 0.1 tries Belgium 2,128 2.8 744 1.3 1,157 4.7 987 2.2 961 2.1 Bulgaria 537 0.7 92 0.2 185 0.8 82 0.2 7 0.0 Czech Re- 181 0.2 388 0.7 1,386 5.7 193 0.4 139 0.3 public Denmark 1,710 2.3 1,205 2.2 476 1.9 386 0.9 848 1.8 Finland 1,149 1.5 722 1.3 678 2.8 587 1.3 837 1.8 France 12,138 16.0 8,892 15.9 3,141 12.8 6,606 14.9 9,566 20.6 Germany 10,160 13.4 9,253 16.5 2,786 11.4 4,742 10.7 6,132 13.2 Greece 152 0.2 281 0.5 155 0.6 34 0.1 10 0.0 Hungary 215 0.3 476 0.9 214 0.9 65 0.1 195 0.4 Ireland 585 0.8 291 0.5 514 2.1 751 1.7 300 0.6 Italy 3,575 4.7 5,497 9.8 1,932 7.9 1,599 3.6 2,210 4.7 Luxembourg 728 1.0 829 1.5 408 1.7 92 0.2 291 0.6 Netherlands 5,266 7.0 2,633 4.7 863 3.5 2,060 4.7 2,880 6.2 Norway 1,177 1.6 1,109 2.0 693 2.8 1,934 4.4 943 2.0 Other CEE* 154 0.2 82 0.1 130 0.5 47 0.1 38 0.1 Poland 432 0.6 636 1.1 267 1.1 657 1.5 681 1.5 Portugal 218 0.3 357 0.6 303 1.2 190 0.4 457 1.0 Romania 212 0.3 289 0.5 221 0.9 119 0.3 66 0.1 Spain 3,691 4.9 2,269 4.1 1,093 4.5 2,938 6.6 2,361 5.1 Sweden 3,276 4.3 2,160 3.9 1,079 4.4 2,714 6.1 3,368 7.2 Switzerland 2,043 2.7 917 1.6 595 2.4 1,322 3.0 1,141 2.5 Ukraine 252 0.3 306 0.5 38 0.2 96 0.2 63 0.1 United 19,805 26.1 13,198 23.6 4,737 19.3 12,756 28.9 10,224 22.0 Kingdom European 70,908 93.6 53,040 94.7 23,246 94.8 41,689 94.3 44,093 94.7 total Australia 1,915 2.5 653 1.2 167 0.7 271 0.6 827 1.8 Canada 174 0.2 92 0.2 24 0.1 13 0.0 101 0.2 Israel 60 0.1 244 0.4 28 0.1 365 0.8 295 0.6 USA 2,475 3.3 1,889 3.4 980 4.0 1,351 3.1 1,200 2.6 Other rest 219 0.3 74 0.1 79 0.3 516 1.2 25 0.1 of the world Total rest of 4,843 6.4 2,952 5.3 1,277 5.2 2,517 5.7 2,448 5.3 the world Total 75,752 100.0 55,992 100.0 24,523 100.0 44,206 100.0 46,541 100.0 Source: www.evca.eu *Other CEE consists of Ex-Yugoslavia & Slovakia

A good measure of the relative importance of PE activity within each country is to compare the value of PE investment with the value of the country’s gross domestic product (GDP). Although there is

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

substantial fluctuation in each country roughly in line with aggregate trends at the European level, nevertheless the relative position of the different countries over time has remained relatively stable. Here it should be remembered that, taking into account external debt financing, the levels of investment activity are likely at least twice as high in these countries (EVCA statistics only take into account direct PE investment, not the addition of external debt).

Table 3: PE investment as a % of GDP Country 2007 2008 2009 2010 2011 Austria 0.33% 0.12% 0.07% 0.24% 0.11% Baltic countries 0.59% 0.23% 0.02% 0.10% 0.15% Belgium 0.63% 0.22% 0.34% 0.28% 0.26% Bulgaria 1.75% 0.26% 0.53% 0.23% 0.02% Czech Republic 0.14% 0.25% 0.98% 0.12% 0.09% Denmark 0.75% 0.50% 0.21% 0.16% 0.35% Finland 0.64% 0.39% 0.39% 0.33% 0.44% France 0.64% 0.46% 0.17% 0.34% 0.48% Germany 0.42% 0.37% 0.12% 0.19% 0.24% Greece 0.07% 0.12% 0.07% 0.01% 0.00% Hungary 0.21% 0.45% 0.23% 0.07% 0.19% Ireland 0.31% 0.16% 0.32% 0.48% 0.19% Italy 0.23% 0.35% 0.13% 0.10% 0.14% Luxembourg 1.94% 2.10% 1.09% 0.23% 0.68% Netherlands 0.92% 0.44% 0.15% 0.35% 0.48% Norway 0.41% 0.36% 0.26% 0.61% 0.27% Other CEE* 0.13% 0.06% 0.11% 0.04% 0.03% Poland 0.14% 0.18% 0.08% 0.19% 0.18% Portugal 0.13% 0.21% 0.18% 0.11% 0.27% Romania 0.17% 0.21% 0.19% 0.10% 0.05% Spain 0.35% 0.21% 0.10% 0.28% 0.22% Sweden 0.95% 0.64% 0.37% 0.80% 0.88% Switzerland 0.64% 0.27% 0.17% 0.33% 0.25% Ukraine 0.24% 0.25% 0.05% 0.09% 0.06% United Kingdom 0.96% 0.73% 0.30% 0.75% 0.59% Source: www.evca.eu

Interestingly, the Scandinavian countries and in particular Sweden have a relatively high level of PE activity, according to this indicator. Peak activity in the UK and Sweden approached 1% of GDP in 2007, and has recovered most of the crisis’ collapse in 2010/2011. France has somewhat lower levels of activity, reaching a peak of 0.64% in 2007. Germany is somewhere around the European average, reaching a peak of 0.42% of GDP in 2007. Some of the countries with smaller economies have more fluctuation from year to year, with peak levels sometimes reflecting the impact of one large deal. Luxembourg and Bulgaria, for example, have PE investment levels of almost 2% in 2007.

Table 4: PE investment as a % of total M&A activity Country 2007 2008 2009 2010 2011 Austria 8.8% 3.4% 6.4% 17.1% 4.8% Baltic countries 25.1% 17.5% 1.7% 3.8% 8.4% Belgium 10.7% 2.6% 5.1% 9.5% 3.1% Bulgaria 23.7% 6.6% 7.8% 13.7% 1.1% Czech Republic 13.7% 9.1% 45.1% 12.3% 8.3%

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Denmark 17.6% 19.5% 18.7% 13.0% 7.9% Finland 9.0% 16.0% 39.6% 39.5% 32.5% France 12.2% 8.3% 11.6% 18.1% 17.1% Germany 9.2% 17.5% 5.2% 12.1% 15.9% Greece 2.5% 2.7% 5.2% 2.2% 0.7% Hungary 4.6% 22.7% 10.1% 12.0% 5.8% Ireland 6.3% 9.2% 12.3% 16.2% 3.9% Italy 3.1% 10.1% 13.3% 7.4% 4.3% Luxembourg 6.4% 17.1% 11.8% 3.9% 2.5% Netherlands 3.5% 4.0% 3.6% 10.4% 13.8% Norway 3.1% 7.1% 21.6% 20.3% 11.0% Other CEE* 7.2% 5.3% 13.5% 4.9% 3.9% Poland 12.2% 13.4% 11.9% 17.7% 4.1% Portugal 3.2% 4.9% 17.8% 4.9% 35.4% Romania 12.1% 19.4% 36.3% 49.9% 52.2% Spain 4.5% 4.8% 1.7% 7.9% 4.8% Sweden 14.5% 6.2% 18.6% 24.5% 17.9% Switzerland 7.3% 0.9% 2.3% 5.3% 4.2% Ukraine 10.8% 7.0% 17.9% 2.3% 3.8% United Kingdom 7.7% 6.7% 3.8% 11.9% 11.8% Source: own calculations based on data from www.evca.eu

Another indicator of the relative importance of PE in different countries is the percentage of total value of mergers and acquisitions (M&A) deals accounted for by PE (see Table 4). This value fluctu- ates to a great extent, even in the same country. Even though there is not a lot of PE in the CEE countries, it can nevertheless make up a significant proportion of M&A deals. In Romania, for example, PE accounted for about half the total value of M&A deals in 2010 and 2011. Among the more industrial- ized countries, PE has accounted for significantly over 10% of total M&A deals in the Scandinavian countries, Germany, France and the UK.

A further measure of the relative importance of PE in different countries is the percentage of employment accounted for by companies owned by PE. Systematic data on this indicator are not collected by EVCA. However, data from individual countries shows a wide variance in this figure, with the highest figure likely being the UK with 20% of private sector employment accounted for by PE portfolio companies. The figure in Germany is estimated to be somewhere around 1.2 million in 2010, i.e. about 3% of the labour force.

A number of factors explain the great difference in the role of PE on corporate finance in different countries, rather than a simple theory. “Financialization” theories do not seem to work well, since differences in both the level and the rate of increase in the significance of PE between the countries are so high. Rather, financialization appears to be influenced very much by national institutions and policies, rather than being a general trend towards a greater role for finance. The so-called Varieties of Capitalism (VoC) theory 4 does not work so well either, as it would expect a clear division between the liberal market economies (LMEs), like the UK and the US, where PE would play a strong role, and coordinated market economies (CMEs), like Germany, the Netherlands and Sweden, where it should

4 Hall, P. /Soskice, D.: Varieties of Capitalism: The Institutional Foundations of Comparative Advantage , Ox- ford University Press, 2001. 9

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

play a much smaller role. In fact the UK has the greatest absolute amount of both PE fundraising and investment among the European countries, and among the highest relative level of PE activity (outside of Europe, the US also has high levels of PE activity). However, Sweden and other Nordic countries, and to a certain extent the Netherlands, which are clearly classified as CMEs in the VoC theory, also have high relative levels of PE activity. In Sweden, assets under management (AUM) by Swedish PE funds in 2011 were equivalent in value to 9.9% of GDP, not too far behind the UK at 14.8% of GDP (and the US at 12% of GDP). The Netherlands also have a high level (3.0%) relative to Germany (1.3%) and Poland (1.2%).

An important role in explaining these differences is played by both supply and demand factors. The Nordic countries and the Netherlands also have very large pension funds, which are among the financial investors with the highest demand for PE investment. PE funds thus are likely to benefit from having strong local institutional investors, especially as government regulations frequently encourage local investment, or restrict the percentage of money that can be invested in another currency. De- mand factors include industrial and ownership structure, as it is easier for PE to acquire companies listed on the stock market with dispersed ownership, as well as to buy up privatized companies and divisions that are spun off by large corporations. These are all factors that help explain the strong relative position of Sweden in the relative ranking of PE in Europe.

A final trend that could be examined is the decrease in the percentage of PE investment in Europe going into Britain. An important explanation here is “saturation”, as the high level of PE investment in the UK (with an estimated 20% of private sector employment in PE portfolio companies) makes it difficult to find promising new investments. The lack of promising investments and high purchase prices caused by high demand is a factor driving PE funds based in the UK to look abroad for investment opportunities, and for new PE funds to be established in countries other than the UK.

2.3. The impact of the crisis on the PE industry and its image The impact of the crisis on the external image and self-image of the PE industry has been quite different across countries. The public image of PE varied between countries before the crisis. Particular- ly in Germany and the UK there was quite a bit of negative publicity for the PE industry, with considerable criticism coming from trade unions and left parties. In Germany the high-ranking Social Demo- cratic politician Müntefering received international attention in 2005 when he characterized PE as “locusts” who suck assets from companies and then abandon them. The Hans Böckler Foundation, which is close to the trade unions, published a number of case studies where PE has played a negative role regarding employment, working conditions and the development of the company. Similarly, in the UK PE received quite a bit of public criticism from the trade unions, particularly in a few cases where there were mass redundancies or de-recognition of trade unions involved. John Monks, the former head of the British trade union confederation TUC, continued to criticize PE quite heavily when he became head of the European Trade Union Confereration (ETUC).

The PE industry in Germany and the UK responded to this public criticism in a number of ways. First, the relevant associations (BVK in Germany and BVCA in the UK) financed case studies and surveys which highlighted the positive contribution of PE to company growth, employment and innovation. These studies were published on the websites of the associations and also circulated to the press,

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

etc. Second, the PE industry in both countries took voluntary steps to increase transparency at both the PE fund and the portfolio company level. In the UK a commission headed by Sir David Walker published a report in 2007 recommending a number of voluntary measures for transparency in the industry, including publication of financial and employment reports by the portfolio companies and more information on their portfolio by PE funds. A commission was set up to monitor the implementation of these guidelines and publish the results in annual reports.

Similarly, in Germany voluntary transparency guidelines were adopted by the BVK. In contrast with the UK case, implementation was monitored by the PE association itself, not by an independent commission. Compliance with the guidelines was much lower than in the case of the UK, however.

Since the onset of the crisis, this negative image of PE in the UK and Germany has been displaced by the negative role played by banks in the financial crisis and by high management salaries. Although the image has not turned positive, nevertheless the frequency of mentions of PE in the press has decreased considerably, in contrast to the situation a few years before the crisis. Furthermore, trade unionists at the local level sometimes see PE as a positive force (or at least a “last resort”), as an investor willing to provide fresh capital to distressed firms that other investors do not want to touch.

In Italy, in contrast, the image of PE was largely positive up until the crisis. PE was publicized by the industry as an important force for modernizing the Italian economy, which consisted mainly of SME, family-owned firms. The portrayal in the press was of an “Italian way” of PE modernization, which was distinct from the more speculative variant found in the Anglo-Saxon world. However, since the crisis, publicity has turned quite negative in the media, as a number of the most prominent Italian firms bought up by PE have had large layoffs or even gone bankrupt under the pressure of high levels of debt.

Sweden is a case where PE had a more balanced public perception before the crisis. Trade unionists had a more moderate view of PE, on the one hand recognizing the role that PE can play in bringing in new capital and management, on the other hand complaining about a reduction in information and consultation rights in some cases. Sweden has quite large pension funds, in which employees are represented in the boards, which are quite heavily invested in PE, thus Swedish trade unions are also likely influenced by the high returns some PE funds bring to their pension funds.

Finally, in other European countries, for the most part where PE has not played such a big role and has not had a high public profile, either before or after the crisis.

Within the industry there has been quite a bit of soul-searching since the crisis. Some in the PE industry have stated that too many PE deals were based on financial engineering rather than a good business plan. In particular commentators within the industry have questioned whether the so-called mega-deals (very large deals) are a phenomenon of the past, as well as the so-called public-to-private deals, which often involved buying companies from shareholders on publicly traded markets at a substantial premium. The PE associations (e.g. EVCA, BVCA, BVK) have continued their efforts to improve the image of PE by publishing positive studies on the impact of PE. In part the PE industry has tried to distinguish itself from more speculative, short-term investors, such as hedge funds or even normal mutual funds, who invest in equity on average less than one year. The average PE investment, in contrast, is around 4-5 years. 11

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

2.4. Key challenges for PE investments in the last ten years The key challenges for the PE industry have changed significantly over the past 10 years. At the beginning of the period, the industry was at the worst point in the crisis following the bursting of the high-tech bubble. Some of the most profitable segments of the PE industry had focused on helping young firms in the so-called TMT (technology, media and communications) area grow rapidly and prepare for listing on the stock market. With the bursting of the bubble, it became apparent that many of these companies had bad business models and had no chance of achieving profitability, even in the long-run. Although some PE houses had already made substantial money through exiting these companies they had taken public, many still had a lot of these companies in their portfolios. A major challenge for these PE houses was to restructure these portfolio companies in the hopes that they might become more attractive for potential buyers, typically larger firms in the same industry.

With the recovery of the macroeconomic environment after 2003, a new key challenge for PE houses was to raise new funds to invest in companies before their prices increased too much. The PE industry also expanded its activity beyond its major countries like the UK. In many countries the PE industry lobbied for changes in national regulation to create a more favourable environment for fundraising and investment. This includes removal of restrictions on domestic institutional investors, changes in tax treatment (deductibility of interest payments in debt and treatment of “carried interest”), authorization of legal structures particularly suited to PE houses and funds, and improvement of exit options e.g. IPOs.

With the onset of the recent crisis in 2008 the PE industry once again faced a similar situation like in the early 2000s. On the one hand, exit options were restricted as the IPO market almost completely shut down and potential buyers through “trade sales” became very cautious. At the same time, the economic downturn hurt the profitability of portfolio companies, many of which had high interest payment obligations through a high level of debt taken on during the PE acquisition. Finally, PE houses faced a major challenge in finding sources of refinancing for loans which were approaching maturity for some of the portfolio companies.

With the recovery of macroeconomic conditions many PE houses were able to get refinancing and/or get banks and other holders of debt to agree to restructuring of the outstanding debt. Often the terms of this debt were renegotiated, so the new debt had only a fraction of the value of the previous debt. PE houses also faced a challenge in restarting fundraising, since many investors were either risk-averse coming out of the crisis, or were short on cash. On the other hand, the crisis also created new opportunities for the PE industry, as many companies ran into financial difficulties and needed cash and restructuring, and furthermore, some large, diversified companies searched for buyers to acquire some of their non-core operations.

2.5. Changes/developments of the PE investment model during the last ten years The European PE industry is very heterogeneous, consisting of hundreds of PE houses (management firms) pursuing one or a small number of specialized strategies and focusing on specific segments of the market and even on companies in specific sectors. As a result it is not possible to talk of changes in “the” PE investment model over the past ten years. However, it certainly is possible to talk about 12

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

the introduction of new models or changes in existing models, as well as shifts in the relative importance of different strategies.

As mentioned above, at the beginning of the ten year period the PE industry was recovering from the shock to the so-called “early stage/development” investment model, which was focused on investing in young companies with very high growth potential (particularly in the TMT area and biotechnology) and trying to exit through an IPO after a relatively short period of time. Although some PE houses had made stellar returns up until the peak of the bubble in March 2000, the bursting of the bubble signaled the end of this investment model, at least on a widespread basis.

With the recovery of macroeconomic conditions in 2004, a new model came to the fore in the Euro- pean PE industry, namely the large buyout (the largest being referred to as “megabuyouts”). Until the peak of the bubble new records were rapidly being set for the largest European buyout. On average, the amount of leverage used increased with deal size, thus it was easier to finance these megabuyouts since three quarters or even more of the buyout was financed by external debt. Many of these firms were taken off the stock market (so-called public to private deals). Due to speculative activity by hedge funds, etc. stock prices were bid up during the takeover process and PE funds frequently had to pay premia of 20% or even more above the initial price paid for stock. According to Prequin, 82% of buyout by value were accounted for by deals over $1billion in 2007. By 2012 this proportion had decreased to 53%.5

With the onset of the crisis the model of the highly leveraged mega-buyout was called into question. Fundraising was difficult in general, but it was particularly difficult for new mega-buyout funds. How- ever, the crisis has brought with it a discussion of new opportunities in the so-called “turnaround” segment of the PE industry, i.e. PE funds which specialize in buying up distressed companies and restructuring them in an attempt to regain profitability. Often there are large employment losses in this type of situation; however, the PE industry argues it has made a positive contribution since at least some of the jobs could be saved (the counterfactual would be total loss of jobs).

In general there has been a decrease in the amount of debt leverage used in comparison with the mid-2000s, and the prices paid for acquisitions have also decreased. One common measure of the price of acquisition is the so-called Entry price to EBIDTA multiple, i.e. the ratio of the price paid for a company to its earnings before interest, depreciation, taxation and amortization (EBIDTA). On average, this multiple in 2012 was about half the value (7.5) of the level reached in 2007 (14.3).

5 Prequin Private Equity Spotlight March 2013, p. 15.

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Figure 2: PE entry price to EBIDTA multiple

14.3 14

10.1 10.2 9.9 10 9.3

8 7.5 7.2

0 2006 2007 2008 2009 2010 2011 2012 Source: Prequin Private Equity Spotlight March 2013, p. 15.

A major upcoming challenge is the so-called “wall of debt”, which is the maturity of much of the debt used to finance highly-leveraged mega buyouts in the next few years. As macroeconomic conditions have once again turned unfavourable to the refinancing of this debt, it will be a major challenge to either sell off these firms before the debt becomes due or else find another source of refinancing.

2.6. Changes in regulation of PE in Europe in the last ten years The regulatory environment and the relative strength of the different stakeholders involved have changed greatly over the ten years examined. The mid-2000s were characterized by an environment generally favourable to the PE industry. In many countries it was able to bring about regulatory and legal changes in its favour. During this period EVCA published a bi-annual benchmarking report on the regulatory and tax environment in different European countries, and could document an improvement in this environment in this period.

With the onset of the crisis the regulatory environment turned decisively in favour of those (trade unions, social democratic parties, NGOs, etc.) in favour of stronger regulation of PE. The main change at the European level in this area is the Alternative Investment Fund Managers Directive, which was finally approved by the European Parliament at the end of 2010. The directive was transposed into national law by the Member States and is coming into effect this year (2013). According to the Euro- pean Commission, the following are the main provisions of the Directive 6:

6 Source: Directive on Alternative Investment Fund Managers (‘AIFMD’): Frequently Asked Questions Refer- ence: MEMO/10/572 Event Date: 11/11/2010, available at: http://europa.eu/rapid/press-release_MEMO- 10-572_en.htm?locale=en 14

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

• Increase the transparency of AIFM towards investors, supervisors and the employees of the companies in which they invest; • Equip national supervisors, the European Securities Markets Agency (‘ESMA’) and the Euro- pean Systemic Risk Board (‘ESRB’) with the information and tools necessary to monitor and respond to risks to the stability of the financial system that could be caused or amplified by AIFM activity; • Introduce a common and robust approach to the protection of investors in these funds; • Strengthen and deepen the single market, thereby creating the conditions for increased investor choice and competition in the EU, subject always to high and consistent regulatory standards; and • Increase the accountability of AIFM holding controlling stakes in companies (PE) towards employees and the public at large.

2.7. Outlook and future perspectives

At the time of this writing the PE industry is facing a challenging and uncertain time. Although surveys of institutional investors indicate that, on the whole, they would like to increase their financial investments in PE, nevertheless this is only one of a number of elements that play a role in the development of and outlook for the PE industry. One challenge is to find a secure source of external debt and refinancing. This is possibly the element of the PE model that varies most over time. A second is to develop a model which is less dependent upon highly-profitable exits through IPOs. A third is to deal with the new regulatory model, which will require more transparency and less leverage.

The PE industry in Europe is here to stay, nevertheless it will continue in a different form and with different accents than it did during previous boom periods (high-tech bubble at the end of the 1990s, buyout boom in the mid-2000s). In all likelihood a model of PE investing which will grow in importance is the so-called mid-market/mid-range deals, between a few hundred million and less than 1 billion in value, which will use less leverage, will focus more on operational improvements than financial engineering, and will possibly take longer to exit and thus require more patience on the part of investors.

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

3. Country reports

After discussing the major economic trends for the PE market in Europe we will now present an analysis of six European countries. While France and Germany will be analysed in more detail, the results of the country reports on the UK, Sweden, the Netherlands and Italy will be discussed in one chapter. The country reports are structured according to the following points. Firstly, we describe the overall development of the PE sector before and during the crisis and present relevant statistical key figures like the number of deals, the volume of deals, affected industries, investment strategies, exit strategies, etc.

Secondly, the role and relevance of PE before and during the crisis and the impact of the crisis on its investment behaviour is discussed including an analysis of possible labour outcomes of PE investments such as restructuring practices, employment developments, work organisation and quality of labour and industrial relations. This analysis is mainly based on an extended review of available literature and case studies.

Thirdly, we analyse current challenges for PE like the so called wall of debt and the need to refinance the debt for many companies represents a major issue.

Fourthly, we are interested in the perception of PE among companies, unions, etc. Has PE become more attractive in times where banks are reluctant to provide companies with credits? Has PE become more important as a last resort for companies that got into economic troubles due to the crisis?

3.1 France

3.1.1. INTRODUCTION The financial crisis has caused a large public debate on the financialisation of the economy and those who are crucial actors of it: PE funds. In France, the debate was particularly vivid, because France is one of the major EU countries for PE and more particularly LBOs. Critics pointed the financial trap of the debt burden, the impact of the debt on productivity requirements and connected risks for employment and working conditions.

Jensen thus was confronted with criticism (1996) when he showed that PE is not only a financial tool, but a real business model based on several levers to increase companies’ financial performances: financial engineering, governance and operational efficiencies 7. Though there is a debate on the impact of PE on companies’ business performance (Amess and Wright, 2007; Kaplan and Ströberg, 2009); the financial mechanisms are today well known. Concerning governance issues, existing literature (Jensen, 1996) stresses the disarticulation of decision levels, namely between business managers at company level and strategic decision makers represented in the PE controlled management body. Little knowledge however exists about the industrial relations developments in PE managed companies. How do employee representative participate in decision making concerning quantitative (job creation and redundancies) and qualitative employment (wages, working conditions, etc.) developments?

