"'Jobs Declined at Companies Acquired by Private Equity'—True or False?"

Financial Supervisory Service Journal Analyzes 144 PEF-Acquired Korean Companies
Employment Growth Was Higher in the Acquisition Year and Five Years Later
Korean PEFs Differ from U.S. Firms, Where "Mass Layoffs Are Common"

"The number of domestic employees, which stood at 2,291 at the end of 2022 just before the acquisition, rose by 444 to 2,735 in the first half of this year."

This was the explanation MBK Partners issued on October 27 in response to claims that the number of employees at Osstem Implant had declined. The previous day, the Metal Workers' Union's Osstem Implant branch held a press conference at the National Assembly, saying, "368 permanent employees have left the company over the past year," and held MBK responsible.

The claim that jobs decline in number and quality when a private equity fund (PEF) acquires a company is a recurring issue. A dispute over the decline in the number of workers is also continuing at Homeplus. Do jobs really disappear at companies acquired by PEFs? A paper that examined this question using recent data from South Korea was published in the Financial Supervisory Service journal Financial Supervisory Research (Vol. 13, No. 2).

No Significant Employment Decline at PEF-Acquired Korean Companies

Han Sanghun, a senior investigator at the Financial Supervisory Service, and Professor Rosemary Batt of Cornell University compared employment growth rates at 144 companies in which PEFs had held at least 50% of the shares for more than three years with those at more than 31,000 other companies, using NICE Information Service's corporate database, KISVALUE. The results showed no statistically significant decline in employment at PEF-acquired companies at any point from 2005 to 2019. In fact, their employment growth rates were higher than those of other companies in the year of acquisition and five years later.

The researchers cited South Korea's strict regulatory environment, which limits the aggressive financial techniques used by PEFs, as the reason. "South Korea imposes strong regulations on PEFs, including requirements to ensure transparency and report activities, as well as restrictions on aggressive financial engineering strategies," they said. "This regulatory environment may encourage business models that enhance employment stability at acquired companies."

In the United States, financial engineering techniques such as leveraged buyouts (LBOs), which load acquisition debt onto the acquired company, additional borrowing to fund dividends, and sale-and-leaseback transactions are widely used. Critics say these practices can lead to deteriorating finances and mass layoffs. In contrast, South Korea requires acquisition debt to remain at the fund level, imposes strict disclosure requirements, prohibits dismissals without just cause, and gives priority to wages and severance pay in the event of bankruptcy. The argument is that PEFs therefore have greater incentive to generate returns through operational improvements and sales growth rather than short-term cash extraction.

The head of a PEF management firm said, "There was a time when foreign private equity funds dominated the capital market and restructuring was sometimes a core strategy. But since the domestic PEF market has grown and local PEFs have emerged, strategies focused on sales growth and value enhancement, rather than cost cutting, have become the norm."

14 Bills to Regulate PEFs Pending in the National Assembly... "Regulation Should Not Simply Tie Their Hands"

Fourteen bills to amend the Financial Investment Services and Capital Markets Act and directly regulate PEFs are pending in the National Assembly. They include proposals to lower the borrowing limit from 400% to 200% of net assets, expand reporting requirements for borrowing, asset sales, and dividends, and require companies to notify worker representatives of the employment impact of an acquisition. It remains uncertain which bills will survive the process of consolidation or dismissal, but the PEF industry is already on edge over the substance of the bills currently pending.

An investment banking industry source said, "As we mark 20 years since the introduction of the PEF system, there is certainly a need to reconsider the role and responsibilities of PEFs." The source added, "But one-sided regulations that simply tie their hands based on the 'demonization of private equity funds' would only have the adverse effect of undermining the dynamism of the capital market," urging a cautious response.

Meanwhile, at its annual general meeting on October 28, the PEF Managers' Council approved a proposal to dissolve the council and transition to the Korea Private Equity Association (tentative name). It aims to begin operations in January next year. The council had previously highlighted the need to establish a self-regulatory framework and create a channel for communication with the National Assembly and government authorities. An investment banking industry source said, "There is already a substantial body of research on the relationship between private equity funds and employment, and individual firms have released relevant materials several times, but perceptions of private equity funds are not changing easily." The source added, "It is also important for the association, which is set to launch next year, to do more than simply oppose one-sided regulation and to proactively speak out on employment and responsible management."

This content was produced with the assistance of AI translation services.