7 Kaplan S.N & Strömberg P.: Leveraged buyouts and private equity , working paper 1420, NBER, July 2008. 16

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Against this background, this paper aims at giving a better understanding of the impact of PE on industrial relations, employment and working conditions, especially in the post-crisis context. The question is twofold: Has the crisis challenged the very mechanisms of the PE business model and to what extent both industrial relations and employment trends in PE managed companies have changed under the effect of the crisis?

In the case of France, these questions are not simple to answer: there is little evidence giving insight to the impact of PE on industrial relations and employment in France and even less in the specific developments during the crisis. This paper thus uses a combined methodology. A literature review gives insight to existing findings, especially before the crisis. A quantitative analysis is carried out on the PE industry developments. In addition, the paper is completed by a qualitative case study analysis.

First, the paper gives an overview of the PE industry in France and its developments before and after the crisis, showing how one of the major PE scenes in Europe slowed down in the aftermaths of the crisis, however without evidence of a structural change of the relevance of the business. Secondly, an analysis of conditions framing PE investments in France then suggests a growing concern to regulate PE business. In the third part, the analysis of existing literature on the impact of PE on employment and industrial relations in France shows the need for more and better data in this field. The last part of the paper focuses on qualitative evidence on company developments, both regarding economic/financial and industrial relations/ employment trends. If there is a clear difficulty for employees to influence company developments, especially in cases where the crisis aggravated financial conditions, the paper however stresses trends towards a better understanding among employee representatives of the specificities of PE and its impact on governance and employment which could be the first step towards an enhanced participation in company governance.

3.1.2. PE IN FRANCE BEFORE AND DURING THE CRISIS

ONE OF THE MOST IMPORTANT COUNTRIES FOR PE IN EUROPE : ACTORS , ROLE AND RELEVANCE OF PE IN THE FRENCH ECONOMY Due to the lack of official data assessing the importance of PE in the French economy appears difficult. European data provided by PE actors themselves (EVCA) suggests that France is the second or third most important country in Europe for PE after the UK and before or after, depending on the year, Germany.

In addition, a recent, but fast and high degree of financialisation of the French economy took place (Morin, 1998). In the 1980s and 1990s the state gradually withdrew from major companies that had been nationalised after the Second World War and in 1981-1982. This gave first rise to complex in- tertwining shareholdings between banks, insurance companies and private firms. When the firms later developed a strategy of core and non-core business, they gave way for foreign funds to invest in the capital of large French stock-exchange listed firms. Between 1995 and 2006, the ratio of stock market capitalisation to GDP tripled in France whereas it doubled in Germany and increased 1.9 fold in the US. In parallel, the presence of foreign institutional investors among the 40 largest French firms strongly increased.

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

This penetration of the French economy by foreign actors also applies to the PE scene. Major worldwide PE firms – mostly US-based – such as Blackstone, Carlyle or KKR are present in France and some of them made important investments. Carlyle for instance is a shareholder of many public (France Telecom) or private (SagemCom, Moncler, Numericable, Zodiac Marine, etc.) companies as well as real estate. Some other major players are from the UK, such as Permira or Lion Capital, the first having invested in companies such as NDS or Genesys. The latter owns Findus Group, Materne, Picard Surgelés and Alain Afflelou. Other important players are French PE such as AXA Private Equity, LBO France or PAI Partners.

No reliable recent figures 8 are available on the number of companies dealing with or being concerned by PE. The French business association of PE (AFIC) claims a membership of 270 investment funds in 2012 that would all together have a portfolio of around 5,000 companies employing around 1.2 – 1.5 million employees in France. Some more detailed figures can be found in a study from AFIC from 2011: among the 5,000 companies concerned by PE at the end of 2010 around 4,500 had their headquarter in France. The study further uses a sample of around 2,000 French-based companies that, according to AFIC, were employing 2.2 million people worldwide.

Like other countries, France also has a state owned investment fund. Aimed at better addressing the crisis, the Fonds Stratégique d’Investissement (FSI) was set up in 2008. Its initial capital of €6 billion was increased to €20 billion in 2011. Among many others, the FSI has invested in companies like Air France, Valeo, Danone, Eiffage, France Telecom, and Renault. In 2009, the FSI concluded an agreement with the Abu Dhabi based SWF Mubadala Development Company PJSC for joint investments in French firms.

The recently created “SME’s stock exchange” (“Bourse des PME”) also is important for the development of PE. Supported by the government and aimed at facilitating fundraising for SMEs, this new stock exchange should start acting in 2013 as a subsidiary of NYSE-Euronext. NYSE-Euronext already accounts for around 800 SMEs based in France, the Netherlands, Belgium and Portugal. Within three years NYSE-Euronext plans to attract 300 more SMEs and increase available funds from €2 billion today to €4 billion in 2015. However, at the moment it is too early to know whether this new fundraising device is likely to compete with PE funds.

A trend considered more likely to change the French PE scene seems to be sector concentration. Currently, 270 firms are acting as PE in France. Among them are many small firms managing less than €100 million. Given tighter financial market conditions, experts agree that fundraising will become more and more difficult for these firms. In 2011 already, only four PE companies raised almost half of

8 The most recent available figures found are provided by AFIC, the French PE business association. About the limits of those figures see p. 30. 18

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

the capital 9. If some companies are expected to simply disappear, others go for mergers 10 or set-up networks 11 in order to face their lack of resources.

TRENDS IN VOLUME , SIZE , SECTOR AND STRUCTURE Like in any other country, PE in France benefited largely from the credit bubble up to its peak in 2007. Since then, the PE activity either measured through the number of transaction (see Figure 3) or the disclosed value (see Figure 4) has been erratic at a quite low level compared to the pre-2007 period.

Figure 3: Number of PE deals in France Number of companies under PE 350

300

250

200

150 304 308 240 100 215 154 50

0 2007 2008 2009 2010 2011

Figure 4: Volume of PE deals in France

PE deals in France in value

9 According to the economic analysis firm Xerfi (2012), Astorg, Qualium, Chequers Capital and Argos concentrated €3 billion out of the €6.4 billion raised in 2011. Managed capital of those firms ranges from €720 million to €2.15 billion. 10 As for instance, Atria merged with Naxicap (Natixis PE fund) in 2011. 11 In October 2012, the French fund Activa has created Private Equity Network (PEN) together with the British Graphite Capital, the German ECM and the Spanish MCH. 19

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Figure 5 shows the important decrease in investments after the crisis. Whereas over €12 billion were invested in around 270 companies in 2007, less than €7 billion were invested in less than 150 companies in 2009. The figure also gives evidence for an increase in investments in 2010 and 2011, though the 2007 level has not been reached. According to Xerfi (2012), 2012 perspectives are in sharp contrast with 2011 figures. PE raised €2,3 billion in the first half of 2012, i.e. 47% less than one year before (€4,3 billion during the first half of 2011). This seems particularly true for investments under LBO: during the first half of the year 2012, PE investments in LBO amounted to €200 million only (Dealogic 12 ). In 2013, PE investment volumes are expected to continue turning down by 25% (Xerfi, 2012). After the 2011 bounce, 2012 seems to have been a quiet year with only a handful of major seals. Charterhouse and Equistone disposed the industrial group Fives. Lion Capital bought Alain Afflelou, a major optician retailer. Labeyrie from the agrofood sector was acquired by another PE firm. Only few deals have been over €500 million. Against this background, analysts consider 2011 as a post 2007-crisis peak that is likely to turn into a new investment crisis for PE. Interestingly, the different types of invested capital did not evolve in the same way during the crisis. The investment decrease goes along with a reduction in buyout capital. The volume of growth and venture capital, on the contrary, appears more stable.

Figure 5: PE investment volumes in France 14,000,000 300

12,000,000 250

10,000,000 200

8,000,000

150

6,000,000

100 4,000,000 Numbercompanies of Investment volume in 1,000 € Investment volume1,000 in

50 2,000,000

0 0 2007 2008 2009 2010 2011 Buyout Capital Growth/Rescue/Replacement Capital Venture Capital Number of newly invested companies (only buyout)

Source: EVCA

The downturn in investment volumes should also be analysed against the background of changing distribution between equity and debt. Up to 2007, a PE firms could use a small portion of equity and a large portion of debt financing. The debt/equity ratio was 70%/30% or could even climb to 80% or

12 Quoted in Les Echos, “Les opérations de LBO au point mort en France ”, 26/07/2012, p. 24. 20

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

90% in some cases. Since the crisis and the given economic environment PE firms are obliged to invest more in equity and this ratio has decreased to 50%/50% or even 40%/60%. In the same manner, EBITDA multiples used to value companies have decreased. The standards were that a company could be valued through a 7-8 EBITDA and up to 9x multiple before the bubble. This figure has now declined to 5x.

The crisis does not seem either to have deeply changed the role of foreign players in the French PE business (Figure 6). As a matter of fact, the volume of foreign investments has fallen during the crisis (over €2 billion in 2007 vs. less than €300 million in 2009). But the proportion of investments by foreign PE players appears stable (around 20 %). Moreover foreign players participate in the post-crisis investment increase in 2010 and 2011. Since the construction of the EVCA data is not explicated, Figure 6 should however be handled with particular caution: it is not clear whether “local private equity players” do or not include French subsidiaries of foreign PE firms nor does the data make the difference between “local” and “foreign” money. Beyond this cautious state of mind, this phenomenon of foreign PE firms being less involved in the deals during the crisis can be found elsewhere through Europe.

Figure 6: Origin of PE investment in France 14,000,000

12,000,000

10,000,000

8,000,000

6,000,000

Investment€ volume1,000 in 4,000,000

2,000,000

0 2007 2008 2009 2010 2011 Local investments by local private equity players Local investments by foreign private equity players

Source: EVCA

Changes in the PE business are furthermore reflected by the evolution of the size of the deals. In- deed, the crisis year 2009 did not record any deal over €150 million and the largest portion of deals were smaller than €15 million. The post-crisis evolution in 2010 and 2011 however suggests that bigger deals could become again more relevant.

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

There are still big deals on the market but they tend to be less easy. The valuation issue can hinder some of them. PE firms are more reluctant to acquire assets such as those from the retail industry given its poor economic outlook. Before the crisis, almost every asset was quickly sold. Today, only “good” assets can be sold quickly. Some major assets which are for sale are still waiting for some bids.

Figure 7: Number and size of PE deals in France 12,000,000

Number of companies

10,000,000

8,000,000

8 4

6,000,000 4 4

3 2 4,000,000 69

Investment€ volume1,000 in 4 61 69 2,000,000 33

11 223 232 171 143 176 0 2007 2008 2009 2010 2011 Small (< 15 mil €) Mid -market (15 - 150 mil €) Large (150 - 300 mil €) Mega (> 300 mil €)

Source: EVCA

As shown in Figure 8, sectoral distribution of PE investments has largely evolved during the crisis. The sectors concentrating most investments before the crisis – such as retail and construction – have fallen (far) behind other sectors showing an increase in investments in the post-crisis period. These are for instance computer and consumer electronics, financial services, consumer services and transportation. This evolution echoes to the statement of a PE fund manager stressing that “before the crisis every deal was possible, now PE focuses on growing, high profitability sectors”. Only business and industrial products appear as a stable PE target. Though a more detailed analysis – by business activities within this sector – might show a different picture, i.e. shifts in business before and after the crisis.

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Figure 8: Sectoral distribution of PE investments in France

Unknown

Transportation

Real estate

Life sciences

Financial services

Energy & environment

Consumer services

Consumer goods & retail

Construction

Computer & consumer electronics

Communications

Chemicals & materials

Business & industrial services

Business & industrial products

Agriculture

0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 Investment volume in 1,000 €

2007 2009 2011

Source: EVCA

Another consequence of the crisis is the way PE investors exit. Secondary or third LBOs were replaced by sale to financial institution. The rise of divestment by write-off reflects the valuation issue as regards to the pre-2007 bubble. The increase of IPOs as well as trade sale shows the number of deals which reached maturity in 2011 compared to 2009 even though the economic situation and especially the stock markets were not seen as favourable.

Figure 9: Exit scenario of PE deals

Divestment by other means

Sale to management

Sale to financial institution

Sale to another private equity house

Repayment of principal loans

Repayment of silent partnerships

Divestment by write -off

Divestment by public offering

Divestment by trade sale

0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 Divestment volume in 1,000 €

2007 2009 2011

Source: EVCA

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

In spring 2012, Linklaters published a study 13 claiming that $550 billion of European LBO loans is due to mature between 2012 and 2016. Given the risk aversion caused by the dark economic environment, an important part of firms under LBO could default. This analysis is confirmed by Moody’s, which issued a study 14 stating that there would be a refinancing peak in 2014-2015. Moody’s assessment was that at least a quarter of the companies with debt maturing through 2015 will default. “Over half the debt maturing through 2015 is concentrated in 36 companies, each of which has over €1 billion of debts”. These figures could even be higher with the closure of the high yield market.

Figure 10: “The Wall of debt”

In France, many huge firms are facing this issue of debt burden and maturity. In 2009, for instance, PAI was obliged to dispose Monnier (a tile manufacturer) to its creditors. An acquisition financed with a €1,8 billion debt. Since then, many companies have faced troubles as regard to their debt burden. Materis, a major chemistry company, acquired by the PE fund Wendel tried to dispose some of its assets. In another case, Numericable, a cable operator, has achieved a renegotiation of part of its €2,5 billion debt through a new bond issue. The debt’s maturity was postponed even though its problems had not been solved. Its owners Carlyle and Civen tried to find an issue in order to organize their exit. TDF group (terrestrial broadcast, network & satellite services) owned by TPG, AXA Private Equity, Charterhouse Capital Partners and FSI (French sovereign fund) was faced to a €4 billion debt. In 2011, its shareholders envisaged an IPO but finally decided to lengthen the debt’s maturity. They were able to postpone a major debt’s reimbursement from 2014 to 2016, but with increasing financial costs. Another relevant example is PagesJaunes that was partly acquired by Goldman Sachs and KKR in 2006. PagesJaunes is a provider of local advertising and information on the Internet, mobile

13 Negotiating Europe’s LBO debt mountain. Linklaters. 2012. 14 Moody’s. Unrated European LBOs remain under pressure from refinancing burden. May 29th 2012. 24

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

and in print media. PagesJaunes and its two major shareholders tried to restructure the €1,8 billion debt. Its goal was to extend debt maturity so as to avoid a 2013 reimbursement. In order to do so, PE was obliged to give up part of its equities to the creditors.

Beyond general statistical data, these examples in France illustrate how serious and severe this phenomenon is and applies to many companies faced with a debt’s burden. However, one should keep in mind that this macroeconomic situation does not apply to every PE investor. For instance, KKR has got interests in only one company in France with a huge debt. Otherwise, it does not feel concerned by the wall of debt.

AN IMPORTANT PE SCENE REGULARLY UNDER POLITICAL ATTACK FROM UNIONS AND DURING THE LAST PRESIDENTIAL CAMPAIGN The numerous French Trade Unions are mostly hostile to LBO and investment funds. The CFDT had ordered few years ago a study on financialisation and social dialogue which was quite critical about investment funds. In the case of the CGT, in 2006 some of its members founded a “collectif LBO”, an independent organization dedicated to employees coming from companies under LBO. Its aim is to support employees and trade unions under these circumstances. Therefore they implemented a strategy of influence in order to heighten awareness of journalists, members of parliament and other elected representatives.

Some years ago, organizations such as ATTAC published recommendations and warnings concerning LBOs. One should add that the echoes of the US election first during the primaries process and then during the campaign itself brought to light the issue of LBOs in France through the past of Mitt Rom- ney and Bain Capital. A critical approach to financialisation of the economy was also taken by François Hollande during his presidential campaign: he announced several proposals aimed at regu- lating LBOs.

3.1.3. THE LEGAL AND POLITICAL FRAMEWORK OF PE IN FRANCE

COMPANY LAW AND FINANCIAL MARKET REGULATION Investment funds are regulated by a law from 1983 introducing the legal framework of so-called FCPR ( Fond commun de placement à risque )15 . With no status of a legal person, FCPR is a financial vehicle only. It benefits from fiscal incentives, namely tax-exemption on revenues and added-value (under the condition that the fund exists at least five years).

LBOs are not subject to any dedicated law. They obviously are regulated by common law concerning company mergers . However, recent debates on the morality of LBOs as well as the government’s search for higher tax income led to new tax regulations likely to have an impact on LBOs.

A first step – taken by the former right-winged government in December 2011 – introduced restrictions to the amount of debt interest payments a company may deduct from its taxable income. This amendment to the finance regulations concerns in particular cases, such as LBOs, where shares are not directly managed by the company settled in France. To benefit from debt interest payment

15 The FCPR is a mutual fund with regulations specifically adapted to the private equity and venture capital business. 25

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

the French company will thus have to prove that it has real decision making power and is not only an intermediate holding between the French business and a foreign-based PE fund. Approved by Par- liament, this measure is unlikely to change PE business, as judged by PE managers. Restraining LBO activity further was a key point of François Hollande’s presidential campaign in 2012. The new socialist government intends to tighten LBO activity by taxing profits generated by selling a company under LBO. The socialist-government’s first annual budget released on September 28th, planned to tax fund managers’ share of the profit from their investments, known as carried interest, at a rate of as much as 75%. The government also planned to double taxes on capital gains and further restrict the amount of debt interest payments. Those measures that would have reduced returns on leveraged buyouts were strongly criticised by the French PE industry. Its 3,000 executives followed a protest started by entrepreneurs who have called themselves “pigeons”, i.e. “dupe”. Once seriously considered by the Hollande government, these measures have in the meantime been given up.

Some impact on PE business could however be expected from the planned finance bill 2013 aimed at limiting fiscal benefits of some types of investment funds, as for instance, funds specialised in innovation ( Fonds communs de placement dans l’innovation, FCPI ) and in SMEs ( Fonds d’investissement de proximité, FIP ).

LABOUR LAW The French industrial relations system is characterised by weak union representation but provides for legal rights that the works council can use as a lever when it comes to changes affecting the company’s shareholder structure and employment 16 . The information and consultation rights provided by law oblige the employer to inform the works council in advance and with a good quality of documentation 17 . In many cases, such as restructuring plans, new forms of work organization or the arrival of a new shareholder, the works council is informed and consulted. Therefore, it is asked to give an opinion on the management’s project. Whether it is positive or negative, this opinion must not be followed by management who has the sole decision prerogative. However, the consultation procedure is – sometimes - used in an extensive way close to negotiation or deliberation - by employee representatives as a means to participate in the company governance and decision making (Bévort et Jobert, 2008).

In the specific case of PE, the works council can thus use information-consultation rights to get information about the new management project and its impact on employment and working conditions. In the case of change in shareholders, the works council has to be informed and consulted based on procedures provided by labour law. The works council will for instance try to get information about the new ownership structure, the financial conditions of the deal, the business plan,

16 France has a complex system of employee representation at workplace level through both the unions and structures directly elected by the whole of the workforce : the « comité d’entreprise », works council. These structures are present in most medium and larger companies. Figures from DARES, for the period 2004- 2005, show that in workplaces with 50 employees and more, 81% of the companies have a works council. According to the company structure, works councils can exist at establishment, company and group (national and/ or European) level, so as to ensure a representation at relevant decision making level. 17 The information rights cover labour, economic and financial issues. The economic and financial information to be provided includes details of: ownership, sales and profits; production levels; investment and state aid; plans to change production equipment or methods; an overview of future prospects, etc. 26

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

etc. Furthermore, information and consultation rights can then be used as a framework to monitor management decision-making and its impact on the company’s financial situation, its business activity and employment. In case of worrisome developments such as turnover decline or rumours about an upcoming disposal process, the works council can initiate a specific information procedure called “droit d’alerte” to push management to disclose its plans.

Moreover, there has recently been a trend towards legal action aimed at strengthening information- consultation rights in the event of LBOs. Indeed, employees tend – when it comes to a critical company business situation – to take the PE fund for responsible, beyond their direct employer. Those actions are part of a wider debate on the validity of the economic rationale of a restructuring plan. There also have been some attempts to question the very lawfulness of LBOs. However, the Conseil d’Etat 18 (highest French administrative jurisdiction) stated in 2011 that the creation of a holding aimed at organising a buy-out cannot be considered as such as an abuse of process.

A famous case of legal action taken by employees to show the responsibility of the PE fund is Sub- listatic . In 2007, the liquidation of this textile printing company employing around 200 people was decided. This decision came at the end of its third LBO in less than 10 years. Because the decision to shut down the company was based on strategic decisions taken outside the company, the employees started legal action to show the responsibility not of their direct employer but of the PE fund Acland Capital Investment. There was a twofold rationale behind this legal action. First, employees asked for the recognition of the PE fund as the real employer . Secondly, they wanted to get acknowledged that their company was part of a group managed by a PE fund . While the purpose of the first claim was to show that the relevant decision – and thus information and consultation – level was not the company but the PE, the second claim was aimed at denouncing the unlawfulness of the social plan presented by the management. Indeed, according to French labour law, in the event a company belongs to a group, a social plan has to include an outplacement proposal within the group. After four years of legal action at different labour court levels, the decision by the Cour de Cassation in 2011 did neither recognise the status of employer nor of company for the PE fund heading Sublistatic. Never- theless, as lawyers specialised in LBO underline, the debate on labour issues related to LBO was opened introducing new uncertainty in LBO business. Interestingly, a PE fund manager who was interviewed in the course of this study stressed that the company’s “social climate” has become one of the conditions to take into account when concluding a transaction under LBO.

Further, employee rights in the context of LBOs have been strengthened concerning access to information , in particular for the works councils’ expert. According to French labour law, an LBO acquisition is subject to an information-consultation procedure of the works council. At the end of this procedure, the works council has to give its opinion about the acquisition. Although the content of the opinion (be it positive or negative) does not have any impact on the management decision (an opinion is not a veto-right), the management needs this opinion to conclude the deal. Therefore, access to information has become a major lever for employees to influence the decision making process: if they cannot stop the deal, they can at least get information on the conditions of the deal that will

18 In France, there are two kinds of courts: general (judicial) courts and administrative courts. The Conseil d’Etat is the supreme administrative court specialized in administrative laws and disputes as regards to the exercise of public power. 27

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

have an impact on the future of their jobs. Labour courts have confirmed wide access to information in the context of LBO. Concerning the scope of information, first, courts stated that employee representatives have access to all documents related to the judicial and financial aspects of the deal. In a case led by the work’s council and accounting company Syndex, the judge extended this information right to all LBO cases, disregarding the national localisation of the fund’s headquarter.

Against the background of this recent legal action, lawyers specialised in LBOs have introduced labour law in judicial considerations to take into account when launching a LBO transaction 19 . Among the guidelines for LBOs, lawyers recommend to hide as much as possible the links between the PE fund and the company. Decisions should, for instance, always be announced by the company management and not by the fund.

Indeed, lawyers stress that the crisis has caused a more critic approach of LBOs, not only among unions and public opinion, but also among judges.

Interestingly, legal action has also been taken by management : company level management tries to hold PE funds for responsible when it comes to a company failure. Though lawyers consider those claims unlikely to be successful, this initiative, and also those led by employees and their representatives, suggests more upcoming judicial debate about LBOs.

Besides the impact of French “hard law”, analysts recently underlined that an international business such as LBO in France is also guided by external law developments. This is for instance the case of the “UK Bribery Act” that covers every company having a subsidiary in the UK or a partnership with a UK company.

Furthermore, interviews showed that growing influence could also be expected from “soft law” such as ESG-reporting. A PE fund manager we interviewed stressed that environmental, social and governance issues are strongly taken into account before the deal, but also during the whole management process of the acquired company.

Only a few companies have employee representatives in the board 20 . Even though it might happen that these workers’ representatives do have a lot of information in case of a takeover by a PE investor, it does not seem to be statistically meaningful.

3.1.4. INDUSTRIAL RELATIONS , EMPLOYMENT AND WORKING CONDITIONS IN PE MANAGED COMPA- NIES : EVIDENCE FROM THE LITERATURE PE funds and especially LBOs regularly fuel the public debate in France, opposing supporters and critics of this business model. The crisis and namely the identification of a “Wall of debt” have triggered a series of public statements on the pro’s and con’s of LBOs. And recently, the proposal of the

19 Labour law was introduced in the latest Guidelines for LBO published by the international law firm Salans (“Le Guide du LBO”, 2012, Option Finance ). 20 This situation is likely to change. A recent national collective agreement ( Accord national interprofessionnel ) provides employees board level representation in French companies with more than 5,000 employees. Though employees will be able to send only one or two representatives to the board, the very possibility to have employee board level representation in private companies, can be considered as a major change in the French governance system. 28

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

new elected French socialist government to tax LBO deals contributed to relaunch the debate on LBOs.

The two major actors in this debate are the AFIC, the French association of investment funds ( Associ- ation Française des Investisseurs pour la croissance- AFIC ), on the one hand, the “Collectif LBO”, an organisation founded by the CGT and that today leads a network of LBO-critics (academics, lawyers, journalists, etc.), on the other hand.

Supporters of LBOs in France stress the economic benefit of LBOs for companies, especially those facing financial difficulties in the context of the current crisis. Moreover, some economists consider the business model as a profitability lever for a single company and more generally as a tool to fix capitalism 21 . Based on the positive business effect of LBOs, some analysts have shown that employment growth belongs to the benefits of LBOs.

Critical voices on LBOs point at the multiple risks of such a business model for companies. The union network “ Collectif LBO”, for instance, denounces LBOs as one of the major tools of the financialisation of the economy and “profit-only driven management”, which are responsible for massive pressure on employment and working conditions. But criticism also arises from LBO “insiders”. A former president of the European Private Equity and Venture Capital Association ( EVCA ), Jean-Bernard Schmidt, posted a paper in the forum of a major French Economic Newspaper, Les Echos , headlining: “LBOs are back, bad news for companies” 22 The article claims that LBOs turn companies with little financial risk into financially critical situations: because of the reimbursement of the acquisition debt, the company faces more difficulties to finance business growth. The author thus shows concerns about the increase of LBO deals, only two years after the major financial crisis: “Today 1.700 companies are under LBO in France concentrating 27 billion Euros capital and 50 billion Euros acquisition debt. One can imagine the economic growth that could have been created if these resources had been set to work.”

Despite the vivid, regularly upcoming public debate, there is only little French literature giving insight in the impact of PE and LBOs on company developments. This is all the more true concerning the effect of LBOs on industrial relations and working conditions.

The most often (and reliable 23 ) quoted study by Amess and Wright (2007) suggests a cautious assessment of the impact of PE on employment. Indeed, evidence on employment is mixed and differs according to the situation of the company and the type of PE. The study shows that there is no significant effect of LBO on employment, compared with other companies. However, it stresses that buyouts involving existing managers are likely to have a positive impact on employment (after the first year), whereas external buyouts tend to have a negative impact on employment trends. On wages, however, Amess and Wright’s conclusion is less cautious: in line with the business model mechanism, PE buyouts have an overall effect of depressing wages.

21 Appéré et Rosenfeld (2008), Quel avenir pour les LBO? , La Gazette de la Société et des Techniques, n° 49. 22 “Le retour des LBO, une mauvaise nouvelle pour les entreprises”, Cercle les Echos, 02.03.2011. 23 Amess and Wright (2007) is one of the scarce anglo-saxon study not financed by the industry. It also ex- cludes venture capital and builds on comparison with firms in the same sector which were not subject to LBOs. 29

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Moreover, academics express serious doubts on the representativeness of existing literature based on data whose reliability must be questioned (cf. “encadré”).

Analysis lacking reliable data

The discussion on the impact of PE on employment is mainly based on “self-made” datasets. Thus, conclusions on the impact of PE on employment range, according to the chosen approach, from job creation to job cutting (Bedu, 2011). Analysing the most relevant literature on this topic, D. Hall (2007) shows the methodological limits and reliability of existing studies 24 . Several issues are pointed out by Hall:

Sample : Existing studies do not distinguish between different types of PE, such as venture and buyout capital. However, venture capital is well known to be invested in small, fast growing start-up companies. Conclusions thus do not account for differentiated analysis of probably positive impact in venture capital cases and negative impact in the event of buyouts. Secondly, studies suggesting that employment is growing do not necessarily reflect that the number of companies under PE is rising.

Data : Most surveys rely on data provided by PE-owned companies themselves; opinions are thus used as facts.

Interpretation : The basis of comparison referred to when it comes to factor-analysis does not appear relevant. Comparison should not be made between PE companies, but between PE and non-PE companies in the same sector, “otherwise the comparison may simply reflect the fact that PE companies are in faster growing sectors, for example”.

Against this background of multiple bias underlying existing studies, N. Bedu (2011) stresses the need for public data.

As far as known, there are two French studies aimed at assessing the quantitative impact of PE on employment. One has been led by the industry (AFIC/ Constantin, 2007), the other by academics (Boucly et al. , 2008). The studies differ by their robustness: while the first one is based on the business-organisation’s members’ opinions, the latter – in the absence of existing public data – has tried to build a robust sample (existing industry data cross-checked with public data and company reports), with a mid-term trend approach (dataset ranges from 1994 to 2004). Thus the conclusions of the studies do differ.

The industry-study states a genuine positive impact of PE on employment, social dialogue and working conditions. It states that annual business growth, employment growth and wage increase are above the French national average. The study also underlines that working conditions and employment relations get improved with the company falling under the LBO business model: more money spent on training; more works councils and health and security bodies are created. As a result, ab- senteeism and employee turnover appear lower after the LBO than before. Based on qualitative research in 200 companies, this study offers a first picture on the social situation in companies under LBO. According to the selected sample, the results however appear to apply to small and medium

24 The studies examined by Hall are the following: BVCA/ IE 2006; EVCA/CEFS 2005; NVCA/ Global Insight 2007; FT 200; Amess and Wright 2007. 30

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

sized enterprises (SMEs): more than half of the companies have less than 200 employees and less than €50 million turnovers. Thus, evidence on growing works council numbers after getting under LBO seems directly linked to the size of the company: indeed, a close look at the methodology shows that works councils have been created in companies with more than 50 employees, which is the legal minimum size required to set up a works council in France. Interestingly also, job creations only concern the service sector, although almost 50% of the sampled companies are in the industry. Whether conclusions of the study are representative for the other larger, industrial companies under LBO must thus be questioned.

The academic study suggests more nuanced conclusions: PE has a positive impact in the event of private to private transactions, but not in case of divisional buyouts (outsourcing). As a matter of fact, both studies however suggest similar results concerning the impact of PE on SMEs. Concerning the industry-study, this is directly related to the sample only consisting of SMEs. As for Boucly et al. , LBOs are “an engine of growth for SMEs”, especially in the French context where “PE acts as substi- tute for a weak capital market”. Only in case of private to private LBOs “targets grow significantly more than other companies both in terms of assets and jobs”.

A different insight in the impact PE can have on employment and working conditions is given by a qualitative, case study based analysis of evolutions occurring under the effect of PE. Giving voice to union representatives, a study ordered by the CFDT about the financialisation of the economy gives evidence about the risks PE’s engender for social dialogue 25 . Based on their experience in companies under LBO, the interviewed unionists point out a series of changes related to the new business model of their company. A general feeling shared by employee representatives is to belong to a company driven by managers disconnected from the day-to-day business. Indeed, unionists underline the focus laid on financial rather than on business performance. In this context, the decision can be taken to shut down R&D activities considered not profitable enough with the long-term effect that the company is not able anymore to sustain its technological driven business development. Moreover, decision-making centers in LBO structures are not located at company level anymore, but far away, within the investment fund managing the LBO. However, there is no direct contact between employee representatives and the real decision makers. A further change in employment relations identified by company based unionists concerns pay developments. LBO management policies commonly include an individualization of wages based on performance-related pay. This results in higher pressure on the individual employee and makes it more difficult for unions to organize collective bargaining claims. Understaffing as a result of a continuing search for productivity gains is also mentioned in connection with the pressure caused by LBOs. Interestingly, this feeling of excessive workload and undermined working conditions is emphasized disregarding the employment trend – up or down – of the company.

As a result of those changes, unionists face bigger difficulties in participating in management decisions. In practice, according to employee representatives social dialogue has become more conflict- ual under LBO, especially where there had been a dynamic social dialogue before.

25 For an English presentation of the main results, see Chambost et al. (2009). 31

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

The study concludes on the necessity to imagine new ways of collective action adapted to companies under LBO. Among those possible new fields of action, the authors suggest a better access to relevant information and management level, a better articulation between the different employee representation levels and bodies, focused action at key moments of the LBO life of a company (acquisition, renegotiation of covenants, sale, etc.), and finally action on corporate social responsibility.

This qualitative study ordered by the CFDT surely suffers from two limits. First, the interview-based approach on the “feeling” of the representatives gives good insight in the perception and representation. The analysis would though have gained in solidity if backed up by some analysis of the financial and economic, but also organizational and institutional context of the case studies. Second, though the case-study approach is good to help understanding situation in details, it does not allow observ- ing global trends, beyond single company situation. Moreover, a follow-up study would be interesting to at least understand how those companies evolved after the crisis.

More generally, the scarcity of existing literature suggests that there is a need both for reliable data- studies and for more recent data-analysis assessing the quantitative and qualitative evolution of employment – under the effect of PE – since the crisis.

3.1.5. THE IMPACT OF PE FUNDS ON THEIR PORTFOLIO COMPANIES IN FRANCE BEFORE AND DURING 26 THE CRISIS : CASE -STUDY EVIDENCE

IMPACT ON ECONOMIC PERFORMANCE , FINANCE AND GROWTH From a general perspective, PE has got several levers in mind to improve value when they plan to make an investment. PE of course uses the debt lever as well as the fiscal lever through the deductibility of interests. They can also try to improve the target’s value through an improvement of its economic performances: savings, synergies, cost efficiency measures etc. Moreover they will try to improve the company’s situation through early reimbursement of debt. Eventually, they also benefit from the economic environment improvement that will increase the multiples used to assess the value.

Kaplan and Ströberg showed in a study 27 that if PE outperformed the Standard and Poors 500 slightly, as a matter of fact its performances were negative after General Partners fees. Whatever value was created by PE, it was largely captured through fees and carried interests.

John Kay illustrated this trend by trying to assess how much of Warren Buffett’s $62 billion would be the property of Limited Partners. He assessed that the cumulative effect of 2% of annual fees as well as the 20% of gains over 42 years “is so large that the earnings of the investment manager completely overshadow the earnings of the investor” 28 .

26 The following analysis is based on case study evidence. A full text of the case studies can be found in the appendix of this paper. The analysis is also fuelled by the experience based knowledge collected during the author’s work as economic expert for works councils, namely in PE managed companies. 27 Kaplan S. and P. Ströberg: Leveraged Buyouts and Private Equity, Journal of Economic Perspectives 23 (N°1) 2009, pp. 121-146. 28 Kay J.: The charges laid against us, Financial Times. January 30 2009. 32

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Some bias must be taken into consideration when one tries to assess of the PE’s impact on economic performance, finance and growth. If PE investors bought more or less every asset being on the market, they have become more selective since the financial crisis. Therefore, if PE firms invest in companies, they tend to focus on high growth potential targets. The sample of company cannot then be considered as representative of the whole economy.

For theoretical as well as pragmatic reasons, managers are some of the great potential winners of capital gain. Indeed, based on the agency theory, management packages are used to align management’s behaviour and shareholders’ interests. Therefore in case of an exit, calculation applied to managers can lead them to get important multiple capital gains.

Professional organizations such as EVCA communicate a lot on the alleged high performances of LBO. However these claims collide with the difficult task of assessing the value creation of LBO commonly measured through IRR (Internal Rate of Return).

The first remark is that a clear and independent assessment should be allowed to use complete and reliable data. Unfortunately, these data are not available to independent researchers. In order to measure IRR, one should take into account the whole life period of a dedicated fund. In that case, it’s still too early to have an idea of the most recent funds performances of the 2004-2007 period. Moreover as some researchers have demonstrated 29 , IRR as a tool of performance evaluation offers several biases and pitfalls.

Beyond these remarks, the different levers to obtain operational efficiencies are the following: a cost reduction plan without any growth component; growth achieved with stable costs; the spin-off or the disposal of some assets; outsourcing some functions: manufacturing, R&D, payroll, etc.

Contrary to the rest of the world, during the first half of 2012, LBO in France were down to a very low level due to restrictive credit conditions, high prices and a negative economic outlook. Many projects were cancelled.

Permira did not sell Iglo to Blackstone and BC Partners because it wanted to obtain not less than €2,8 billion. In France, other projects were also given up. Belambra was not sold due to a matter of price. The same reason applies to the retail company But. PAI and Axa Private Equity quit the process. The Vivarte and Elior disposure were postponed. “If the Business Plan had been implemented as predicted, there would not have been any trouble” said one CEO. That’s the kind of statement many CEO could emit. And this is reflected in the troubles any companies are facing. There are several ways to solve the issue and face the wall of debt. Renegotiation of the debt, as done by TDF which was able to postpone its reimbursement, is the first solution. To write off the debt is another one, made possible by the French “procédure de sauvegarde financière accélérée, SFA” created in 2011 – an equivalent to the American Chapter 11 – that allows a company faced with the debt service burden to ask the banks or other creditors to cancel the part of the debt. Another lever to find new resources is bond’s emission. There are also examples where the investment firm asks for new cash injection, as, for instance, Equitstone Partners did so in Desmet Ballestra capital. Eventually, debt’s

29 Phalippou L.: The hazards of using IRR to measure performance: the case of private equity , SSRN working paper, 2007. 33

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

conversion in equity can be an option. This solution is not very common in France, but was obtained by Novasep : Its debt was reduced from €415 to €150 million through equity conversion.

All in all, to rephrase Lefebvre (2012), LBOs will not disappear, but are very likely to change. Accord- ing to an investment fund manager, the slowdown of the French LBO market since September 2011 is not directly related to the crisis in itself, but to the French economic and political situation. Against this background, the following analysis of a change in LBO deals was published by the law firm Salans (“Le Guide du LBO”, 2010): Sale process are stretched over time; Sellers are more involved in the financing of the acquisition; Relations between lenders and loaners become more rigid; Investment funds tend to a tighter control of management.

IMPACT ON EMPLOYMENT LEVELS AND RESTRUCTURING To estimate the impact of PE on employment and restructuring practice is difficult and none of the analysed company case studies provide clear evidence. However, one should keep in mind that most PE acquisition plans include restructuring measures at least in the first years, which can be verified through the analysis of the acquisition business plan.

For instance, a high tech company was acquired by a PE investor. The PE managers said that they would create jobs in the forthcoming years. If the Business Plan had been confirmed, this comment would have become true. But in that case, the discussion concerned a high growth company. And when looking at the data, one could see that the level of R&D would indeed grow but not as quickly as the level of turnover. In fact, costs had to be tightened. And the ratio R&D/sales was supposed to decline through the Business plan period.

In a retail frozen food company (company A), the global level of employment is rising through the opening of new shops. Employment figures have evolved positively because of the growth the company enjoyed. In order to find new levers of growth, it even has begun its internationalization. One should also mention that few months after the 3 rd LBO, the company organized a restructuring plan – of a small department – even though the company was making huge profits.

Some other companies did face restructuring. In the case of the PagesJaunes group, a big restructuring plan was launched before the opening of the yellow pages competition. Trade unions had gone to court – and lost – in order to protest against this plan. It’s of course impossible to say what would have happened without PE but one can mention that the restructuring plan took place few months after the PE arrival.

In the case of TDF, employees also faced a big restructuring plan and there were many layoffs. The company had lost 1,000 employees in a period of eight years A restructuring plan implemented in 2010 led to 550 layoffs. Actually more than 600 employees left the company on a voluntary basis. In the meantime, the Spanish subsidiary was disposed. Moreover some subsidiaries used a lot of temporary workers.

In the case of company B, many layoffs were organized. France was in the focus in 2007 and additional people left the company since then. The German subsidiary was highly impacted in 2012. An-

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

other subsidiary was disposed in 2012 due to the financial restructuring. One should add that many managers were also laid off due to poor performances.

IMPACT ON WORKING CONDITIONS Many employee representatives interviewed estimated that working conditions have worsened since PE took over the company.

In the case of TDF, unionists had the impression that working conditions worsened since the second LBO. Some specific studies on working conditions were even commissioned to experts by the health & security dedicated body. The new organization leads to a new regional cutting up. Skilled workers feel left alone due to the new working organization and mobile handset that provides information and tasks to perform. Team contact does not exist anymore. Neither do they meet their managers. Moreover, the decline of support functions leads to the transfer of some tasks to the skilled workers or middle managers. And the numerous layoffs lead to an overload for many employees.

In the retail frozen group (company A), employee representatives do have the impression that the pressure has increased through the financial criteria they are due to submit. A reduction of the number of employees per shop is feared. In the case of company B, work conditions have been declining since many years due to the restructuring plans that lead to many layoffs. This has resulted to reduced productivity and loss of morale among employees. In Company C, employees knew that the LBO would lead to another step: either a disposal by block or through IPO. Of course, this did not help employees to be highly motivated, uncertainties being a major stress factor.

IMPACT ON INDUSTRIAL RELATIONS Interviews realized with unionists coming from different companies show that the satisfaction level regarding to industrial relations seems poor. In some cases, unionists did not know much about the involved shareholders or not even that a company is under LBO. They do have a very vague knowledge of the owner’s identity. In the case of the KME group, an Italian group with a strong Ger- man location, even though the company is public, its major shareholder is a PE firm. It recently organized a transaction quite similar to an LBO but neither the employees’ representatives in France nor the works council received any information on the bond issue and its impact on the debt structure.

In a Belgian foundry with employees in France and in Belgium, employees’ representatives did not know that their group was under LBO. They have never received information on their shareholder nor on debt structure. Disinformation seems to be a common practice.

A good level of satisfaction seems quite uncommon in the view of unionists. In the case of TDF, unions provide a board member and therefore, they consider, at least members from the most important union, their knowledge of the whole deal and in the aftermath of the takeover to be good. This opinion is not shared by the second biggest union.

In another traded high tech company, a PE firm decided to invest to become the major shareholder. In that case, it was not a LBO. It was just an investment in a company that came close to bankruptcy three years ago. If trade unions did not receive much information about its arrival, they did not react negatively: as a matter of fact, the PE arrival was linked to a share capital increase. And this new in-

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

jection of liquidity helped to reimburse part of the huge debt burden that was threatening the company’s future. This seems to be one of the rare cases with a PE arrival without union reluctance.

More commonly, employee representatives have to trigger a battle for information when they are in a company under PE. Unionists in a Telco company (company B) were not able to get any information about the PE investor, nor documentation related to the takeover during a long time. They were obliged along with the works council’s expert to sue the company in order to get the information. The court decided the expert was due to receive the information. And through the expert’s work, they were allowed to get a comprehensive view of the takeover, the acquisition business plan, the debt structure as well as the shareholder’ alliance.

In a French-based connecting company owned by Bain Capital, during years, the works council tried to get relevant information about its shareholder. It was only during an information and consultation procedure due to a restructuring plan that the works council’s expert was able to get the documentation. Thus, the work’s council got the information through the expert’s report.

One major French group of retail frozen food went through three successive LBO deals. Even though the works council was informed and consulted, it was not able to get detailed and specific documentation about the takeover beyond general data about the purchase price, the cost of debt and the covenants. No information was disclosed about the legal organization – the different holdings –, the acquisition business plan or the shareholders’ alliance. A legal battle was required to deepen the subject and get the information through the works council expert.

The three last cases suggest that employee representatives with time build up knowledge about PE and the way they can have influence on decision-making, at least on the way to get information. This is particularly true in the event of major events such as employment of debt restructuring, i.e. in cases of emergency. As a matter of fact, the battle for information – through the expert who in the French case has broad prerogatives – appears crucial and as a first lever and step towards gaining influence on decisions related to employment and working conditions.

3.1.6. CONCLUSIONS AND OUTLOOK In order to assess the role and relevance of PE in France, one needs to go beyond stereotypes about France. Companies that are traded on the stock market have a huge proportion of foreign investors. Foreign Direct Investment flows are entering France on a high level. On the matter of PE, France has been and still is one of the major countries of the PE scene. Before the 2007 crisis, it was the second most important European country for PE – behind the UK – as regards to the funds raised and the value and the number of deals. This could have changed in 2012 as the French economy is struggling to avoid recession and the German economy is enjoying a slight growth.

As the rest of Europe, France has seen a sharp decline of PE deals after the 2007 peak. And if the number of deals has grown again in 2010 and 2011, it seems that 2012 was a year of another decline. Looking more deeply at what happened recently, the number of mega-deals decreased sharply. Many assets have been for sale but did not find any acquirer. The poor economic outlook combined with a more cautious approach from banks and other financial institutions led to a selective attitude from PE. Retail assets for instance directly linked with the growth prospect seem harder to sell than

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

before. As explained by a PE manager, almost every asset used to be sold. Prices and leverages were high. All these features have disappeared. The bubble is over.

However, the crisis might have slowed down the financialisation and internationalization of capitalism, but it has not caused a fundamental change in its role. PE business might be done differently since the crisis, with a stronger focus on profitable deals. But the business is far from disappearing and might be undergoing a settling phase, becoming a structural institution of the international capitalism. Under the French tax system, PE firms take advantage of legal provisions to pay low taxes and they are pretty much skilled to organize large-scale tax avoidance. And the tax system is less strict than in many other places, another counter-intuitive idea.

Regarding the trends in companies already under PE, the present study shows that the crisis tends to have strengthened financial constraints. The way those constraints are handled largely depends on the negotiating power and indeed the business strength of the company. The focus of the present study on divisional buyouts giving evidence for mostly negative impacts of PE both on the financial, economic and employment situation of the company interestingly gives a contrasting view to other existing studies mainly based on data and evidence from SMEs in growing business sectors.

As for the impact on labour relations, several drivers for change can be identified. First, the crisis has triggered a political debate about the legitimacy of LBOs which, on employee side, has triggered collective and especially legal action aimed at a stronger employee influence on decision-making in companies under LBO.

At a political level, a lot of criticism was raised against PE and the disaster that it could produce. The French presidential campaign echoed the American one that had lead to harsh criticism, some of them coming from Republican candidates against PE and its behaviour. During the 2012 fall, some proposals were made to raise taxes against capital gain. But an upheaval of entrepreneurs leads to a withdrawal of the measure. The only measure that was voted by the parliament was a cap on the deductibility of tax interest; a measure that already exists in countries such as Germany.

Second, there is evidence suggesting that PE funds could tend to take social “issues” more into consideration, be it before acquisition or during the LBO management, thus concentrating their efforts on already profitable companies where growth could be achieved without job cutting. In the long run, another mitigating effect could come from ESG principles that some PE funds seem to take more and more into account under the pressure of some of their investors.

However, because of the intrinsic business model of a PE managed company, it is unlikely that identified trends such as pressure on wages, working conditions and difficulties for workers to participate in company decision making will significantly change. Even though the AIFM directive will slightly correct this, there is a lack of transparency of PE. Short-term financial goals as well as large managers’ financial incentives tend to introduce bias in the way companies are managed. Interestingly, redundancies in the event of a takeover by a company do not only concern employees but also local management. Due to high leverages, the pressure is huge on many companies under LBO. LBOs are organized by PE investors through many holding companies. In those circumstances, the top company holding is quite often located either in Luxembourg or in some Caribbean Islands.

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Against this background, workers representatives have some troubles in order to reach the decision making process and be informed properly. Because information and consultation processes are not very strict as regards to PE takeovers and shareholders changes, it can happen quite often that unionists do not even know that their company is being owned by PE firm. In most cases, even though there’s an information & consultation process, workers representatives do not get much information and details on the deal: acquisition business plan, fund’s strategy, main features of the debt’s structure, etc. It can however happen that due to a works council expert, workers representatives can get a comprehensive view. But these cases remain rare.

This is also true for SMEs where a “good” economic situation might overshadow the problematic situation of mostly weak social dialogue structures. What happens in case of a crisis in a SME with no or fragile social dialogue? One can imagine that in a financially driven SME it will be even more difficult for employees to influence the decision-making process than under a traditional paternalistic management.

As a matter of fact, more evidence – quantitative and qualitative – would be needed on employment and social dialogue to get a better understanding of the factors explaining positive and negative trends, also in a long-term perspective. Existing evidence to which the present study hopes to have contributed however suggests that, in any case, stronger employee participation in company decision making is likely to rebalance information and power asymmetry that is particularly strong in the case of companies under PE and thus to contribute, depending on the situation, either to a better redis- tribution of economic wealth or to a better anticipation of financial problems jeopardising both business and jobs.

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

3.2 Germany Compared to other European countries, the debate on the influence of PE on companies and their employees was particularly intensive in Germany. To a certain extent triggered by Franz Müntefer- ing's (the former SPD chairman) reference to PE investors as ‘locusts’, a polarising discussion developed in Germany in the years prior to the crisis. However the onset of the financial crisis saw the subject of PE fading into the background as public debate increasingly focused on banks and the effects of the euro crisis. This trend may also be associated with the fact that PE fund activities declined greatly in the course of the crisis. Considering that about one million employees work for companies in the hands of PE investors, the question of the effects of PE investments on portfolio companies and their employees nevertheless remains very valid. The aim of the German country study is to look at what effects the economic and financial crisis has had on the German PE market and whether it has changed the influence PE has on companies and their employees. The study starts by looking at recent developments in the German PE market. Based on an analysis of national and European statistics, the effects the crisis has had on PE activities in Germany are shown. This is followed by an overview of the existing German regulatory framework for PE. Existing research findings on possible effects of PE investments on jobs and employment are then looked at, with a focus being put on the evaluation of a large number of case studies. In doing so, the selected case studies are thematically evaluated and compared with each other in an attempt to define the possible effects of PE investments on companies and their employees. The findings emanating from the market analysis and the evaluation of the case studies are then used as the basis for a discussion of the possible effects the crisis has had on PE behaviour and what impact these have had on companies and their employees.

3.2.1. THE DEVELOPMENT OF THE GERMAN PE MARKET From its initial low levels in the 1980's, the German PE market experienced substantial growth from the mid 1990's onwards, peaking in 2007. This development is for the most part attributable to the increased activities of Anglo-American PE companies in Germany. These years saw funds like Permi- ra, Kohlberg Kravis Roberts (KKR) or Blackstone investing huge sums in the German market, as witnessed by a series of 'mega-deals' involving hundreds of millions of Euros. By contrast, German PE firms concentrated more on small and medium-sized investments, with a particular focus on Venture Capital and SME financing. The onset of the economic and financial crisis in late 2007 saw a collapse of the German PE market, as was the case in a number of other industrialised countries. This in turn led to a massive decline in new investment and many funds experienced problems attracting money for their investments or 'leveraging' these investment with the help of bank loans. Despite the fact that market conditions have somewhat recovered and improved since 2011, PE investment levels remain well below those seen prior to the crisis.

In 2011, PE investments in Germany accounted for 0.24% of Gross Domestic Product (GDP). 30 Looked at from a European ranking, this means that Germany occupies a place in the lower middle. Though the PE share of GDP is traditionally much higher in Scandinavian and English-speaking countries,

30 Figures issued by the Bundesverband Deutscher Kapitalbeteiligungsgesellschaften (BVK) on the basis of European Private Equity and Venture Capital Association (EVCA) statistics. 39

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

France is also higher-ranked than Germany, with its percentage of 0.48% above the European average of 0.33%. 31

PE has been gaining in importance over the last few years in the field of ‘corporate finance’ (see Ta- ble 5). In the mergers and acquisitions (M&A) market, the share of acquisitions financed by PE increased from 9.2% in 2007 to 17.5% in 2008. Collapsing to 5.2% in 2009 on account of the crisis, the figure for 2011 was back up at 15.9%. In addition, PE investors are increasingly involved in public offerings (IPOs) in Germany – at the peak of PE activities in Germany in 2007, they played a major role in 8 of 46 IPOs. While there were practically no IPOs in 2008 and 2009 due to the difficult market conditions, PE investment activities are now increasing appreciably.

Table 5: The importance of PE investment for corporate finance in Germany 2007 2008 2009 2010 2011 Share of M&As financed by PE 9.2% 17,5 % 5,2 % 12,1 % 15,9 % Value (€ million) 8,034 453 68 2,533 1,498 IPOs No. of IPOs 46 4 3 17 13 IPOs with PE involvement 8 1 0 3 5 Source: EVCA

INVESTMENTS There is no systematically compiled, verifiable data on PE investment activity in Germany. One of the main sources of statistics on the investment volumes of PE companies is the BVK ( Bundesverband Deutscher Kapitalbeteiligungsgesellschaften ), the German association of PE firms. One longstanding problem with the BVK figures was that they only recorded the activities of PE companies with their headquarters in Germany or registered with the BVK. As a result it can be expected that the actual number of PE deals is higher than shown in the BVK data. 32

This problem has been at least partially solved by the introduction of the so-called "PEREP Analytics", an initiative of the European Private Equity and Venture Capital Association (EVCA), which records and analyses the activities of all EVCA members throughout Europe. 33 It should however be noted that the EVCA figures for Germany are based on the BVK figures and that there are a number of German PE firms not belonging to the BVK and thus not appearing in its statistics. The same is true for foreign funds not belonging to any EVCA-affiliated organisation. Despite these statistical short- comings, the BVK and EVCA data do in our opinion sufficiently accurately reflect basic trends and developments.

Up till the end of the 1990's, PE investment volumes remained at the constant and relatively low level of about €500 million a year (see figure 11). In the wake of the global dotcom boom starting in the late 1990's, activities of PE companies soared, with PE investment volumes quadrupling between

31 When looking at these figures, one should bear in mind that the calculations only cover the capital actually owned by the funds. As the vast majority of company takeovers are leveraged deals (i.e. with the majority of funding borrowed from the banks), the volume in relation to GDP can actually be two or three times higher. 32 Cf. Scheuplein, C.: Buyouts in Deutschland. Die angelsächsische Achse , forthcoming. 33 In addition to these public sources, there are also other data sources, e.g. Dealogic or CIMBOR, which can be accessed for a fee. 40

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

1997 and the 2000/2001 dotcom peak. The bursting of the dotcom bubble saw the PE branch experiencing its first crisis, with investment volumes declining significantly in 2002 and 2003. The market recovered somewhat between 2004 and 2006, though investment volumes remained far below those of 2000/2001. The situation changed however in 2007 and 2008, with the German PE market experiencing an unprecedented boom. Taking EVCA data as the base, the amount of money invested by PE firms in German companies rose to over €10 billion in 2007. Even though slightly receding in 2008 on account of the first effects of the crisis, some €9 billion still went into new investments. 34 2009 however saw the PE market collapsing, hit hard by the effects of the economic and financial crisis. Though the market recovered somewhat in 2010 and 2011, investment levels still remained well under those of the pre-crisis years. 2012 even saw levels declining and, according to industry sources, the outlook for 2013 is characterised by uncertainty. 35

Figure 11: Investment volumes of PE funds from Germany and abroad in Germany (1990-2012)

12,000,000

10,000,000

8,000,000

6,000,000 in 1,000 in €

4,000,000

2,000,000

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Private equity investments in Germany according to BVK statistics Private equity investitionen in Germanyaccording to PEREP Analytics

Source: BVK and EVCA PEREP Analytics

INVESTMENT STRUCTURE The dominant proportion of investments made by PE firms in Germany is in the field of buy-outs, representing 87% of all PE deals in the 2007 boom (see Figure 12). By contrast, Venture Capital and

34 Here again, one needs to bear in mind that the investment amounts listed only represent the capital actually owned by the private equity firms. The actual amounts of funds used in buy-outs are in all probability two or three times higher, as buy-outs are generally 50 - 70% financed via bank loans in order to achieve the desired "leverage". 35 Cf. BVK: Private Equity-Prognose 2013 - Erwartungen der deutschen Beteiligungsgesellschaften zur Markt- entwicklung , Berlin February 2013. 41

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

other investment forms 36 only accounted for a very small share of total investment volumes. The effects of the economic and financial crisis greatly impacted the buy-out segment, leading to its vir- tual collapse in 2009. Nevertheless the buy-out market has since somewhat recovered. Other investment forms by contrast came through the crisis basically unscathed.

Figure 12: Investment structure of the German PE market (2007-2011) 12,000,000

10,000,000

8,000,000

6,000,000 in 1000 € 1000 in

4,000,000

2,000,000

0 2007 2008 2009 2010 2011 Buy -out Other PE investments Venture Capital Source: Source: EVCA PEREP Analytics

With regard to the effects of the economic and financial crisis on the German PE market, it is interesting to look not just at the total investment volume, but also at the structure of the buy-outs (see figure 13). At the time of the PE investment peak in 2007, a small number of large deals (€150 - 300 million) and mega-deals (> €300 million) accounted for about one half of total PE investment in Ger- many. The remaining investments included a larger number of medium-sized deals (€15 - 150 million) and small deals (< €15 million). Even as the crisis took hold in 2008, this buy-out structure initially continued to hold sway. The situation changed however in 2009, a year in which no buy-out worth more than €150 million was recorded. Though there was a decline in small and medium-sized deals, the collapse of the German buy-out market was attributable to the complete disappearance of large and very large deals. While PE deals picked up slightly in 2010 and 2011, the megadeal segment remains to this day well behind the levels experienced prior to the crisis. By contrast, the market for €150 - 300 million deals picked up slightly in 2011, becoming the principal factor in the increased total investment volume on the German PE market.

36 This includes seed capital and rescue capital, but also minority holdings by a private equity investor. 42

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Figure 13: Buy-out structure in Germany (2007-2011) 10,000,000

9,000,000

8,000,000 5 number of deals

7,000,000

6,000,000 3 8 5,000,000

in 1,000 € 1,000 in 1

4,000,000 8 8 3,000,000 1 76 2 2,000,000 60

4 48 1,000,000 46 22 98 109 69 0 65 64 2007 2008 2009 2010 2011 < 15 mil € 15 - 150 mil € 150 - 300 mil € > 300 mil € Source: EVCA PEREP Analytics

In addition to the buy-out structure, the target sectors of these investments also changed in the course of the economic and financial crisis. The 2007 peak phase saw PE firms investing mainly in companies in the manufacturing, communications, chemical and retail sectors. Moreover the transport sector also accounted for a relatively high number of buy-outs. However it should also be taken into account that the high shares of certain sectors were often attributable to a limited number of mega-deals, as witnessed by the fact that the 77 buy-out deals in the manufacturing sector in 2007 involved a larger investment volume than the 94 deals in 2009. These figures show that the crisis did not necessarily affect the number of acquisitions in certain sectors, but that it did have an appreciable influence on the size of the deals. In addition we also see that pre-crisis investment volumes differed greatly from sector to sector. Whereas the communications sector was characterised by above-average large buy-out deals prior to the crisis (13 acquisitions with a total investment volume exceeding €1.7 billion in 2007), the 22 buy-outs in the industrial services sector in that year accounted for only €500 million. Generally speaking, the economic and financial crisis led to a collapse of investment volumes in nearly all sectors, with the communications sector (-93% between 2007 and 2009), retail (-88%) and manufacturing (-80%) being particularly hard hit. The only sectors showing an increase in 2009 were life sciences and consumer electronics, with both the investment volume and the number of acquisitions growing. The slight recovery of the PE market saw investment levels in most sectors increasing until 2011, though levels remained well below those achieved prior to the crisis. Moreover the recovery was characterised by a predominance of small and medium- sized buy-outs.

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Figure 14: Investment volumes and number of acquired companies in buyout deals by sector (2007- 2011)

3 Agriculture 2

77 Business & industrial products 94 91 22 Business & industrial services 33 30 12 Chemicals & materials 7 17 13 Communications 11 23 11 number of deals Computer & consumer electronics 27 27 11 Construction 6 14 43 Consumer goods & retail 50 61 14 Consumer services 21 12 5 Energy & environment 8 17 12 Financial services 7 4 10 Life sciences 13 17

Real estate 1 1 13 Transportation 7 8 3 Unknown 10 2 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 in 1,000 € 2007 2009 2011 Source: EVCA PEREP Analytics

EXITS One main feature of the business model of PE investors involves selling an acquired company after a certain period of time, wherever possible at a price higher than originally paid. There are various ways available for making such "exits". One of the most attractive – and profitable – exit strategies is to float the company via an initial public offering (IPO). Another strategy involves selling the company to other investors, for instance to another company or industrial investor (trade sale), to the company's management (MBO or MBI) or to another financial investor (secondary sale). Finally, there are undesired exits caused by insolvency and the complete write-down of an investment in a company, thus leading to the complete loss of the funds invested by the PE firm.

Over the last few years, the most frequent exit form has been to sell the company to an industrial investor, in most cases another company (see Figure 15). In the boom year of 2007, this divestment form accounted for some 36% of all exits. Other exits consisted of IPOs and secondary sales. By contrast, the insolvency rate was very low (2.8%).

The situation changed however with the onset of the crisis. Within just two years, the percentage of failed PE investments soared to some 43%, and in 2009 nearly one in two of PE exits involved write- downs on the amounts invested. Looking at the total volume of these write-downs, the figure even increased slightly in 2011.

Sales to industrial investors and other PE firms and in particular the number of IPOs declined greatly in this period, with successful IPOs accounting for a mere 1.4% of exits in 2009. The difficulties expe- 44

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

rienced on the international financial markets thus had a direct effect on the business of PE investors. Also of note is the fact that the share of sales to company management increased during the crisis.

Figure 15: Exits from PE investments (2007-2011)

Divestment by other means

Sale to management

Sale to financial institution

Sale to another private equity house

Repayment of principal loans

Repayment of silent partnerships

Divestment by write-off

Divestment by public offering

Divestment by trade sale

0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 in 1,000 €

2007 2009 2011 Source: EVCA PEREP Analytics

FUNDRAISING A development on the German PE market comparable with the actual investment is that of fundraising, i.e. organising the financial resources needed for the investment. Along with loans, these monies constitute the financial basis for PE investments. With regard to the volume of such third-party financial resources, the statistics provide an indication of the financial strength of the PE funds and thus of their ability to operate on the M&A market. The statistics embrace all German funds registered with the BVK as well as the capital managed by international PE firms in Germany.

As with the investment amounts, fundraising also experienced an initial boom in 2000 and 2001, with some €5 billion (2000) and €4 billion (2001) being raised by PE funds active in Germany. Following a drop in 2002 and 2003, funds raised again increased up to 2007, a year in which PE firms in Germany were able to raise more than €5.5 billion from private and institutional lenders.

Looking at the development of the funds raised after 2007, we can clearly see that economic downturns or recovery always have an early and greater effect on fundraising and that changes in investment levels occur at a somewhat later date. This is borne out by the fact that, while investment levels still showed slight growth in 2008, the funds raised had already plummeted. By contrast, 2011 saw a major increase in funds raised, though without any concomitant increase in investment levels. At this juncture, it should be noted that an increase in funds raised is not necessarily associated with 45

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

an increase in PE investment activities. Similarly nothing is said about the countries in which the funds are invested.

Generally speaking, the larger (Anglo-American) PE funds took in a lot more money in the years before the crisis than they invested. This resulted in the PE firms achieving high liquidity levels, providing them with so-called "dry powder", i.e. financial resources not immediately reinvested. These resources were available to the funds during the crisis.

The last few years have therefore by no means been characterised by a lack of capital, but much more by a lack of attractive buy-out targets and by a lack of opportunities to further leverage capital through bank loans. 2012 saw the PE sector again experiencing a fundraising downturn, indicating that the effects of the economic and financial crisis still prevail and representing a continuing challenge for the German PE market.

Figure 16: Funds raised by PE investors in Germany (1990-2012)

6,000,000

5,000,000

4,000,000

3,000,000 in 1,000 in €

2,000,000

1,000,000

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: BVK statistics until 2006, PEREP Analytics from 2007 onwards

3.2.2. OVERALL CONDITIONS FOR PE INVESTMENTS IN GERMANY Alongside the availability of attractive buy-out targets and the overall economic situation, country- specific conditions have a major influence on the behaviour and growth of the PE sector in the different national markets. 37 These conditions include financial market regulatory aspects and tax laws, as well as such entrepreneurial issues as country-specific labour legislation.

37 Wilke, P. et al.: The impact of investment funds on restructuring practices and employment level , European Foundation for the Improvement of the Living and Working (Eurofound), Dublin 2010. 46

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

FINANCIAL MARKET REGULATION AND THE FISCAL TREATMENT OF PRIVATE EQUITY FUNDS Various steps to deregulate the financial market have been taken in Germany since the 1990's in an attempt to better align the German financial market with the regulatory structures of other states, with a particular focus on the USA and Great Britain. The focus here is on the four so-called "Financial Market Promotion Acts" ( Finanzmarktförderungsgesetze ) adopted between 1990 and 2001 in an effort to make Germany more attractive as a financial centre, while at the same time improving investor protection. The intention behind this legislation was to promote PE activities in Germany, with the objective of making greater use of the financial markets for corporate funding (alongside traditional bank loans). The various Financial Market Promotion Acts led to the abolishment of stock exchange tax, opened up the futures market to investment companies, expanded investment opportunities for funds, provided for the introduction of derivatives trading in real estate and for the tax exemption of capital gains, and eased investment restrictions for funds.

Further relevant deregulation steps included (i) the Transformation Act ( Umwandlungsgesetz ) introduced in 1994, which opened up the possibility of transferring debt to a company that had been taken over; (ii) the Investment Modernisation Act ( Investitionsmodernisierungsgesetz ) allowing hedge funds to be set up in Germany as of 1 January 2004; and (iii) the 2007 Venture Capital Act ( Wag- niskapitalbeteiligungsgesetz ) which established further tax breaks for PE funds in Germany.

The onset of the economic and financial crisis saw an at least partial political volte-face , with a re- regulation of financial markets as the order of the day. Of major importance in this respect are the attempts to regulate investment funds on a European level, as seen by the Alternative Investment Fund Managers (AIFM) Directive adopted in 2010 to better regulate the managers of alternative investment funds. In the future, PE funds will need a licence from the German Federal Financial Super- visory Authority (BaFin). To gain this, they will need to be able to prove that portfolio and risk management are handled separately. Moreover, all PE firms will need a depositary, the primary function of which is to separate asset safe-keeping and management functions. This should avoid conflicts of interest and better protect investors. In concrete terms, this means for instance that the depositary controls the valuation of a PE fund's assets. In addition, PE firms are subject to minimum capital requirements, and fund manager performance-related payments are to be made in the form of shares in the fund which they are obliged to retain for a certain period. Last but not least, the new AIFM Directive introduces new transparency requirements for PE funds, with investors and supervisory authorities needing to be informed of fund transactions. When the value of a transaction exceeds a certain threshold, the target company's directors and works council must be informed of the buy-in.

In the opinion of sector experts, the introduction of the AIFM Directive in Germany could entail major additional costs for most PE firms, in the future requirements will necessitate new reporting and management structures and more specialist staff. These extra costs will be a major problem, especially for smaller funds. 38

38 http://www.pwc.de/de/finanzinvestoren/private-equity-branche-steht-vor-umbruch.jhtml 47

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

The AIFM Directive is to be transposed into national legislation by mid-2013. Germany is planning to merge the new statutory requirements with existing investment legislation in the context of a recast Capital Investment Code ( Kapitalanlagegesetzbuch ).

The European Private Equity and Venture Capital Association (EVCA) carried out a series of bench- mark studies between 2003 and 2008 looking at the legal and tax frameworks for PE in various Euro- pean states. These include for instance the legal frameworks allowing pension funds and insurance companies to invest in PE, fiscal incentives for PE investments, legal requirements for a fund's structure or incentive schemes for research and development (R&D). For each individual criterion, a value between 1 (best) and 3 (worst) was awarded. Of the 27 countries analysed, Germany was ranked 22nd in 2008. This indicates that market conditions for PE investors in Germany are relatively difficult. The best conditions for PE in 2008 were offered by France, followed by Ireland, Belgium and Great Britain. One of the main points criticised by the sector is the high tax burden for funds in Ger- many compared to other countries.

Figure 17: Private equity: Tax and legal frameworks

0.5

1 1.2 1.23 1.26 1.27

1.5

1.84 1.85 1.97 2.03 2 2.15 2.18

2.37 2.41

2.5

3 2003 2004 2006 2008 Germany EU average country with the most favorable conditions Source: EVCA Benchmarking Studies 2003-2008 (the lower the index value, the more favourable the tax and legal frameworks are assessed).

LABOUR LEGISLATION Applicable labour legislation can influence the behaviour of PE investors. Germany is regarded as a country with strong workers' rights and influential employee representation structures. Compared with other OECD countries, employment protection is above average, as is the case with regard to

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

legal provisions on redundancies. 39,40 Moreover, workers in Germany have comparatively strong information, consultation and co-determination rights.

These aspects have in the past led to Germany being considered as a relatively difficult market for PE investments. This was mainly associated with the assessment that restructuring measures and possible collective redundancies were more difficult to push through than in countries according less protection to workers and with less co-determination.

However in practice PE firm assessments are a lot more differentiated, as is their behaviour. The case study presented in the attachment to this report of the KKR investment in the KION Group shows for instance that a PE investor can view German co-determination structures as a positive asset, supporting the work of PE management. In the case at hand, the basis for the cooperation between the investor and the employee representatives lay in at least partially overlapping interests. During the 2008/2009 crisis KION had to react very flexibly to changes in the market to prevent a major downturn which would have led to redundancies. During this process management and employee representatives came together and reached agreements on strategies and instruments for counteracting the development.

Obviously the relationship between investors and employee representatives is very much dependent on individual circumstances and there are of course many examples of the two sides opposing each other. Generally speaking, the German co-determination structures can be advantageous for funds, as a spirit of cooperation with employee representatives can help speed up the implementation of restructuring measures but taking into account the interests of employees.

3.2.3. THE INFLUENCE OF PE ON COMPANIES AND THEIR EMPLOYEES - RESEARCH FINDINGS There is a plethora of literature looking into the development and work of the PE sector, though there are major qualitative differences with regard to the data used and to the regions studied. The large majority of existing studies focuses on Anglo-American countries. 41 By contrast, publications dealing with continental Europe are much more seldom.

In fact the number of studies dealing solely with the situation in Germany and using reliable data is very limited. Generally speaking we can distinguish between two methodological approaches in the existing literature. On the one hand, long-term econometric studies – based on comprehensive quantitative data – generally attempt to use various economic indicators to compare developments in portfolio companies with other companies not in the hands of a PE investor. On the other hand we have analyses based for the most part on case studies. These look in detail at specific developments in individual companies. Though such case studies are undoubtedly valuable, their findings can only be generalised to a limited extent.

39 http://www.oecd.org/employment/emp/oecdindicatorsofemploymentprotection.htm 40 This applies at least to regularly employed workers in companies with more than 10 employees. Protection of agency workers is for instance much lower (around the European average). 41 Wright, Mike et al.: The impact of private equity and buyouts on employment, remuneration and other HRM practices , Nottingham 2009. 49

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

ECONOMETRIC STUDIES

Up to now there have been very few quantitative studies dealing with the consequences of PE investments on companies and their employees in Germany. In fact there are still just two such studies looking specifically at the German situation. 42

The first has the title "Economic Impact of Private Equity in Germany" (2004) and was compiled by the Deutschen Beteiligungs AG in cooperation with the Finance magazine . This study compared the growth and employment development of portfolio companies with companies not funded by PE. It analysed 45 buy-outs that had taken place between 1997 and 1999, comparing them with similar companies. According to the study, the portfolio companies studied developed nearly twice as fast as the other companies over the same period. While the turnover of the portfolio companies increased on average by 7.4% a year, it only rose by 3.9% in the other companies. As regards employment, headcount in the portfolio companies grew on average by 4.5% a year, while the comparable figure for the other companies was just 2.2%.

The second study looking at the consequences of PE investments on companies and their employees in Germany bears the title "Der Einfluss von Private Equity Gesellschaften auf die Portfoliounterneh- men und die deutsche Wirtschaft" ( The influence of private equity firms on the portfolio companies and the German economy ) (2005) and was conducted by the BVK in conjunction with PwC. The study is based on a survey of 198 PE firms and 128 companies financed by them. Taking into account similar surveys that had already been conducted in 1998 and 2001, this study revealed an average 4.4% growth in employment in buy-out companies over the period 2000 to 2004.

This figure does not however take into account the headcount development in so-called turnaround transactions, i.e. PE investments in companies in major financial difficulties. Looking specifically at these situations, we see that headcount declined 28% over the same period.

The study underlines the fact that, in particular in companies in financial difficulties, the growth in business after a PE investor had come on board was above average, with such companies showing average EBIT growth of 56.7% between 2000 and 2004.43 Against this background, the study comes to the conclusion that at the end of the day it is better to 'sacrifice' a certain proportion of headcount during restructuring rather than to risk insolvency and the subsequent loss of all jobs. Notwithstand- ing the basic methodological limitations of such studies, we should take note that both studies were conducted by the PE sector itself.

CASE STUDIES Findings on the effects of PE investments are provided by a number of case studies related to specific companies. These clearly illustrate the behaviour and influence of PE investors on companies and their employees. However the findings of these case studies are difficult to generalise and there are examples both of cases where PE has had a negative effect on the company and its employees, and of cases with the opposite effect.

42 Cf. Lutz, E./Achleitner, A-K.: Angels or Demons? Evidence on the Impact of Private Equity Firms on Employ- ment, Zeitschrift für Betriebswirtschaft (ZfB), Sonderheft Entrepreneurial Finance, No. 5, pp. 53-81, 2009. 43 EBIT = Earnings before Interest and Taxes 50

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Given the political controversy over PE in Germany, it comes as no surprise that there are quite a lot of case studies looking at different PE cases. Some of these go into great detail and are based on reliable data and understandable arguments, while others tend to be more illustrative and journalistic. From an academic perspective, the German Hans Böckler Foundation has commissioned a series of case studies looking at the course of PE investments in various companies and sectors. 44 In addition, a number of political institutions, research institutes and management consultancy agencies have conducted research into the effects of PE investments. 45

Last but not least, the PE sector itself has published a series of case studies on the basis of its experience in German companies, highlighting the positive influence of PE on portfolio companies. 46 Fur- ther case studies have been produced by research institutes and consultancy agencies with close links to the PE sector or which have been commissioned by the latter. 47 The following table provides an overview of well-known case studies dealing with the effects of PE investments on companies and their employees. The majority of the short and journalistic reports provided by the PE industry (BVK case study database) tend to focus more on the economic development of portfolio companies. For this reason, we have not included them in the overview. 48

44 Kamp, L./Krieger, A.: Die Aktivitäten von Finanzinvestoren in Deutschland, Arbeitspapier 103, Hans Böckler Foundation, Düsseldorf 2005. Böttger, C.: Strukturen und Strategien von Finanzinvestoren , Arbeitspapier 120, Hans Böckler Foundation, Düsseldorf 2006. Faber, O.: Finanzinvestoren in Deutschland – Portraits und Investitionsbeispiele , Arbeitspapier 123, Hans Böckler Foundation, Düsseldorf 2006. Blome-Drees, J./Rang, R.: Private Equity-Investitionen in deutsche Unternehmen und ihre Wirkungen auf die Mitarbeiter - Eine konzeptionelle und empirische Analyse , Hans Böckler Foundation, Düsseldorf 2006. 45 Socialist Group in the European Parliament: Hedge Funds and Private Equity – A critical analysis , Brussels 2007. Schewe, G./Ortwein, G./Leo, A.: Der Einfluss von Private Equity-Gesellschaften auf die Corporate Gover- nance – Der Fall Hugo Boss AG , Arbeitspapiere Westfälische Wilhelms-Universität Münster, No. 56/2008, Münster 2008. Schewe, G./Grundmann, F./Ortwein, G./Helmes, S.: Der Einfluss von Private Equity-Gesellschaften auf die Corporate Governance – Der Fall Grohe AG , Arbeitspapiere Westfälische Wilhelms-Universität Münster, No. 57/2009, Münster 2009. Wilke, P. et al.: The impacts of private equity investors, hedge funds and sovereign wealth funds on industrial restructuring in Europe as illustrated by case studies , European Commission: Employment, Social Affairs and Equal Opportunities, Brussels 2009. Wilke, P. et al.: The impact of investment funds on restructuring practices and employment levels , European Foundation for the Improvement of the Living and Working (Eurofound), Dublin 2010. 46 Private Equity – Wir investieren in Deutschland: database containing over 80 short case studies, http://www.wir-investieren.de/was-ist-private-equity/casestudies-beispielfalle/. 47 Kaserer, C. et al.: Erwerb und Übernahme von Firmen durch Finanzinvestoren , Expert Report for the German Federal Ministry of Finance, Center for Entrepreneurial and Financial Studies in collaboration with the Euro- pean Business School and the law firm White & Case, Munich 2007. Schulz, W./ Kaserer, C./ Trappel, J. (Eds.): Finanzinvestoren im Medienbereich – Gutachten im Auftrag der Direktorenkonferenz der Landesmedienanstalten , Hans-Bredow Institut der Universität Hamburg in cooperation with the Center for Entrepreneurial and Financial Studies TU München and the Institut für Publi- zistikwissenschaft und Medienforschung der Universität Zürich, Hamburg 2008. 48 One example is the list of short case studies found on the Internet page "Private Equity – Wir investieren in Deutschland". Further case studies regularly appear in the magazine Unternehmeredition . 51

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Table 6: Overview on selected German company case studies Authors/ Source Company case studies Kamp, Lothar / Krieger, Alexandra: "Die Aktivit ä- A.T.U., Wincor Nixdorf, Celanese, Symrise, Vite r- ten von Finanzinvestoren in Deutschland – Hin- ra, MTU Air Engines, Grohe, Sirona, Bundesdru- tergründe und Orientierungen" (The activities of ckerei, IWKA financial investors in Germany - Background information and trends), Hans Böckler Foundati- on, Düsseldorf, 2005. Blome -Drees, Johannes / Rang, Reiner: "Private Edscha, Springer Science+Business Media, Equity-Investitionen in deutsche Unternehmen Hamburger Morgenpost und ihre Wirkungen auf die Mitarbeiter – Eine konzeptionelle und empirische Analyse" (Private equity investments in German companies and their effects on employees - A conceptual and empirical analysis), Hans Böckler Foundation, Düsseldorf, 2006. Böttger, Christian: "Strukturen und Strategien Tenovis, Wincor Nixdorf, Grohe, Bundesdruckerei von Finanzinvestoren" (Financial investors: structures and strategies), Arbeitspapier 120, Hans Böckler Foundation, Düsseldorf, 2006. Faber, Oliver: "Finanzin vestoren in Deutschland Premiere, Kabel Deutschland, Beru – Portraits und Investitionsbeispiele" (Financial investors in Germany - portraits and investment examples), Arbeitspapier 123, Hans Böckler Foundation, Düsseldorf, 2006. Kaserer, Christoph et al .: "Private Equity in Grohe, Celanese, Sulo, Premiere, Gagfah Deutschland – Rahmenbedingungen, ökonomi- sche Bedeutung und Handlungsempfehlungen" (Private equity in Germany, economic importance and recommendations for action), Books on Demand, Norderstedt, 2007 van den Burg, Ieke / Rasmussen, Poul Nyrup: Autoteile Unger, Grohe, Linde, Märklin, Mobi l- “Hedge Funds and Private Equity – A critical com Analysis”, PSE – Socialist Group in the European Parliament, Brussels, 2007. World Economic Forum (2008): “Globalization of Messer Griesheim Alternative Investments: Working Papers Vol- ume 1 – The Global Economic Impact of Private Equity Report 2008”, Geneva, 2008. Schulz, Wolfgang / Kaserer, Christoph / Trappel, Premiere, Kabel Deutschland, ProSiebenSat1 Josef (Eds.): "Finanzinvestoren im Medienbe- reich – Gutachten im Auftrag der Direktorenkon- ferenz der Landesmedienanstalten" (Financial

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

investors in the media sector), Hans -Bredow - Institut für Medienforschung an der Universität Hamburg, Hamburg, 2008. Wilke, Peter et al.: “The impact of investment ProSiebenSat1 funds on restructuring practices and employment levels“, European Foundation for the Im- provement of Living and Working Conditions (Eurofound), Dublin, 2010. Haves, Jakob / Meixner, Marie / Reich, Emma n- KION, Iglo uel / Wilke, Peter: ‘Private Equity and Labour in Europe: Did the crisis changed the perception and role of Private Equity’, Hans-Böckler- Foundation, Düsseldorf, 2013 (forthcoming).

Analysing the case studies of (former) German portfolio companies as to which issues were looked at and what conclusions were drawn, we find quite a strong focus on how individual companies have developed after having been taken over by a PE investor. In addition, there is nearly always a description of the restructuring measures carried out and an analysis of how employment has developed. There is however a dearth of analyses on the effects of PE on working conditions and industrial relations. This obviously has a lot to do with the fact that such effects cannot be assessed through analysing quantitative data (economic indicators, headcount, etc.) and that they are difficult to prove from a methodological perspective.

BUSINESS DEVELOPMENT OF COMPANIES Most case studies report that the business development of the companies has been positive in the medium term, whereby positive business development is not always synonymous with positive effects for employees. One good example of this is the case of Grohe , a leading manufacturer of bath- room fittings. The company was acquired in 1999 by BC Partners, only to be sold five years later in the context of a "secondary buyout" to a consortium led by the Texas Pacific Group. While in the hands of the PE funds, Grohe was subjected to comprehensive restructuring, resulting in massive redundancies and plant closures in 2005. Nevertheless the company recovered in the wake of the restructuring, showing a major improvement in profitability. This development was accompanied by continuing redundancies. Though employment levels have picked up again since 2010, they are still below the 2005 level at the time of the buy-out.

A similar development can be seen in the case of Premiere . Previously belonging to the German media group, Kirch, the company was seen as a restructuring candidate at the time it was taken over by the PE investor Permira. Its financial situation and profitability were worrying at that time. Though the business situation of the company improved greatly under Permira management, this went hand in hand with redundancies.

The buy-out of Iglo , a frozen food company, led to restructuring measures costing 500 jobs, most of which resulted from the closure of a plant in Great Britain. At the same time, the company developed positively under Permira, with turnover and profits rising even during the crisis. 53

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Nevertheless there are also examples where a buy-out has not just led to a positive business development, but where employment has also greatly increased. One example is Wincor Nixdorf, where the number of employees increased by 3,200 (1,000 in Germany) during the five years of KKR and Goldman Sachs involvement. At the same time, the company's level of indebtedness was greatly reduced.

There are however examples of business downturns, as was the case at Sirona and the Bundesdruck- erei . Both companies ended up being in a worse economic situation than before the respective buyout. A similar fate applied to Tenovis and Kabel Deutschland.

Märklin , the manufacturer of model railways, is a further example of an unsuccessful attempt by a PE investor to restore profitability. Märklin was already in bad financial shape before being taken over by the British investor Kingsbridge in 2006. Restructuring did not help improve the financial situation and the company had to file for bankruptcy.

Turning to the forklift manufacturer, KION , a comprehensive restructuring programme initially led to a positive business development. However the outbreak of the economic and financial crisis and a sharp downturn in orders saw the company suffering increasing difficulties, with loan agreements with the banks having to be renegotiated and the investor (KKR) having to inject further liquidity. In the meantime, business has picked up again and the financial situation has improved, mainly through the engagement of a Chinese investor.

EFFECTS ON THE FINANCIAL STRUCTURE OF THE PORTFOLIO COMPANIES In the cases looked at, the majority of portfolio companies reveal the financial structures of a leveraged buy-out typical of PE takeovers. When acquiring a company, PE firms generally use as high a proportion of loans as possible, thereby enjoying the advantages associated with PE.49 The loans taken out by the PE investor are then transferred to the portfolio company, which in turn becomes liable for the payment of interest on the loans and loan repayment. This basically means that the acquired company more or less pays for its own acquisition. In most of the cases looked at, the high levels of debt incurred in the portfolio companies constitute a long-term business liability, as has been seen at A.T.U. , Wincor Nixdorf , Viterra , MTU Air Engines , Grohe , Sirona , Bundesdruckerei , Tenovis, Kabel Deutschland, Edscha and ProSiebenSat1 .

EFFECTS ON EMPLOYMENT Many of the case studies look explicitly at the effects PE investments have had on the development of employment in the portfolio companies. An analysis of a wide range of portfolio companies does not however reveal any general trend. Effects range from moderate to heavy job losses (as in the cases of Grohe , Tenovis or Märklin) , to major increases in employment (as at Wincor Nixdorf or Siro- na ).

49 An easy-to-understand description of the leverage model can be found in Kreiß, C.: Auswirkungen von Pri- vate Equity auf Investoren, übernommene Unternehmen und die Volkswirtschaft , in: WiSt Wirtschaftswis- senschaftliches Studium Heft 2, C.H.Beck und Vahlen, München und Frankfurt/M., 2010, p. 91-95. 54

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Moreover, the analysis of employment effects is subject to easily explainable methodological difficulties. First of all there is the problem of counterfactual evidence, i.e. the question of what would have happened to the company and its employees without the involvement of a financial investor. This question is of particular importance for "turnaround investments", as the companies in question were already in financial difficulties before being acquired by the investor and would therefore probably have had to lay off employees anyhow. This can for instance be assumed in the cases of Märklin and Premiere .

Secondly, a longer period often needs to be used to analyse the absolute employment effects. This was not possible in the case studies listed here. International studies show that, though PE investments often lead to initial short-term reductions in employment on account of the restructuring measures implemented, reductions are frequently reversed within four or five years of the buy-out through higher growth. 50 Such growth in employment is generally attributable to the improved business development of the company in question.

The statistical development says nothing about the type of new jobs. Similarly, as seen in a long-term observation of headcount at Grohe , there are also cases where the job losses are never totally reversed.

A third methodological problem is whether the reduction in employment levels constitutes actual job losses or whether jobs are just relocated. PE investments are generally accompanied by restructuring measures in the companies in question, and it is common practice for parts of the company to be outsourced or sold off. In such cases, the jobs affected are often not actually lost, but instead merely transferred to another company. The same is true when headcount increases through the acquisition of new companies.

One example of a positive employment development under a PE investor is Wincor Nixdorf where, in the course of the investment process, some 3,200 new jobs were created. By contrast, in the case of Tenovis – under the same investor (Kohlberg Kravis Roberts/KKR) – five production plants were sold in the first two years with the loss of 2,400 jobs. Further restructuring steps cost a further 600 jobs, even though the case study shows that this had no positive effect on either turnover or profits. The restructuring measures at Grohe similarly cost some 1,000 jobs. The Hamburger Morgenpost case study shows similar job losses. This was also the case at Märklin , where some 400 jobs were lost as a result of the insolvency.

In the case of Messer Griesheim , the manufacturer of industrial gases and cutting systems, the company was already in the middle of restructuring when it was acquired by Allianz Capital Partners and Goldman Sachs in 2001. Restructuring continued under the new owners, leading - according to the case study - to a headcount reduction of 3,056 employees, whereby some 80% of these losses were attributable to the sale of company divisions. The Messer Griesheim case is an example of the methodological problems mentioned above of assessing employment developments when parts of a company are sold off.

50 Wright, M. / Amess, K.: The wage and employment effects of leveraged buyouts in the UK , International Journal of the Economics of Business, Vol. 14, No. 2, 2007. 55

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

EFFECTS ON RESTRUCTURING MEASURES Why are the findings so different? In the wake of a takeover by a PE firm, more or less comprehensive restructuring measures are generally implemented. These measures can differ greatly, and are greatly dependent both on the specific situation of a company at the time of its acquisition and on the basic investment strategy followed by the PE investor.

One often seen practice is the so-called "buy and build" strategy, under which further companies are acquired to expand or develop existing lines of business. This was for instance the case at ProSie- benSat1 , Wincor Nixdorf , Celanese , Sulo GmbH , Gagfah, Märklin and Hamburger Morgenpost. Busi- ness expansion measures such as building new assembly plants (at Wincor Nixdorf ) or increasing the number of outlets (at A.T.U. ), are also commonly practiced restructuring measures. The aim of such measures is generally to leverage synergy effects and gain market shares/market leadership, thereby enhancing a company's value. Taking KION as an example, the investors tried to gain market shares through acquisitions, holdings and joint ventures, to achieve worldwide market leadership.

A further point often mentioned in the case studies is the international expansion of portfolio companies, as was the case at A.T.U . Modernisation measures may also be applied, including process optimisation, upgrading research and development activities and extending the product range, as was the case at Grohe . At Premiere changes in employee incentive systems were introduced.

Indications of cost-saving measures being introduced in the portfolio companies are to be found at Wincor Nixdorf , Grohe, Hamburger Morgenpost, Märklin and ProSiebenSat1 In the case of Symrise , this took the form of an increase in working hours and a pay freeze. Outsourcing or direct staff cuts were to be seen at Grohe, Hamburger Morgenpost and Märklin .

"Secondary buyouts" – i.e. the sale to a further investor – often turn out to be major challenges for portfolio companies. In many cases restructuring measures aimed at improving profitability have already been carried out by the initial investor, thereby limiting the opportunities available to the second investor for further efficiency gains. In addition, the financial situation of a company can further deteriorate through a second debt-financed buy-out. 51

EFFECTS ON WORKING CONDITIONS AND INDUSTRIAL RELATIONS Data on the influence of PE investors on working conditions in the companies in question are few and far between in the case studies looked at. In most cases, reference is only made to cost-cutting measures, in particular in relation to personnel costs.

Similarly, the effects on industrial relations and the general working climate in the portfolio companies are seldom dealt with in the case studies. This problem is obviously related to the already mentioned methodological problems of measuring such influence. Nevertheless, certain statements in this field are to be found in the case studies.

In the case of Grohe , the PE investors were seen to have worked well (at least until 2003) with the works council and the metalworkers' trade union, IG Metall. After the secondary buyout in 2004

51 Blome-Drees, J. / Rang, R.: Private Equity-Investitionen in deutsche Unternehmen und ihre Wirkungen auf die Mitarbeiter – Eine konzeptionelle und empirische Analyse , Hans Böckler Foundation, Düsseldorf, 2006. 56

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

however, negotiations were started with the works council on collective redundancies and plant closures.

The sale of the traditional brand Märklin to a PE investor was supported by the respective trade union, as well as the works council and employees, as otherwise there was a risk of immediate insolvency. In the context of the headcount reduction, employment and training companies were set up and special restructuring agreements concluded for individual locations. Nevertheless, the Märklin works council was still critical of the extent and form of the job cuts, with in its opinion the individual locations being pitted against each other. On account of the growing mismanagement on the part of the investor, the works council again called on management in 2008 to put forward a realistic strategic plan for the future. This was not forthcoming and the company went bankrupt in 2009.

Employee representatives at Messer Griesheim were aware of the bad financial situation of the company when negotiations with the investor began in 2001. The study reveals that it was mainly the employee representatives on the supervisory board who, on account of their wealth of experience, were actively involved in the negotiations over job cuts. The long and intensive discussions ended with an agreement on the necessity of the planned restructuring measures.

At KION as well, a spirit of cooperation existed between the financial investors and the employee representatives. This included the active involvement of the works council in the selection of a suitable investor and a regular exchange of views between the two sides during the 2009/2010 crisis.

These findings from well-known case studies illustrate the different developments associated with a PE buyout for a company and its employees. One common feature of most of the case studies is that they concentrate on the period of time immediately before and immediately after the buy-out. Long- term analyses looking at the effects of a PE investment over several years or over the total investment period (or possibly even longer) are few and far between.

3.2.4. THE INFLUENCE OF CHANGED ECONOMIC CIRCUMSTANCES ON THE BEHAVIOUR AND IM- PORTANCE OF PE IN GERMANY DURING THE CRISIS The economic and financial crisis has had a major and lasting effect on the market conditions for PE investors in Germany. The uncertain macroeconomic situation experienced over the last few years has made PE investments more difficult. Private and institutional investors exercise greater caution in the selection of their investments and the readiness of banks to provide loans for very large and highly leveraged company takeovers has decreased. In the years before the crisis, most of the larger funds took in a lot more money than they actually invested. Against this background, many funds had enough capital of their own to finance larger buy-outs. However the share of bank loans in the context of financial leverage is an important factor for achieving the desired return on investment – a return that is difficult to be achieved solely through use of own capital. In addition there were much fewer attractive large buy-out targets available on the market on account of the economic uncertainty. This resulted in an appreciable decline of large and very large company buy-outs in Germany, with the focus shifting towards smaller and medium-sized ones. Moreover, the sectors targeted by PE investors have changed. Last but not least, many funds have been increasingly investing in minority

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

holdings. 52 The advantage here is that one can invest in large companies without so much risk, as the amount of capital involved is relatively small. 53 As the funds were under pressure to invest the money they had taken in before the crisis, company shares were also purchased on the stock markets, at least as long as these shares were relatively low-priced on account of the weak markets.

Alongside the problem of new investments, further difficulty was experienced in divesting/existing investments during the crisis. Due to the overall economic uncertainty and falling corporate valuations, the sale of investments was, at least for a time, very difficult. Such a situation can be a problem for a PE firm, as the individual funds of the investment firms generally have an agreed maturity, after which investors are repaid their money with a set rate of return. To finance these repayments, funds are forced to sell portfolio companies. An exit via the stock markets would in most cases not have delivered the expected rates of return. Against this background, it became common practice to sell to strategic investors or to give the management of the company in question the opportunity to buy out the holding. Total exits dropped sharply during the crisis and a large number of PE investors were forced to retain their portfolio companies longer than originally planned.

The crisis affected the PE sector not just from a financial perspective, with the global economic downturn also hitting many companies in the hands of PE investors. This was a problem in particular for companies taken over by PE investors in the boom years at high prices and with high leverage, as they still had to service their credit obligations even though company results were weak. In addition, the equity levels of many of these companies were comparatively low. Sectors subject to cyclical developments such as the German automotive industry or engineering were hit especially hard, with the result that a number of these companies saw themselves faced with serious financial difficulties or even had to file for bankruptcy.

Against the background of these changed market structures, the question arises as to what consequences these are having on the investment behaviour, role and importance of PE in Germany. When analysing market developments, two general findings are that the crisis is still casting a shadow over the PE sector, and that the long-term effects of the crisis are as yet unforeseeable. Furthermore, some general trends became visible during the crisis which may influence the future development of PE and its impact on labour in Germany.

In the recent crisis many PE funds have concentrated their business much more on their existing investments and focus especially on restructuring activities in these companies. This trend is backed up by a survey of 170 PE investors active in Germany, in which 90% of the participants stated that the greatest change in their business models over the coming years would be a stronger focus on a more active portfolio management instead of solely “financial engineering”.54 According to this survey the main reason for this change to the PE business model was the lack of available leverage capital. 55 This increased focus on real structural changes in the portfolio companies may increase the restructuring activities and also affecting labour outcomes. If such a development will lead to negative consequences for the employees will very much depend on the actual case. However, a shift away from a

52 PwC: Private Equity Trend Report 2012. Learning to live with the new reality , 2012. 53 Meyer, T.: Private Equity. Zu früh für einen Nachruf , Deutsche Bank Research, Frankfurt 2009, p. 12. 54 PwC 2012. 55 Ibid. 58

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

PE business model which purely is based on a speculative use of leverage capital and “financial engineering” is generally to be welcomed.

One indication of the changing PE market in Germany is the fact that the number of active PE firms has been decreasing since 2010. 56 It would seem that a number of PE funds have stopped operating on account of the difficult market environment. Against this background it can be expected that the German PE market is experiencing a kind of market consolidation with a smaller number of large funds such as KKR, Blackstone or CVC on the one side, and a large number of smaller but more specialized funds on the other.

As in other European countries the number of secondary buyouts has also increased in Germany during the crisis. As described, the main reasons for this increase have been the difficult market conditions causing limited possibilities to end investment by other exit strategies and the fact that many funds were looking for new targets to invest their so called dry-powder, i.e. raised funds which has to be invested before the end of the determined investment period. Several examples in Germany have shown that secondary buy-outs may cause specific problems for the portfolio companies and their employees. For the second investors it might be more difficult to increase the value of the portfolio company as the first investor already has carried out restructuring measures. In such as situation further “value-adding measures” can affect the very substance of the company resulting in higher debts and uncertain perspectives for the company and its employees.

Apart from the risk of increasing debts due to secondary buyouts many companies still have to cope with debt burdens resulting from an exaggerated use of leverage capital in the boom years before the crisis. These debts have to be repaid in the years to come which might cause problems for some companies. Even now there are examples of companies which tried to reschedule their debts, with payment periods for debts due being extended. However, such practices just postpone the financial risk of high debts into the future. It is difficult to forecast how portfolio companies will develop from a business perspective and what restructuring measures might become necessary. What we have however seen in the last few years are the effects a high level of debt and a low level of equity can have on a company. The availability of low-interest loans often led PE firms to acquire companies without adequately taking the risks involved into account. This was especially the case with regard to German automotive companies, 57 a sector known for its difficult market conditions caused by high competition levels and the accompanying pressure on margins. A series of company owners took advantage of the boom years to sell their companies to PE investors at high prices. The loans taken out by the investors to finance these acquisitions were for the most part then transferred to the companies. In combination with a much worsened market, these high levels of debt were behind an above-average number of insolvencies in the German automotive sector during the crisis.

As described above, the national framework conditions often have an influence on the development of a PE investment. The interviews we conducted with fund managers and employee representatives

56 According to BVK statistics, the number of private equity firms active in German and registered with the BVK has been declining continually since 2010. Cf. BVK: BVK Statistik – Das Jahr in Zahlen 2012 , Berlin 2013. 57 Scheuplein, C.: An die Wertschöpfungskette gelegt. Die finanzgetriebene Restrukturierung in der deutschen Automobilzulieferindustrie und ihr Scheitern , in: Prokla – Zeitschrift für kritische Sozialwissenschaften, Heft 166, Jg. 42, Nr. 1, p. 49-64. 59

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

in the course of this study lead us to assume that PE firms operating in Germany generally adapt their practices to the "rules' of the German Companies Code ( Betriebsverfassungsgesetz ) and the legal provisions regarding co-determination. As seen in the case of KION , a spirit of cooperation is even possible between an investor and the employee representation body in certain circumstances. Espe- cially when a company is in economic difficulties and when restructuring measures are on the agenda as in the recent economic crisis, co-determination can have an appreciable added value for the company concerned. Finally the impact of a PE investment on the relationship between management and employee representatives can be very different from case to case and general statements are difficult to make. However, in Germany in particular, the image of a fund as an investor can play an important role in the acquisition process. In the case of KION , the bad image of a PE fund as one of the bidders played a decisive role in not winning the tender. This can be seen as an indication that a positive public image can be advantage for a fund and that this fact maybe influence decisions of PE funds in the future.

Finally, it seems that the crisis has changed in somehow the way PE is viewed in Germany. Although debates about PE have been quite polarized in Germany, in recent years PE funds have increasingly been seen as “normal” market players and the debate about these investors became less emotional. There are now even examples (as was the case at KION ) of employee representatives pleading for their company to be taken over by a financial investor rather than an investor from within the industry. On the divestment of the Blohm&Voss shipyard by Thyssen in 2011, the employee representatives for instance spoke out in favour of being taken over by the PE investor Star Capital and against the competing shipyard Lürssen Werften. It would seem that employee representatives fear more adverse effects for the workforce when a strategic investor from within the industry takes over the company that when the takeover is by a PE investor. Finally, during the crisis some companies had problems to obtain traditional bank loans due to the restricted debt policy of many banks. In such a situation PE might be an alternative for corporate financing.

3.2.5. CONCLUSIONS AND OUTLOOK The analysis has shown how the economic and financial crisis has changed the German PE market, with regard to both the size and structure of investments, and in part to the strategy and behaviour patterns of the funds.

The German PE market is currently going through a difficult period, and there is no sign of any boom on the horizon. After the positive development seen in 2010 and 2011, investment volumes again declined in 2012. Though basically more positive, the outlook for 2013 remains overshadowed by the prevailing uncertainty 58 resulting from the overall weak macroeconomic development in Europe and the continuing difficulties on European financial markets.

Current developments on the US PE market do however show how quickly the PE market can recover. This is greatly dependent on the positive development of certain market factors, one of the main ones being the availability of credit. Generally speaking, we can assume that most of the current development trends on the German PE market are temporary (for instance the lack of "leverage capi-

58 BVK: Private Equity-Prognose 2013 - Erwartungen der deutschen Beteiligungsgesellschaften zur Marktent- wicklung , Berlin February 2013. 60

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

tal", the comparatively low levels of investments, weak investment levels in the industrial sector and the very limited exit opportunities via IPOs). One factor speaking in favour of increasing investor interest for PE is the current lack of adequate returns on other forms of investment (e.g. government loans). This makes PE an interesting investment form, in turn meaning that at least the larger funds should have no problem accessing fresh capital. 59

It can be stated that the economic and financial crisis has resulted in a partial change of strategy on the part of the PE sector, with a number of PE funds recognising in the crisis that an investment strategy based solely on the availability of low-interest loans and "financial engineering" is too risky from a long-term financial perspective. This has led to a number of funds adjusting their investment and value-adding strategies. Indeed, the credit bubble experienced in the years before the crisis in many cases merely postponed or even obscured the necessity for such a change in strategy.

Possible effects of this adjustment on companies and their employees have been discussed in this study. Nevertheless it is still difficult to arrive at any final appraisal of the effects, as the crisis is by no means ended and there is still insufficient empirical evidence for instance in the form of up-to-date case studies.

From a political perspective, the focus must be on finding ways of positively leveraging PE investments to the benefit of companies, employees and the economy as a whole. The current development of the PE sector towards more professional management structures and strategies aimed at a long-term and sustainable increase in a company's value is to be welcomed in this respect. What is also needed is greater transparency within the PE sector and in certain cases a better spirit of cooperation between the PE firm and the workforce and its representatives. Examples show that such a spirit of cooperation between the interest groups concerned has great potential for positively shap- ing a PE investment.

59 Ernst & Young: Branching out. How do PE investors create value? A study of European exits , 2012. 61

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

3.3 Evidence from other European countries – GB, NL, Italy, Sweden The following part gives insight in the PE business, its developments after the crisis and its implications for employment in four further European countries: the UK, Sweden, the Netherlands and Italy. Those countries are known for their variety of economic, political and industrial relations regimes. As part of the European Union, they also share a common trajectory, namely the regulatory framework for doing PE business.

Organised in four parts, the following section aims at giving an overview of national specificities concerning the relevance of the PE business, its developments before and after the crisis, the debates on PE and a literature review on findings about the outcome of this business model for employment and industrial relations. By choosing a thematic rather than a purely national approach, similarities and in some cases convergences between countries will also be pointed out.

RELEVANCE OF THE PE SECTOR

PE has developed along the internationalisation and financialisation of the economy namely made possible in Europe both by changes in European and national legislation. As a result, the national economies in Europe share common business features. However, Europe, because of its history, shows a variety of business systems according to different regimes, for instance, of capitalism, regulation and industrial relations. Thus the relevance of PE varies across countries. The following part looks at the several important contextual features which help to explain both the similarity and variety of PE scenes in Europe.

PE has been more extensive in the United Kingdom than in any other European country and in size and activity globally second only to the US. Thus the UK is notable for being the domicile for a large number of PE funds 60 . Investments by these funds in portfolio companies operating in the UK are also the largest in Europe. The broader business and financial context in the UK provides a favourable environment for PE activities to develop.

A key factor is that the UK has long been an important global centre for ‘finance capitalism’, exempli- fied by the prominent and long-standing role of the City of London. A broader context is the charac- ter of the UK ‘business system’. The UK, along with the US, has been characterized as a ‘liberal market economy’, notable for a preference for coordination by market rather than relational or regulatory means (see chapter 2). A key aspect of the emphasis on markets in the UK has been a concern to maintain low, and even to reduce, regulatory barriers to business operations. For example, there are few regulatory obstacles to takeovers in the UK; there is no restriction on foreign companies acquiring UK firms; and there are few restrictions on the movement of capital in and out of the country. The growing role and legitimacy of finance capitalism rested on intellectual supports such as theories of ‘efficient markets’ and ‘shareholder primacy’, as encapsulated in the notion of ‘shareholder value’ (Lazonick and O’Sullivan 2000). Well-developed equity markets in the UK, in the form of high liquidity, transparency, and minority investor protection, also provided opportunities for PE to acquire ownership stakes in listed companies. Thus PE business both benefits from and fuels this existing

60 Five of the largest PE funds by capital raised are based in the UK (Apax Partners, Permira, Pantheon, 3i, and Charterhouse). Over the ten years to 2010, these firms raised £349 billion pounds. At the present time, there are 403 PE firms based in the UK, of which around half specialise in buy-outs (EVCA 2012). 62

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

fertile ground: the role and growth of PE in the UK can be viewed as an important element of the development of ‘financialization’.

Moreover, the UK has been seen as an especially favourable locale for PE activity because of the nature of the regulatory regime and favourable tax arrangements.

There is no law specifically on PE, and such funds are in effect subject to general aspects of company, securities, and competition law. However, overall, PE funds have fewer obligations to disclose than other types of investment funds. In part responding to the EU Directives on Takeovers, mergers and takeovers have come to be more legally based, while still leaving the UK a relatively open for M&As, including hostile takeover bids. Key features are tax transparency of limited partnership fund structures for domestic and non-domestic investors, with no tax liable on the fund itself. In practice, management fees and carried interest are not usually liable for VAT. The tax treatment of PE has received considerable attention in the UK as in a parliamentary investigation of PE in 2007 (Treasury Select Committee 2007). Two issues have attracted particular interest. One is the taxation of the returns to general partners of PE funds 61 ; the other is the corporation tax treatment of debt within investee companies 62 .

Nevertheless, there are some perceived limitations of UK tax law from a PE perspective. One is that the most recent all-employee share ownership plan – the Share Incentive Plan – cannot attract tax benefits for employees when the employing company is under the control of another (i.e. a PE fund). The EVCA has also drawn attention to the limited concessions for executive incentive schemes, whereby schemes are either unavailable for PE-backed firms, too small in terms of rewards, or unap- proved for tax purposes (meaning that tax charges are liable on the exercise of options rather than the sale of the underlying shares).

The weakness of labour regulation also favours the development of PE business. There are few decision-making rights for employees in the UK, so much therefore depends on what trade unions can obtain for their members. Derived from the EU Information and Consultation Directive, UK employees have rights to information and consultation in collective redundancies and M&As. However, this law has not been much used and is considered by the unions to be weak and ineffective. On transfer of undertakings, it is important to note that PE takeovers, as share transactions, are not viewed as a change of control which triggers employee rights to information and employment protection under the EU Directive on Safeguarding Employee Rights in the Event of Transfer of Undertakings (TUPE). Barriers to restructuring imposed by labour law thus tend to be weaker than in many other European countries making the UK an attractive site for PE.

Over the course of the last decades, Sweden has developed into one of the most important PE markets in Europe. The evolution of legislation dealing with alternative investment funds illustrates the importance of European developments for the Swedish company law: it enabled foreign-based funds to become active in Sweden. The initial regulation of investment funds dates from the enactment of

61 Following public outcry, the government introduced in 2008 a flat CGT rate of 18 per cent (before tapered to 10 %; now 28 per cent for higher income taxpayers). However, this is still substantially lower than the marginal rate of income tax. 62 Still under debate. 63

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

the 1974 Mutual Funds Act (Aktiefondslagen, AFL). In 1990 this was replaced by the Act on Collective Investment Funds (Lagen om värdepappersfonder, VPFL), which in part was a reaction to the EC’s passage of the UCITS Directive in 1985. Although not a member of the EC at the time, Sweden nonetheless sought to adapt national legislation to that of the Community. The special fund status primarily involves investment rights and governance. The former refers to risk management, where special funds may deviate from the general risk requirements after obtaining permission from the Swedish Financial Supervisory Authority (SFSA).

Regarding governance, special funds such as hedge funds may, with permission from the SFSA, limit their offering to special groups of investors. These groups include, among others, professional investors, investors subscribing to at least a minimum investment, and foreign investors.

The regulatory situation regarding PE is similar to that of hedge funds, there is again no specific legislation targeted at PE firms. However, it may be noted that PE are not open to the general public and therefore do not require SFSA consent to operate. PE funds also lie outside of the VPFL, as the PE firms are considered to provide advice regarding the acquisition and management of companies rather than of financial instruments. In contrast to the hedge funds, the activities of PE funds do therefore not require authorization nor are they the object of supervision by the SFSA (Zimdahl 2009).

A final piece of legislation specifically related to PE involves the investment strategies of the public pension funds. A new pension fund was created by government in 1996 with the specific assignment to invest exclusively in Nordic unlisted companies. In 2001 the remaining public pension funds were also allowed to make PE investments up to a maximum limit of 5% of their capital. However, the pension funds may not invest directly in a company, and as a consequence the pension funds have made substantial investments in the funds of PE firms (Henrekson and Jakobsson 2008).

Another major feature of the Swedish PE business environment relates to the industrial relations system and its recent developments. Although Swedish trade unions still are among the strongest in the world, union density has declined to around 70%. There are, however, large variations according to the industrial sector, occupation and age: while the Swedish labour force is highly unionized when taken as a whole, it is notably weaker among for instance blue-collar service workers than elsewhere. The general trend since the early 1980s has been towards a decentralization of bargaining. Although the confederations may still coordinate the bargaining of their member unions and local branches, individual unions now generally bargain over pay and working conditions. Employers and local unions moreover play an increasingly important role in supplementing the framework agreements signed at the higher levels through local bargaining. While it is unclear if these developments have any impact on the behaviour of PE, the decline in unionization and the decentralisation of collective bargaining might weaken trade unions’ abilities to represent worker’s interest against potential risks on employment linked to PE business.

Despite strong growth during the nineties, in terms of its share of total employment (5%), total number of firms (2%) and overall Dutch GDP (12%), PE is of relatively minor importance to the overall economy of the Netherlands .

Initially, PE investments mostly concerned seed and expansion capital and were of domestic origins. From the mid-1990s onward, capital targeting larger buyouts started to surpass seed and expansion 64

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

capital. From 2001 onward, buyouts really took off. This was mainly due to a small number of very large buyouts conducted by foreign PE firms. Most buyouts in the Netherlands are private to private and concern mid-sized firms, generally in close cooperation with incumbent management. Large public to private buyouts conducted by foreign PE Firms have been relatively rare in the Netherlands.

In general, foreign PE firms face the same legal environment as domestic firms. They possess the same legal rights to purchase equity in listed and unlisted firms as other investors. Purchasing shares in listed firms is subject to notification requirements once the ownership share reaches certain thresholds.

Since the early 2000s the legislator has shifted the balance of power squarely from the supervisors to shareholders. The two tiered board model is no longer mandatory for large limited liability corporations, while appointment rights of supervisors have been allocated to the General Shareholder Meet- ing (GSM), albeit with a binding suggestion right for the works council, which in practice is hardly ever used.

Taxation impacts PE firms in three ways. Firstly, to enhance the attractiveness of the Netherlands as the location of choice for the legal establishment of foreign investment funds, the Ministry of Fi- nance in 2007 introduced a special legal entity, a so-called Exempted Investment Fund. Under this facility, funds that operate in the Netherlands are exempted from corporate taxation if the fund serves as a collective investment vehicle and has an open-ended nature. The revenue service is currently in the process of defining threshold indicators to determine whether a fund is either the one or the other.

Similarly, the Netherlands has introduced new legislation for the taxation of the so-called ‘carried interest’. Despite heavy lobbying from the Dutch branch organization, a government plan was turned into law in January 2009, albeit in a stripped down version. Under specified conditions the ‘carry’ can be booked as corporate gains and is taxed at 25%. A notable increase from the earlier wealth tax of 1,2% but much lower than the 52% income tax envisaged earlier.

The final piece of relevant taxation concerns the tax deductibility of debt. A high profile state committee in early 2010 made suggestions for a more equal treatment of debt and equity capital to di- minish the attractiveness of highly leveraged buy-outs. It is unclear to what extent these proposals will gain political traction in the near future.

Despite a low level of unionization (21%), the Netherlands is known for encompassing collective wage agreements, negotiated by peak level labour unions and employer organizations, that are made binding across the sector through legal extensions. The Netherlands is also known for well- developed citizenship rights: Under the Dutch Works Council Act, workers possess strong information and co-determination rights. So many firms subject to PE investment will be in the possession of a functioning Works Council while firms without do possess the legal right to establish one in response to PE investment. Unique is the legal right of shareholders and/or labour unions to demand a legal inquest by the Corporate Chamber of the Amsterdam Court in case of an irreconcilable conflict between management and other ‘stakeholders’ over strategic decisions touching on the continuity of the firm (Van der Sangen, 2004a; 2004b).

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Comparatively to the other countries, Italy ’s PE business activity is both recent and little.

This is mainly linked to the Italian business system mostly relying on SMEs. Investment funds were introduced in 1993 and LBOs made possible in 2003. The liberalisation of asset acquisition and sale, i.e. the end of the control of such business by the Banca d’Italia, traces back to 2010. In line with those developments, tax regulation evolved in favour of PE business. Mergers and outsourcing became tax neutral in 2004. Moreover a 2011 law on benefit tax freed funds (though not it entities) from taxes.

Against the background of the prevalence of SMEs, PE development focussed on SMEs thus trigger- ing a debate about the existence of an “Italian way of PE”. A further specificity of the Italian PE business sector is the geographical gap between North and South: three out of four investments were operated in the economically strong Northern part of Italy.

While the legislator secured the framework for the development of PE business, employee rights have not been strengthened and appear to remain weak in legal theory and to some extent even weaker in practice. Protection against employment risks mainly rely on the governmental unemployment benefit system Cassa integrazione , thus rather on the mitigation of the effects of redundancies than on the participation in company decision making.

PE BEFORE AND AFTER THE CRISIS

Despite the variety of PE scenes in Europe, evidence suggests that the crisis shows common features across countries. This seems to be true as much concerning the quantitative (investment volumes, number of deals, etc.) and the qualitative (investment sectors, actors, etc.) developments of the business. Convergence between countries thus appears in the continuity of the business beyond the crisis period and to some extend in the further development of the business based on new opportunities that came up with the crisis.

There have been a number of peaks of activity in the United Kingdom : the late 1980s, the late 1990s, and the mid-2000s prior to the beginning of the credit crunch in summer 2007. The value of PE buyouts steadily rose until 2007, as did the number of very large PE buy-outs (e.g. Alliance Boots, the largest in Europe, and EMI), but these are still relatively few in number.

In recent years PE buy-outs have accounted for about 20% of all M&A deals in the UK. Their proportion of the value of M&A has risen steadily, reaching a peak of around 60% in 2007 (CMBOR). The scale of PE deals has also risen through the 2000s, culminating in the acquisition of a FTSE 100 company (Alliance Boots) by the US fund KKR in 2007. Over recent years, annually around 1,300 UK busi- nesses have received PE funding. The BVCA has estimated that PE funding accounts for the employment of around 3 million people in the UK or approximately 21% of private sector employees (BVCA 2008). Since 2007 the number of buy-outs by UK PE houses has declined from 383 to 233 companies, and the number of mega-buy-outs (over £300 million) has fallen from 21 to 10 (with just 4 in 2009) (EVCA 2012).

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

The number of PE deals in the UK fell significantly after the beginning of the credit crisis in 2007. The value of buy-outs also fell dramatically, from £68 billion in 2007 to £6.3 billion in 2009 (CMBOR). In 2009, there were only 19 buy-outs valued between £50 and £500 million.

However, in 2010, PE activity recovered substantially. The value of funds raised by PE funds fell from £46 billion to £5.6 billion in 2009. It subsequently increased to £9 billion in 2010 and £16 billion in 2011, but is still a long way below 2007 and 2008 levels (EVCA 2012).

The expectation is that PE-backed companies would be highly vulnerable to the recession from 2007, because of their high multiples and high leverage. However, a study by Wilson et al. (2012) finds that PE buy-outs experienced higher growth, productivity, profitability, and improved working capital management relative to comparable firms during the recent recession. They attribute this in part to PE firms taking timely action to assist their investee companies. There appears to be little difference between PE-backed firms and matched private companies in the annual change in employment from 2007 to 2009. A smaller study of larger PE-backed companies by the BCVA (2012) finds that overall employment grew during 2010 by 1.2% compared with a decline of 0.2% in the FTSE All Share. They also exhibited an improvement in their debt to EBITDA ratio since acquisition (from 7.9 to 7.0) (BCVA 2012).

Business changes in the aftermaths of the crisis appear on several points. First, the use of funds by PE houses shifted somewhat from mounting buy-outs to providing capital for growth and mezzanine funding 63 . A major shift in investors has also taken place, with the role of SWF increasing from 4.5% of capital raised in 2008 to around 16% in 2011. At the same time, allocations from pension funds reduced from over 36% to just over 23% (EVCA 2012).

Overall, the credit crisis has posed great difficulties for the PE business model. Reliant on high leverage in most cases, restrictions on the supply of credit have inhibited re-financing deals, leading to costly increases in debt. In turn, this has added to the difficulties in exiting investments. On the other hand, the crisis has created new opportunities for PE funds focusing on turnaround situations, especially those specializing in purchasing distressed debt. PE in particular has also benefited from recent changes in the size and composition of the UK stock market listed sector 64 .

Despite the slightly less severe impact of the crisis in Sweden , the effects of the financial crisis of 2008 are evident in a dramatic fall in the amount invested as well as in the number of investments. Looking more closely at the patterns of investments immediately prior to and during the financial crisis indicates that investments in Swedish companies over the business cycle closely follow the overall European trends.

Investments by Swedish PE firms remained at a relatively stable level throughout the 1990s, rising slightly towards the end of the decade. A dramatic increase occurred in 1999, and investments have

63 62 per cent of funding allocations went to buy-outs in 2011, compared with 93 per cent in 2008; 19.8 per cent was used for growth capital and nearly 13 per cent for mezzanine funding in 2011 compared with 2.9 per cent and zero respectively in 2008 (EVCA 2012). 64 The number of stock market listed companies has reduced substantially from nearly 1,700 in 2000 to just around 1,000 in 2012. In recent years, the number of companies delisting has exceed the number of those newly listing (243 against 163 in 2011). 67

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

trended upwards ever since. The overall upward trend does however include spectacular downturns, in Sweden and elsewhere, in connection with the financial crises in 2000/1 and 2008/9 during which Swedish investment activity was roughly halved.

The drop in overall investments in 2009 is of course also reflected in a precipitous fall in the number of companies that were the target of a buyout. It primarily affected the number of large and mega buyouts. This led to what would seem like another indication of investment adjustments over the cycle, namely a relative increase in follow-on investments to the company. Larger deals have since returned, albeit not to quite the same extent.

The distribution of investments across industries has changed somewhat over time. Whereas industry has lost some of its attractiveness, investments in computers and consumer electronics as well as in what the EVCA terms high tech industries have gained attractiveness. Life sciences also have over time increased. Focusing on the years 2005 to 2011 suggests that the long-term shifts are however driven by other factors than short-term changes in the macro-economic environment. The reduced importance of industry and high tech investments were clear ahead of the crisis, and do not seem to have changed during or after it. Likewise, the shifts into consumer products and life science occurred prior to or during the boom years, and there are no clear indications of a subsequent shift out of them.

Turning to the question of funding, changes over time show a long term decline in the importance of banks and insurance companies, as well as of pension funds, whereas funds-in-funds become more important. But it is interesting to note that the role of government agencies as a source of funding actually is less in Sweden than elsewhere in Europe.

These long term trends seem to be largely unrelated to the business cycle. PE houses had to adapt their behaviour to some extent, and also underscore the role of debt in prompting them into actions. The effects of the crisis do however seem to be transitory; by 2010 investment activity had resumed and appeared to be returning to pre-crisis levels. Apart from temporary drop in investment activity (including a brief disappearance of mega buyouts), most of the changes in the behaviour of PE firms seem unrelated to the financial crisis. Examples of changes in behaviour that are more than an immediate response to the crisis are thus rare. One of the few is the increased prevalence of secondary buyouts as a form of divestment, an exit form that has become more common in Europe and in particular in Sweden subsequent to the crisis. Whether this is the sole outcome of the crisis may however remain to be seen, as there is substantial outstanding debt in the need of refinancing. During the period 2012 to 2016, in Sweden loans equalling almost €20 billion will have to be turned over (Linklaters 2012). Although there are other countries with greater debt burdens, in relation to the size of the economy Sweden ranks among the most exposed countries.

PE developments during the crisis in the Netherlands show a surprising trend: growing assets under management, growing number of investee firms and – up until 2008 – growing share of employment and turnover. Given the comparatively little relevance of the PE business in the Dutch economy, one should be careful when interpreting this trend. Besides those developments the crisis has substantially transformed the financial context for PE funds. Investments came to an almost complete stand- still in 2009. Moreover, this drop was almost exclusively caused by a complete disappearance of ac-

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

tivity in the buyout market, which tends to be dominated by foreign (Anglo-American) PE firms and tend to consist of the largest deals. Megadeals and large deals almost completely stopped in 2009. While there was a pickup of activity during the upswing in 2010, the number of deals as well as their aggregate value is still way below their high water mark in 2007. Given the bleak predictions for the Dutch economy for 2012 and 2013, a further drop in activity is only to be expected.

Even starker was the effect on foreign PE investment. The inflow of new capital from foreign PE firms has dropped to approximately half of what it was before the crisis. Domestic PE investment, while also having largely disappeared during the high tide of the crisis, is now good for two third of overall PE investment, while before the crisis it made up a little over half of all investment. This is largely due to the lack of large LBOs since the crisis, which used to be the exclusive domain of large Anglo- American PE firms.

Also in terms of sectoral distribution the crisis seems to have had an impact. PE firms have moved out of agriculture, construction, communications, business services and chemicals and into retail and manufacturing. The reasons for these shifts are not all crisis related. Construction is of course one of the largest victims of the current deleveraging crisis, while manufacturing firms are known to sit on large amounts of cash, turning them into attractive prey for PE firms. The stories for divestments from communications, agriculture, business services and chemicals, as well as investments in retail, are sector specific and have less to do with the crisis.

The latest development in PE investments in the Netherlands is their increasing presence in (newly) privatized domains of the Dutch welfare state, such as waste management, health care and childcare. In 2006 KKR and CVC bought the Dutch waste management firm AVC, merged it with Van Gan- sevoort in 2007, resulting in the biggest waste manager in the Netherlands. The IPO planned for 2010 was cancelled due to the crisis. The partial privatization of Dutch health care in 2005 set in motion a wave of consolidation in which PE firms are actively involved. Most of these firms are up till now of domestic origin 65 .

In Italy , too, PE business appears to some extent stronger after than before the crisis. Being a very young business until the mid-2000, the period 2006-2011 shows a growing PE-portfolio both in the number of companies and in turnover.

However, shifts in invested sectors can be noticed: though the main sectors remain industry, finance and computer services, the luxury branch lost one fourth of its investments in 2008. The most important sectors for PE in 2011 were real estate and energy.

Though the 2008 crisis does not appear to have strongly impacted the PE industry, the currently critical economic and financial situation of Italy might lead to a severe downturn of the business in the coming years.

65 In an attempt to enhance female labour market participation, since 2005 new fiscal subsidies have given a boost to the number of children in pre-school and after-school childcare. This has turned childcare into a growth industry, which, because of its steady income stream, has proved to be attractive to Anglo-American PEFs. 69

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

An interesting development of the Italian PE scene is the creation of a new PE fund under the control of the Ministry of the Economy and Finance: “Fondo Italiano di Investimenti” (FII). This fund gathers the banking association, the business association Confindustria, a mainly public bank (Cassa Depositi e Prestiti) as well as three private banks (Intesa Sanpaolo, Unicredit and Monte dei Pasci. The rationale underlying this fund is twofold: support the capitalisation of selected companies meant to become international SME champions; support the development of the PE industry. It is however unclear up to now how this fund will evolve. Will it contribute to strengthen the PE business in a “italian way” or will it become a “fund of a fund” serving to secure unsecure financial situations of the private banks’ PE portfolio?

PUBLIC DEBATE AND ITS IMPACT ON PE

Another relevant phenomenon that came up during the crisis is the surge in public interest for the PE business. Long attracting relatively little public attention, scandals have caught the public eye in several European countries. Whether this will lead to legislative changes impacting on the future of PE is too early to tell, yet in some countries already existing outcomes indicating a shift in regulatory approaches can be noticed. Among the studied countries, the only notable exception appears to be Italy.

As in most other countries, there are two points of view about PE in the United Kingdom . The main British business organisation, the Confederation of British Industry (CBI) has a generally positive view of PE, arguing that it is a successful part of the British economy. The CBI was highly critical of the AIFM Directive on the grounds that it would hit UK financial services especially hard. Other criticisms included the following: proposed annual independent valuations of fund assets are unnecessary given annual audit under companies’ legislation and restrictions on leverage create an uneven playing field with respect to other forms of corporate ownership.

The trade union confederation in the UK, the Trades Union Congress (TUC), has been critical of PE, though there has been recognition that companies taken over by PE may prosper. Three main areas of concern have been identified, especially in relation to PE: lack of responsibility of funds to employees and the community; lack of transparency, especially in relation to the rewards available to PE general partners; and the sustainability of the business model given the reliance on debt. More broadly, the TUC has expressed concern that PE poses challenges to the stability of the international financial system. It has suggested that that the OECD and G8 should establish a task force to develop appropriate regulation and taxation arrangements on an international level.

Whilst union concerns have often focused on the fate of employees in firms taken over by PE, there is also the issue of union involvement in pension fund management. There has been increasing investment by pension funds in PE and other alternative investment funds as a way of enhancing returns. The TUC has produced a guide for union trustees of pension funds, pointing out the possible dangers of investing in these asset classes: illiquidity of investments, the level of risk, the sustainability of debt-based business models, short-termism, and conflicts of interest faced by company directors involved in mounting buy-outs (TUC 2007).

In the wake of the sale of Cadbury to Kraft (which was expedited by the involvement of HFs), the TUC has called for the creation of an independent M&A commission and for the introduction of an eco- 70

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

nomic test for whether M&As should be allowed to proceed. This economic test would take into account whether the takeover would be beneficial for the target company and also in the interests of employees, local communities, suppliers and the wider economy. It has also called for the extension of TUPE protections for employees to be extended to takeovers that take place by share transfer (as is usually the case in PE deals).

Following extensive public and political criticism of PE funds in 2007 66 , a set of voluntary guidelines was accepted by the PE industry (the so-called Walker Code). 67 These guidelines require that a portfolio company should publish its annual report and accounts on its website within six months of acquisition, including information on the identity of the PE fund owners, and provide an annual business and financial review similar to those of listed companies. PE funds should publish information on their structure, investment approach, and UK investee companies, along with summary information on the investor base. Information should also be regularly provided to the trade association, the BVCA, which should monitor the operation of the guidelines. As to employees, the guidelines recommended that a PE firm should ensure ‘timely and effective communication, either directly or through its portfolio company, as soon as confidentiality constraints are no longer applicable, especially at times of ‘strategic change’. Although these requirements are not legally binding 68 , in 2009 the Guidelines Monitoring Group reported that all 32 PE firms covered were fully compliant with the guidelines.

Despite the relevance of PE in Sweden , PE long remained largely invisible in the public debate. This suddenly changed when the so-called Carema scandal broke. Carema is a provider of care services originally founded in 1996 and it went through a series of mergers prior to being acquired the British PE company 3i in 2005. A series of recent scandals have however shown that the company is under- staffed, replaces trained personnel by untrained staff, and there has also been evidence for cases of outright maltreatment in some of its elderly care facilities (e.g. Schnyder 2012). An outrage was also caused by the discovery that despite their substantial profits before interest costly internal loans from the PE owners implied that the company paid very limited taxes (Dagens Nyheter 2011). As a result, the Ministry of Finance has stated that they will initiate an oversight of the applicable tax rules. The issue was also debated in parliament, with scathing critique of the recent incidents from all sides.

Similarly, the income and capital gains taxes paid by PE managers have also come under increased scrutiny. The Swedish Tax Agency is currently trying to collect what it deems as outstanding income

66 Large member unions of the TUC, such as UNITE and the GMB, have been highly critical of PE. Through campaigns they have increased the awareness of the public about specific cases and made demands for changes in legislation. 67 These apply to both PE funds and their portfolio companies, where the latter were acquired in a public-to- private transaction exceeding £300 million and more than 50% of revenues are generated in the UK and there are more than 1,000 full time employees or in a secondary transaction in excess of £500 million and 50% of revenues come from the UK and where there are more than 1,000 employees. 68 For this reason the CBI welcomed the Walker Review and greater voluntary transparency. It argues that promotion of such ‘best practice’ is preferable to a rules-based system. The CBI has also accepted the view of the Walker Review that the remuneration of fund general partners does not need to be made public.

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

taxes from a series of top PE executives, arguing that carried interest should be considered as earnings. The Ministry of Finance has furthermore circulated proposals with new rules regarding the taxation of carried interest according to which interest below a certain limit would be taxed as earnings, while interest exceeding the limit would be taxed as capital gains. The proposals were heavily criticized for being too lenient on PE, and bills from the opposition parties calling for treating all carried interest as earnings have recently been put before parliament.

The incidents at Carema have also been criticized by trade unions, and they have also joined in the chorus criticizing the proposals by the Ministry of Finance. Whether this implies a shift away from the traditionally fairly favourable stance of Swedish trade unions (Korpi forthcoming) remains however to be seen. The final word on these measures and proposals has yet to be said, but it is nonetheless clear that PE has moved into the public awareness.

In the Netherlands , despite traces of deteriorating employment and industrial relations, hardly any overt contestation from the side of labour unions over PE activity has occurred. Some labour unions did rally around specific ownership events and claimed that public to private buyouts burdened firms with debt, resulting in declining investments, higher throughput and declining employment conditions. However, no concerted attempt was made by Dutch peak level unions to systematically counter the claims made by the Dutch PE lobby organization about the beneficial effects of PE buy-outs. Nor have they tried to leverage their position in the influential Socio-Economic Council to initiate more restrictive legislation.

This is partly the result of the institutionalized division of labour between peak level unions and local trade and craft unions – the former dealing with issues like pension reform, labour market reform in the tripartite Socio-Economic Council and the latter dealing with employment relations at the shopfloor level. The decreasing salience of foreign PEFs in the Netherlands and the absence of any high stake, high profile leveraged buy-out has largely silenced the public controversy over PEF takeovers that marked the period 2004 to 2008 (Engelen et al. 2008).

Against this background, the public perception of (foreign) PE funds is subject to a publicity cycle which is largely determined by eye catching cases of large Leveraged buyouts, such as the LBO of PCM by Apax, of Hema by Lion’s capital and, more recently, the disinvestment of American PE funds of childcare chains. In some of these cases (Hema) labour unions have actively sought publicity over declining labour standards, especially for workers on temporary contracts. Most contested have been issues related to the financing of these buyouts, the fiscal treatment of debt and the remuneration of PE fund partners.

Over the course of the crisis some legal initiatives have been launched to limit the financial manoeuvring space for (foreign) PE firms. These predominantly addressed taxation of the so-called ‘carry’, which is now subject to a corporate gains tax of 25%, and the fiscal treatment of leverage. Given the sizable share of PE that is domestic, some of these initiatives have been met by resistance from the Dutch industry organization, NVP, and – as a result – have been watered down. Reform of tax advantage for debt financing, for instance, is still in the legal pipeline, despite the fact that legal initiatives to do so have been launched in 2009.

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

More recently, public attention has shifted to the effects of increasing PEF investment in the semi- or quasi-public sector, as described above. The controversy is especially strong over Anglo American PEF involvement in the Dutch childcare sector. The austerity measures enacted from the second half of 2010 onward have not only caused financial problems for investors in childcare, but has also demonstrated the perverse effects of a financialized logic on the business model of care providers. The cut- backs have directly translated in worsening employment conditions and hence diminished quality of care provision to toddlers. A fragile coalition of parents, MPs, labour unions and childcare representatives is currently trying to raise awareness of those effects and is pressing for more regulation.

Even less public attention is given to PE in Italy where no controversial debate about social and economic limits to PE took place – at least before the crisis. Media interest for PE was limited to reporting success stories of the “Italian way of PE”. Only recently the media discovered the other side of the story. Particularly striking is the absence of trade unions in this debate – reflecting the lack both of critical ideas and of resources to act.

LITERATURE REVIEW ON THE OUTCOMES OF PE FOR LABOUR

PE has shown growing relevance in the European economy as well as in the public debate. The last one appears very polarised between supporters and critics, namely concerning the impact of PE on employment. Despite this relevance, PE has not triggered much research in the examined countries. This is all the more true concerning the impact of PE on working conditions and industrial relations. Moreover most existing research goes back to the beginning of the years 2000, i.e. there is no existing study looking at more recent data and PE developments during the crisis.

Furthermore there seems to be a common limit of existing research due to methodological problems in identifying precisely the impact of PE. Indeed, studies often reflect the polarisation of the public debate. There is a variance of results largely depending on the selected approach and methodology – many studies using business industry data.

Though no clear conclusions can be drawn on how PE impacts employment, working conditions and industrial relations, one hypothesis can however be made: complex regulatory business and industrial relations regimes help mitigating negative impacts of PE. Along the diversity of PE scenes in Europe evidence suggests a variance of PE institutional regimes. Interestingly, those regimes might differ between national regimes, but also according to sectors and company specific industrial relations institutions and practices. Other differentiating factors appear to be the type of PE (buy-out or buy- in), the restructuring strategy (employment reduction in the first years and then employment creation) and sector specificities.

For a better understanding of the implications of PE for employment, working conditions and industrial relations, there is thus a common agreement that more – case study based – research will be needed.

The debate on the effects of PE in the United Kingdom has been highly polarized. In terms of effects on employment, work, and industrial relations, trade union-oriented research argues that PE investments disregard employee rights of information and consultation and have negative effects on employment and working conditions. By contrast, the BVCA argues that in the long-term employment 73

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

has grown under PE acquisitions and in the majority of cases industrial relations are conducted ami- cably with employees.

There have been only a limited number of academic studies of their impact. Here, part of the problem has been that information and data has not been forthcoming from the firms themselves. How- ever, as will be listed below, there have been a number of studies of PE ownership of portfolio companies (Gilligan and Wright 2010).

In the past few years, there have been a number of case studies of PE involvement in UK companies. The PE case studies include a wide variance in employment and industrial relations outcomes. One of the best-known cases is that of the AA acquired by PE in 2004. Shortly after acquisition, the company derecognised the GMB union, made a significant number of redundancies, and substantially changed working patterns. However, how far these developments can be blamed on PE is open to question, since it is difficult to judge what the counterfactual situation would have been. Following the initial restructuring, the company recorded an increase in employment.

Moving on to statistical and econometric research, there are several econometric studies of PE portfolio firms in the UK, mainly conducted under the aegis of the CMBOR at Nottingham University (Wood and Wright 2009 and Gilligan and Wright, 2010 for an overview). For the most part they use material collected in confidence from the PE sector as well as portfolio companies’ annual published accounts and cover the several waves of PE backed buy-outs since the early 1980s. Amess et al. (2008) compare the employment effects of leveraged buy-outs (LBOs) of all kinds and traditional acquisitions against a large control group. They find that the PE-backed group has no significant employment changes relative to the control group, but the non-PE backed group shows significant falls. Cressy et al. (2007) compare 48 UK PE-backed buy-outs with a matched sample of 84 companies over a five year period and find that employment falls in the PE sample over four years. Amess and Wright (2007) compare the employment effects of management buy-outs and management buy-ins (MBI) and find that MBIs have a small negative impact on employment whereas MBOs have a positive effect. Pointing out the limits of such studies, Goergen et al. (2011) argue that PE buy-outs are likely to have more adverse effects on employment than MBOs and MBIs because they typically replace the incumbent management, and are thus more likely to break implicit contracts with employees.

On other aspects of employment a survey of buy-outs and buy-ins in the UK and Netherlands finds that employee involvement, job flexibility, and training increase after the buy-out (Bacon et al. 2004). Amess et al. (2007) find that employees in buy-out firms have more discretion over their work practices than comparable workers at non-buy-out firms. Meuleman et al. (2009) show that UK buy-outs backed by more experienced PE firms and buy-outs of divisions have higher growth in employment than other types of PE-backed buy-out.

There are fewer studies which deal with effects on industrial relations. However, regarding union recognition, one study suggests that 5% of buy-outs remove union recognition at the buy-out, but the level of union recognition subsequently increases back to pre-buy-out levels (Bacon et al. 2004). The incidence of joint consultative committees, works council at establishment level, and a European works council was unchanged. Consultation during the buy-out itself, however, was minimal: in 59% of cases employee representatives were not informed about the buy-out and in only 3.7% of cases

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

were they consulted. The authors argue that whilst there does not appear to be a need to provide specific protection for information and consultation after buy-outs, there could be a case for a re- quirement for greater information disclosure to employee representatives during the buy-out itself (Bacon et al: 2011 22).

Large-scale quantitative analyses focusing on wages, employment, and working conditions are also largely lacking in Sweden . A series of reports by the government agency Nutek and the industry association SVCA dealing with the PE industry are the most widely cited, and generally conclude that buyout companies grow faster than all comparison groups. Whilst these results are suggestive, the reports point out that the reference groups are less than perfect. Buyout and reference group companies may for instance differ with respect to size and sector, and comparisons of PE firms with more carefully defined control groups are necessary to achieve a more precise comparison.

An ambitious attempt at reference group construction is the study by Olsson and Tåg (2012). Using a difference-in-difference approach, they evaluated wages and employment among individuals employed in buyout companies by comparing them with individuals in other companies. The analysis covered approximately 200 PE buyouts between 1998 and 2004, and showed employees in buyout companies to have a slightly lowered risk of unemployment as well as somewhat higher average wages during the four years after the buyout. Although the results suggest that PE buyout has a positive impact on wages and employment, the four year follow-up period implies that in most cases the evaluation takes place in the 2nd half of the PE firm’s holding period. This interpretation is consistent with the result that the reduction in unemployment risk was greatest in the first two years following the buyout. While there clearly are no indications of that buyout is detrimental to wages and employment, the long-term consequences of PE buyout for the employees in the portfolio companies still remains uncertain.

A longer follow-up period was used by Bergström et al (2007). They evaluated wages and employment in around 70 buyout companies between 1998 and 2006 and compared them with the development in their 20 largest peers within narrowly defined industrial sectors. The main advantage of this study is the longer follow-up period, as it examined wages and employment over the whole holding period (i.e. pre-entry to post-exit). However, the results reported by Bergström et al (2007) were similar to the firm level results found by Olsson and Tåg (2012) in that there was no effect of buyouts on either employment or wages. In stark contrast to the SVCA studies mentioned initially, the ‘findings suggest that employment and wage levels in the buyout companies have developed in line with the peer groups’ (Bergström et al, 2007: 35).

There is less evidence on the impact of investment funds on working conditions and employment relations. Nonetheless, a survey carried out among local branches of Unionen, the largest trade union in the private sector and the largest white-collar union, looked at how the PE buyout had impacted on the companies and on employment relations (Unionen, 2009). This showed that a majority of the companies had undergone changes in company management as well as cost reduction pro- grammes. With regard to employment relations, around 80% of the locals responded that opportunities for conducting union work had improved or were unchanged. However, a minority found that they had experienced a change for the worse. Most also replied that information and consultation

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

had remained unchanged, yet there again was a large minority (30 to 40%) who believed that access and influence had decreased.

Although these results clearly are interesting, they too would be bolstered by the use of appropriate- ly constructed comparison groups. As it stands, it is uncertain whether the worsening of employee relations reported by the significant minority is something specific to the buyout companies, indica- tive of takeovers more generally, or part of a national trend.

Still, one of the existing studies, Olsson and Tåg (2012) does attempt to look at business cycle effects. In their sample of buyouts from the period 1998 to 2004 they separately examine buyouts before and after the stock market crash of 2001. With a very small sample of companies, they find a significant reduction in the risk of unemployment among employees in companies that were bought out prior to the crash, but no effect afterwards. They interpret this as being an effect of additional capital presumed to come with PE acquisitions.

Most relevant findings on PE in the Netherlands are suggested by the Rotterdam-based team of Hans Bruining and the UK based team of Mike Wright. In a 2005 paper, they used the CMBOR database, which traces buyouts since the late 1970s and now contains records of well over 16.000 buyouts in the UK and on the European continent, to investigate the performance of 45 Dutch buyouts of more than €7.5 million. Their conclusions were threefold. There was no erosion of so-called high commit- ment HR policies; no decrease in job protection, work conditions, employment rights nor in the size of the workforce; no noticeable effect on voice rights, level of unionization or the effectiveness of the works council (Bruining et al., 2005).

According to the authors, the potentially detrimental effects of buyouts were largely absorbed by Dutch employment and industrial relations since these are not subject to managerial discretion but are determined at the sector and national level. Given the high degree of labour protection, Dutch firms are strongly ‘institutionally protected’, limiting the scope of manoeuvring for capital providers (Bruining et al., 2005). Over and above that, Bruining and Wright do report increases in the quality of HRM policies from pre to post buyout, which cannot be explained by Dutch employment and industrial relations (Bruining et al., 2005), suggesting a ratcheting up effect on HRM policies of buyouts. However, this dataset contains both PE and non-PE buyouts and hence cannot carry the conclusion that PE buyouts are in fact responsible for this ratcheting up effect.

Recent data have shown that while PE buyouts do have beneficial effects on the quality of entrepreneurial and administrative management of the firm in question (Bruining, Verwaal & Wright, 2011), a comparison of the effects on HRM practices of PE and non-PE buyouts in the UK and the Netherlands has demonstrated that PEF buyouts in the Netherlands do indeed tend to lead to a weakening of HRM practices suggesting that the positive effects observed in the 2005 study were due to non-PE buyouts. These findings contrast those in the UK (Bacon et al., 2008). Bacon et al. conclude that their findings ‘offer support for concern about the adverse implications of private equity and buyouts for the European social model given the spread of Anglo-American practices into mainland Europe’ (ibid., 1427). Their tentative explanation is that in the Netherlands PE firms focus primarily on buying out distressed firms, resulting in labour unions and works councils willing to collaborate in cost cutting exercises in order to save jobs, while in the UK after 30 years of experience with buyouts PEFs

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

rather pick underinvested firms to enhance value, resulting in improved HRM practices (Bacon et al., 2008: 1427).

There is hardly any research on PE in Italy . Covered by media and presented as success stories or investigated by the Italian PE business association, PE has not been focussed by academics.

The following tables give a comparative overview about the PE dynamics in major European countries under the effect of the crisis and its impact on labour. A first table summarises the main characteristics. Though there are converging trends against the background of the globalisation of the economy and of the European regulation, those characteristics show national diversity and are thus presented by countries.

As for the impact of PE on employment, working conditions and industrial relations, evidence shows a diversity of findings: impacts can be positive, negative or neutral. National industrial relations regimes do play a role: academics seem to agree that strong employee rights mitigate potentially negative effects of PE. On the other hand, existing studies on a same country might come to very different outcomes, according to their reference sample or the specific sector or company situation. Thus existing literature suggests not to overestimate national determinism. But it all the more shows a strong need for more qualitative insight in the factors explaining labour trends under the effect of PE.

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Table 7: Overview of the national case studies France Germany Italy Netherlands Sweden UK 2nd or third EU market In terms of fundraising and recent and little minor compared to the among the most im- 1st market in Europe, investment activities Germany general economy portant markets in second after US ranks fourth respectively third in Europe Relevance of PE Europe. When it comes to PE in the economy investment as a % of GDP, Ger- many is somewhere around the European average high several major reforms to in- liberalisation of high, but mainly do- opened to foreign historically very high Degree of finan- crease the degree of financializa- asset acquisition mestic capital capital under EU legis- cialization tion but still lower than in liberal and sale in 2010 lation market economies complex representation Strong labour regulation and week employee encompassing collec- strong collective bar- weak labour regulation system with enlarged comparable strong information rights, but strong tive bargaining+ code- gaining, but weakening PE scene information- and consultation rights state supported termination rights of TU representation Employee voice consultation rights unemployment (on PE) (namely LBO case law), benefit scheme but suffering from weak representation debt interest payments Various steps to deregulate the tax exemption for Exempted Investment Act on collective In- none, but parliamen- (2011); benefits limita- financial market since the funds; mergers and Fund; regulation of vestment Funds, but tary investigation on tions of some types of 1990's. General labour market outsourcing are tax carried interest; tax no authorisation re- tax treatment of PE in investment funds (2013) regulations and employee pro- neutral deductibility of debt quired for PE deals 2007 Legislation tection rights also apply to PE under discussion specific to funds takeovers. Implementation of the AIFM Directive will cause some new regulation for investment funds. sharp fall, recovery in sharp fall, recovery in 2011, but growth continued drop, little recovery in dramatic fall, but back drop , but recovering Quantitative 2011, but under 2007 under 2007 level during the crisis 2010, but still below to pre-crisis level in in 2010 change level 2007 level 2010 PE before/ sector concentration; sector concentration; nearly State driven Fund: less foreign PE invest- change in investment from mounting buy- after the smaller deals; changing total breakdown of the buyout "Italian way of PE" ment distribution across outs to providing crisis Qualitative divestment strategies market in 2007; volume of deals or fund of a fund? sectors; wall of debt; capital for growth and change under effect of wall of decreased not the number of prevalence of second- mezzanine funding; debt; focus on profita- deals (smaller deals); increase of ary buy-outs; increas- pension funds loss and ble sectors write-offs ing relevance of funds- SWF gained im-

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

in-funds portance Agreement between real estate and privatisation of Wel- consumer products purchase of distressed New opportuni- State fund FSI and Abu energy fare State and life science debt; delisted compa- ties Dubai based SWF nies become targets strong opposition, Critical (“locust debate”) but absent some isolated criticism, growing awareness highly critical, espe- especially by the CGT since the crisis PE has to some but hardly any overt under the effect of PE- cially since Kraft/ and the independent extend disappeared from the contestation and no scandals, supporting Cadbury takeover; Unions employee interest public debate. Generally it concerted attempt at government initiatives guide for union trus- organisation "Collectif seems that PE in the meanwhile national level tees of pension funds; LBO" is recognised as a “normal” call for an independ- market player ent M&A commission Public strong lobbying in fa- Lobbying by the German PE promoting "Italian following public and debate vour of PE (ex. forced association (BVK) which has way of PE" political criticism set and government to with- conducted several pro-PE (case) up of voluntary guide- PE industry impact draw carried interest studies to emphasized the posi- lines ("Walker Code") on PE regulation in 2012) tive implications of PE investments Financialization as core Before the crisis efforts to in- Under the effect of Under the effect of issue of recent presi- crease financialization. Since scandals, some legal scandals, several tax dential campaign; regu- onset of the crisis an at least initiatives to limit the proposals by the Minis- State lations under discussion partial political volte-face and re- financial manoeuvring try of Finance are regulation of financial markets. space of (foreign) PE under discussion firms

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

4. Conclusions and recommendations

Based on the six country studies including an analysis of available statistical data and existing literature as well as an comprehensive review of different case studies we are able to highlight a number of trends regarding the question if the crisis changed the behaviour, role and perception of PE in Europe.

CYCLICAL ECONOMIC DEVELOPMENTS HAVE AFFECTED THE PE MARKETS , HOWEVER TO A DIFFERENT DEGREE IN THE ANALYSED EUROPEAN COUNTRIES The European economies have shown a cyclical economic development with times of economic up- and downturns. Although the intensity of this development was different in the European countries, the general trend is visible in all of the analysed countries. The growth and development of PE markets tends to be closely connected to these overall macro-economic developments. Key indicators such as fundraising and investment activities, the availability of leverage capital, exit strategies etc, are highly dependent on sound economic circumstances and in times of economic downturn PE is forced to adapt their business model. Due to the fact that the size of the European PE markets varies widely from country to country the degree of the impact of the recent crisis on the national PE industries was however different in the six countries. Although the PE markets in Europe currently are going through a difficult period it can be expected that the PE market will recover to some extent. Recent developments in other worldwide PE markets such as the USA and the proposed recovery of the mega-deals market support this assessment and show how quickly PE markets can recover when certain market factors develop positive. Nevertheless, the recent economic and financial crisis hit the PE markets hard and the country analyses in this study suggest that although PE will not disappear due to the crisis it tends to change at least its investment behaviour to some extent, especially against the background of tightened bank credit conditions leading to deals with a reduced proportion of debt and more equity.

In this regard the national framework matters, i.e. national regulation and institutions matter as me- diators of investment fund activities and will influence the development and behaviour of PE in the different countries.

One can clearly see how the economic crisis has influenced the dynamics and the strategies of PE companies in the European markets. This effect funding, exit strategies also the business models of the portfolio companies. However, the demand of the financial industry for the services of PE companies still exists. In times of low interest it is very attractive for institutional investors to allocate at least part of the invested funds in more attractive types of alternative investments. PE partly also is a product of changing ownership structures in capitalist systems where institutional investors are holding growing parts of the share. Actual statistics show 63% of the shares of German listed companies are owned by foreign investors.

FOCUS ON EXISTING INVESTMENTS AND THE ESTABLISHMENT OF PROFESSIONAL RESTRUCTURING CAPABILITIES There are signs that an increasing number of PE firms are beginning to re-appraise and change their business models. One trend is towards a greater focus on existing portfolio companies. In an interview with George Roberts, the founder of the PE fund KKR, he put it this way: ”Over the last four

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

crisis years we tended to have a sort of mantra: ‘Portfolio, portfolio, portfolio’”.69 This strategy aimed at streamlining and ‘nursing’ the existing portfolio is logical in times when new investments and exits are wrought with difficulties and the financial situation of a number of portfolio companies makes it necessary to become more actively involved.

More active portfolio management means that several funds have had to increasingly study ways of restructuring and increasing the value of their portfolio companies during the crisis. Beforehand it had been possible – on account of the advantageous credit policy practiced by many banks with regard to PE funds – to achieve a return on their investments in portfolio companies just through ”financial tricks”.70 Leverage and financial engineering instruments allowed PE firms to make a profit when divesting a company without making any long-term operative changes to a portfolio company.

PE funds are still seeking for high returns on their investment. Because the European market has lost some of its attractiveness due to the economic crisis and its poor economic outlook, PE are now investing more and more in the emerging markets in order to find new opportunities. However it can be expected that in the future even though PE will not leave Europe, they will focus more on rising Asia and other emerging countries.

Beyond this trend, some of the PE funds are trying to implement a diversification of their activity. Many of them are now for instance investing in real estate as a mean to find new growth opportunities. This clearly reflects an evolution and a less attractive market.

THE PRIVATE EQUITY SECTOR IS UNDER GREATER SCRUTINY Investors are similarly exerting pressure to introduce change and greater professionalism into the PE sector. Over the last few years the flow of capital into the PE market has become more international, and now often comes from investors in such emerging countries as China, India, Brazil or the Gulf States. At the same time, the investors themselves have become more professional and are calling for greater transparency on the part of the PE funds some of them being Sovereign Wealth Funds that can be more sensible to the kind of investments that are being made and the way they are handled. The emergence of environmental, social and governance dimensions could also lead to some changes in the PE approach. This trend should not be seen as a miracle tool that could change the whole business model of the PE funds. However, the appropriation of these dimensions by investor in PE could lead to some small behavioural adjustments.

The crisis has boosted this trend towards greater scrutiny, leading to problems especially for smaller PE funds unable, on account of their size, to adequately respond to increased management and transparency demands of investors. In addition, the new statutory requirements introduced by the AIFM Directive entail a further tightening of transparency and fund management requirements. This development will arouse higher operational costs - costs that smaller funds could find it difficult to afford.

It can be expected that the PE sector will become even more differentiated in the future, with the large funds on the one side, and a large number of smaller funds on the other. While the large funds

69 Private Equity International, Volume July/August 2011, p. 28. 70 Folkman, P. et al.: Private equity: Levered on capital or labour?, Manchester 2009. 81

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

are able to adapt to the changed market situation on account of their available human and financial resources, the smaller funds have become more specialised, focusing on specific sectors and active in niche markets. This development affecting the European PE market contrasts greatly with the situation in America, where US funds are currently benefiting from better market conditions. The US PE market is now almost back at its pre-crisis level, and a number of funds have in the last few years begun to diversify into other markets such as public alternative asset management, meaning that they are a lot more robust now than many of their European competitors. 71

Therefore one can say that PE companies have adapted to the crisis because the market forced this due to changing credit facilities, restricted exit possibilities and investors who requested more securities. This brought modifications to the PE business model but it did not change the basic rules.

THE "DEBT WALL " AS A THREAT ? The indebtedness is core in the PE business model. The pre-2007 period was emphasized by huge debt leverage. Of course, the acquisition business plans used at that time did not predict the economic crisis. Therefore many companies are currently faced with a huge wall of debt, many of them located in the most important European countries.

Companies taken over by PE investors before the onset of the crisis in the context of a leveraged buyout will be increasingly feeling the effects of this debt burden over the next few years. The more a company is burdened by debt, the more probable it is that measures will be taken in the future to cut costs in the companies concerned which tend to have negative consequences for the employees.

However many companies are trying to renegotiate their debts through different means: new debt reimbursement schedule, bond offering, assets disposals, and debt’s conversion into equity. Never- theless if some of the companies can feel relieved at least for some years, the wall of debt did not disappear and it could threaten many European companies in the 2013-2015 period. As soon as this issue arises, it could provoke tensions and risks for employees, restructuring measures being one of the easiest tools that companies implement when they are facing difficulties.

LABOUR RIGHTS ARE A MAJOR FACTOR FOR WORKERS ’ REPRESENTATIVES TO GET INFLUENCE The analysis of the different case studies shows how difficult it is to come to any overall conclusions on the effects of a PE investment on the relationship between management and employee representatives. There is no single answer as to whether the crisis has led to a deterioration or improvement of information and consultation practices. Each case has to be judged on its own merits. The case studies evaluated similarly show no clear trend. Nevertheless, there are examples where co- determination was able to influence investment decisions and in general terms to avoid negative labour outcomes of PE investments. On the other side, countries with few workers representatives’ rights such as the UK show that PE funds do not disclose much or many information about their mid- term plan and about themselves. Therefore trade unions and workers representatives do not have many levers to acquire influence on the whole process and to question it. In this regard the national

71 Financial Times: An inequitable divide. US and European private equity groups have enjoyed contrasting fortunes , 28.02.2013. 82

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

context and the institutional setting of the industrial relation system in the countries have a decisive impact on how effective co-determination can influence labour outcomes of a PE investment.

In total the consequences for employees and working conditions after an investment of PE are less predictable as the so-called locust debate indicated. Economic growth after PE investment can super- impose negative effects. However, there also is evidence from case studies that the short term effects can be very harsh. Especially if the PE investor weakens the company by immediately withdraw- ing cash.

PRIVATE EQUITY CAN HAVE MORE OR LESS HARMFUL EFFECTS One should keep in mind that in most of the cases, acquisition business plans are elaborated with restructuring measures forecasted in the first year of the deal. This is not an ideological view but it has been confirmed by the analysis of such documents as well as by PE practitioners.

However, several kinds of PE funds’ targets can be identified. PE investments in high growth companies can accompany the development of these companies. In this case, restructuring measures are often not necessarily needed or severe.

In the case of turnaround companies, the PE acquisition can lead to harsh restructuring measures. On the other side, when a company is in a crisis, PE can even be seen as an alternative to traditional bank loans. When banks are more restrictive in granting loans to companies, PE can step in their stead. This is frequently the case with SMEs in financial difficulties. This situation has been seen in some cases in Germany as well in France. Even though in the latter case, it was an investment in a traded company and not through a LBO mechanism.

Experience with secondary buy-outs in the past shows however, that in such cases specific problems can arise for the companies concerned and their employees. In many cases, wide-ranging restructuring and production optimisation measures have already been carried out by the first PE investor, meaning that the possibilities open to the second investor to further increase the value of the holding are often limited. In a number of cases, this has resulted in “value-adding measures” affecting the very substance of a company. An increase in secondary buy-outs is therefore to be seen as critical from the perspective of the workforce in the companies concerned.

MORE REGULATION OF THE PE SECTOR IS NEEDED The PE sector has become an important part of the European economy and has an increasing impact on the mergers & acquisitions market in Europe. Against this background the European Commission in 2009 proposed the AIFM directive which represents a first step to put the PE industry under a comprehensive and effective regulatory framework.

Beyond the AIFM directive, there’s a debate about further regulation. Especially trade unions and workers representatives demand for precise provisions included in the information and consultation directive as well as in the mergers & acquisition directive to establish a common regulative information and consultation framework in all European countries. This includes more information rights about the fund’s investment strategy, the full disclosure of assets and the structure of management fees. Furthermore there is a demand to reduce tax incentives for PE, e.g. to cap tax deductibility for

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

interests as it’s already implemented in some places like Germany. Finally as regards to PE – as for many other issues – cooperation and exchange of information among European Trade unions is important to mitigate possible negative impacts of PE on employment and labour.

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

5. References

Adveq: Private equity’s impact on employment in portfolio companies. An Adveq survey on its Euro- pean investments , 2012. Acharya, V., Hahn, M. and Kehoe, C.: Corporate Governance and Value Creation: Evidence from PE , 2009. Achleitner, A-K. / Kaserer, C.: Private Equity Funds and Hedge Funds: A Primer , CEFS Working Paper No. 2005-03, University of Munich, 2005. Achleitner, A-K. / C. Andres, A. Betzer and C. Weir: Economic Consequences of Private -Equity Invest- ments on the German Stock Market , Discussion Paper University of Bonn, 2008. Achleitner, A-K. / Klöckner, O.: Employment Contribution of Private Equity and Venture Capital in Europe , Centre for Entrepreneurial and Financial Studies (CEFS) on behalf of the European Private Equity and Venture Capital Association (EVCA), 2005. Achleitner, A-K. et al.: Value Creation Drivers in Private Equity Buy-outs: Empirical Evidence from Eu- rope (January 12, 2010), The Journal of Private Equity, 2010. AFIC/Constanti: The Social Impact of LBOs in France, 2007. AFM: Hedge Funds: An exploratory study of conduct related issues , Amsterdam: AFM, 2005. Amess, K. and Wright, M.: The wage and employment effects of leveraged buy-outs in the U.K. , Inter- national Journal of Economics and Business, 14(2): 179-195, 2007. Amess, K., Brown, S. and Thompson, S.: Management buy-outs, supervision and employee discretion , Scottish Journal of Political Economy, 54(4): 447-474, 2007. Amess, K., Girma, S. and Wright, M.: What are the wage and employment consequences of leveraged buy-outs, private equity and acquisitions in the UK?, CMBOR Occasional Paper, 2008. Appelbaum, E.: A primer on private equity at work. Management, employment and sustainability , CEPR working paper, 2011. Appéré et Rosenfeld: Quel avenir pour les LBO?, La Gazette de la Société et des Techniques, n° 49, 2008. Bacon, N., Wright, M. and Demina, N.: Management buy-outs and human resource management , British Journal of Industrial Relations, 42(2): 325-347, 2004. Bacon, N.; Wright, M.; Scholes, L.; Meuleman, M.: Assessing the Impact of Private Equity on Industrial Relations in Europe , Human Relations September (63), pp. 1343-1370, 2010a. Bacon, N., Wright, M. Meuleman, M. and Scholes, L,: The Impact of Private Equity on Management Practices in European Buy-outs: Short-termism and Anglo American Effects . CMBOR Occasional Pa- per, 2010b. Bacon, N./Wright, M./Meuleman, M./Scholes, L.: The Impact of Private Equity on Management Practices in European Buy-outs: Short-termism, Anglo-Saxon, or Host Country Effects? , Industrial Relations: A Journal of Economy and Society, 51, pp. 605–626, 2012. Badunenko, O., Barasinska, N., and D. Schafer: Are Private Equity Investors God or Evil? , in: DIW Dis- cussion Papers, No. 901, 2009. Baum, C.F., Schafer, D., and O. Talavera: The Impact of Financial Structure on Firms - Financial Con- straints: a cross-country analysis , Boston College Working Paper, No. 690, 2009. 85

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

BCVA: The economic impact of private equity in the UK , London: BCVA (British Venture Capital Asso- ciation), 2006. Bedu, N.: The challenge to assess the consequences of LBO on companies. “Quantitative” evidence from Europe, Private Equity Workshop, University of Geneva, 6th June 2011. Bergström, C., Grubb, M. and Jonsson, S.: The Operating Impact of Buy-outs in Sweden: A Study of Value Creation , Journal of Private Equity, 11: 22–39, 2007. Bernstein, S., Lerner, J., Sorensen, M. and Stromberg, P.: Private equity, industry performance and cyclicality , in: Gurung, A. and Lerner, J. (eds.): The Globalization of Alternative Investments Working Papers Volume 3: The Global Economic Impact of Private Equity. Geneva: World Economic Forum, 2010. Bevort, A./Jobert, A.: Sociologie du Travail: les relations professionnelles , Paris, Armand Collin, Collec- tion « U », 2008. Blome-Drees, J. / Rang, R.: Private Equity-Investitionen in deutsche Unternehmen und ihre Wirkungen auf die Mitarbeiter – Eine konzeptionelle und empirische Analyse , Hans Böckler Foundation, Düssel- dorf, 2006. Boucly, Q., Sraer, D. and Thesmar, D.: Leveraged buy-outs – evidence from French deals , WEF 29008, 2008. Bozkaya, A. and Kerr, W.R.: Labor Regulations and European Private Equity , Harvard Business School Entrepreneurial Management Working Paper No. 08-043; MIT Sloan Research Paper No. 4771-10, 2009. Bruining et al.: HRM in Buy-outs in the UK and Netherlands , International Journal of Human Resource Management 16: 345-365, 2005. Bruining, H., Boselie, P., Wright, M. and Bacon, N.: The impact of business ownership change on employee relations: buy-outs in the UK and the Netherlands , International Journal of Human Resource Management 16: 345-365, 2005. BVK: Private Equity-Prognose 2013 - Erwartungen der deutschen Beteiligungsgesellschaften zur Marktentwicklung , Berlin February 2013. Chambost, I./Hoarau, C./Roturier, P.: Social Dialogue in France and Reactions to the Financialisation of the Economy , Transfer, n° 2, pp. 271-289, 2009. Clark, I.: Private equity in the UK: job regulation and trade unions , Journal of Industrial Relations 51: 489-500, 2009a. Clark, I.: The private equity business model and associated strategies for HRM: evidence and implications , International Journal of Human Resource Management 20 (10): 2030-2048, 2009b. CMBOR: European Management Buy-out Review , 2010. CMBOR: The Impact of Private Equity-backed Buy-outs on Employee Relations , 2008. Cummings, D.: Private equity: Fund types, risks and returns, and regulation , Robert W. Kolb Series in Finance, 2011. Cressy, R., Munari, F. and Malipiero, A.: Creative destruction: Evidence that buy-outs cut jobs to raise returns , University of Birmingham Working Paper, 2007. Davis, S. et al.: Private equity and employment , in: Lerner, J. and Gurung, A.(eds): The Global Impact of Private Equity Report 2008, Globalization of Alternative Investments, Working Papers Volume 1, World Economic Forum, 43-64, 2008. 86

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Engelen, E. and Konings, M.: Financial Capitalism Resurgent. Comparative Institutionalism and the Challenges of Financialization , in: Morgan et al. (eds.) The Oxford Handbook of Comparative Institu- tional Analysis, Oxford: Oxford University Press, 2010. Engelen, E., Konings, M. and Fernandez, R.: The rise of activist investors and patterns of political response: lessons on agency , Socio-Economic Review 6: 611-636, 2008. Ernst & Young: Return to warmer waters. How do private equity investors create value? A study of 2010 European exits , research paper, 2011. Ernst & Young: Branching out. How do private equity investors create value? A study of European exits , research paper, 2012. European Commission: Restructuring and employment , Communication of the Commission of 31st March, COM(2005) 120 final, 2005. European Commission: Restructuring and employment the contribution of the European Union , Commission Staff Working Paper, COM(2008) 419 final, 2008. Evans, J. and Habbard, P.: From shareholder value to private equity – the changing face of financialisation of the economy . Transfer 14 (1): 63-76, 2008. EVCA and KPMG: Benchmarking European Tax and Legal Environments. Indicators of Tax and Legal Environments Favouring the Development of Private Equity and Venture Capital, and Entrepreneur- ship in Europe . Zaventem: EVCA/KPMG, 2008. EVCA: EVCA Yearbook 2007 , Zaventem: EVCA, 2007. EVCA: EVCA Yearbook 2008 , Zaventem: EVCA, 2008. EVCA/CMBR: The Impact of Private Equity-backed Buy-outs on Employee Relations , Research Paper, 2008. EVCA: EVCA Yearbook 2009 , Zaventem: EVCA, 2009. Faber, O.: Finanzinvestoren in Deutschland – Portraits und Investitionsbeispiele unter besonderer Berücksichtigung der Auswirkungen auf die Beschäftigung , Arbeitspapier 123. Hans-Böckler-Stiftung, 2009. Folkman, P., Froud, J., Williams, K. and Johal, S.: Private equity: levered on capital or labour , Journal of Industrial Relations 51: 517-527, 2009. Ganslandt, M.: Internationellt statligt ägande och konkurrens , Underlagsrapport nr 17, Globalise- ringsrådet, Utbildningsdepartementet, Stockholm, 2008. Goergen, M./O' Sullivan, N./Wood, G.: Private equity takeovers and employment in the UK: Some empirical evidence, working paper, 2011. Gilligan, J./Wright, M.: Private Equity Demystified , London: ICAEW, 2008. Gilligan, J./Wright, M.: Private equity demystified: An explanatory guide 2nd edition, 2010. Greenwood, R. and Schor, M.: Investor activism and takeovers , Journal of Financial Economics 92. 362-375, 2009. Hackethal et al.: Private equity - Blessing or curse? The case of IPOs , working paper, Goethe- University Frankfurt, Finance Department, 2010. Hall, D.: Methodological issues in estimating the effect of private equity on employment , PSIRU, Uni- versity of Greenwich, 2007.

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Harris, R., Siegel, D. and Wright, M.: Assessing the impact of management buy-outs on economic efficiency: plant-level evidence from the UK , The Review of Economics and Statistics, 87: 148-153, 2005. ITUC: Where the house always wins: Private equity, hedge funds and the new casino capitalism , In- ternational Trade Union Confederation, Brussels, 2007. Kamp, L./Krieger, A.: Die Aktivitäten von Finanzinvestoren in Deutschland, Arbeitspapier 103, Hans Böckler Foundation, Düsseldorf 2005. Kaplan, S. and Stromberg, P.: Leveraged buy-outs and private equity , Journal of Economic Perspec- tives. 23: 121-146, 2009. Kaserer, C. et. al: Private Equity in Deutschland: Rahmenbedingungen, ökonomische Bedeutung und Handlungsempfehlungen , Norderstedt: Books on Demand, 2007. Kaserer, C. et al.: Erwerb und Übernahme von Firmen durch Finanzinvestoren , Expert Report for the German Federal Ministry of Finance, Center for Entrepreneurial and Financial Studies in collaboration with the European Business School and the law firm White & Case, Munich 2007. Kay J.: The charges laid against us, Financial Times. January 30, 2009. Kreiß, C.: Auswirkungen von Private Equity auf Investoren, übernommene Unternehmen und die Volkswirtschaft , WiSt Wirtschaftswissenschaftliches Studium Heft 2 Februar 2010. Les Echos: Les opérations de LBO au point mort en France , 26/07/2012, p. 24. Linklaters: Negotiating Europe’s LBO debt mountain , 2012. Lutz, E./Achleitner, A-K.: Angels or Demons? Evidence on the Impact of Private Equity Firms on Em- ployment , Zeitschrift für Betriebswirtschaft (ZfB), Sonderheft Entrepreneurial Finance, No. 5, pp. 53- 81, 2009. Meier, M./Möhlmann-Mahlau, T.: Underpricing and performance of private equity - Backed IPOs in Germany – an empirical study , Bremen University of Applied Sciences, SME Working Papers No. 3, 2010. Meyer, T.: Private Equity. Zu früh für einen Nachruf , Deutsche Bank Research, Frankfurt 2009, p. 12.

Morin, F.: Le modèle français de détention et de gestion du capital. Analyse, prospective et comparai- sons internationales , Report for CAE, Les Editions de Bercy, coll. Etudes, 1998. Nordic Innovation Centre: Obstacles to Nordic Venture Capital Funds. Updated version 2009 , Oslo, 2009. NVP: Ondernemend Vermogen; De Nederlandse Private Equity Market in 2007 , Amsterdam: NVP, 2008. NVP: Ondernemend Vermogen; De Nederlandse Private Equity Market in 2009 , Amsterdam: NVP, 2010. Nyren, G and Asbrink, A.: Differences in operating performance: a study of primary and secondary buy-outs , Stockholm: Stockholm School of Economics, Bachelor’s thesis, 2009. Olsson, M./Tag, J.: Private equity and employees , Research Institute of Industrial Economics, working paper, 2012. Phalippou L.: The hazards of using IRR to measure performance: the case of private equity , SSRN working paper, 2007.

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

PSE Group in European Parliament: Hedge Funds and Private Equity-A Critical Analysis , Report of the PSE-Group in European Parliament, 2007. PwC: Private Equity Trend Report 2012. Learning to live with the new reality , 2012. Rodrigues, B. S./Child, J.: Private equity, the minimalist organization and the quality of employment relations , Human Relations, Volume: 63 Issue: 9 pp.1321-1342, 2010. Scheuplein, C.: An die Wertschöpfungskette gelegt. Die finanzgetriebene Restrukturierung in der deutschen Automobilzulieferindustrie und ihr Scheitern , in: Prokla – Zeitschrift für kritische Sozialwis- senschaft, Heft 166, 42. Jg, Nr. 1, pp. 49-64, 2013. Scheuplein, C.: Buyouts in Deutschland. Die angelsächsische Achse , forthcoming. Schewe, G./Ortwein, G./Leo, A.: Der Einfluss von Private Equity-Gesellschaften auf die Corporate Governance – Der Fall Hugo Boss AG , Arbeitspapiere Westfälische Wilhelms-Universität Münster, No. 56/2008, Münster 2008. Schulz, W./ Kaserer, C./ Trappel, J. (Eds.): Finanzinvestoren im Medienbereich – Gutachten im Auftrag der Direktorenkonferenz der Landesmedienanstalten , Hans-Bredow Institut der Universität Hamburg in cooperation with the Center for Entrepreneurial and Financial Studies TU München and the Insti- tut für Publizistikwissenschaft und Medienforschung der Universität Zürich, Hamburg 2008. SEIU: Behind the buy-outs: inside the world of private equity . New York: SEIU, 2007. Siegel, D./Wright, M./Filatotchev, I.: Private Equity, LBOs, and Corporate Governance: International Evidence , working paper, 2011. Stromberg, P.: The New Demography of Private Equity , Swedish Institute for Financial Research, 2007. Strömberg, P. et. al.: Private equity and the resolution of financial distress , Stockholm School of Eco- nomics, working paper, 2012. Tag, J.: The real effects of private equity buyouts , IFN Working Paper No. 851, 2010. Thornton, P.: Inside the dark box: shedding light on private equity , London: the Work Foundation, 2007. Vitols, S.: Private equity: financial engineering or solution to market failure , pp. 61-88, in: E. Hein et. al (eds.): ‘Finance-Led Capitalism? Macroeconomic Effects of Changes in the Financial Sector‘, Mar- burg: Metropolis-Verlag, 2007. Voss, E. et al.: Data collection study on the impact of private equity, hedge and sovereign funds on industrial change in Europe , Report prepared for the European Economic and Social Committee, Wilke, Maack und Partner, Hamburg, 2009. Watt, A.: The impact of private equity on European companies and workers: key issues and a review of the evidence , Industrial Relations Journal 39 (6): 548-568, 2008. Wilke, P. et al.: The impacts of private equity investors, hedge funds and sovereign wealth funds on industrial restructuring in Europe as illustrated by case studies , Report to European Commission: Em- ployment, Social Affairs and Equal Opportunities, 2009. Wilson, N. et.al.: Private equity portfolio company performance through the recession , Credit Man- agement Research Centre, Leeds University Business School, 2010. Wilson, N./Wright, M./Siegel, D. S./Scholes, L.: Private equity portfolio company performance during the global recession , Journal of Corporate Finance Volume 18, pp. 193–205, February 2012.

‘Private Equity and Labour in Europe: Did the crisis change the perception and role of Private Equity’

Wright, M. et.al.: The impact of private equity and buyouts on employment, remuneration and other HRM practices, Journal of Industrial Relations September (51): 501-515, 2009.