Jobs and the Future of Work

Private equity holds the key to creating quality jobs for millions

Companies with private equity ownership employ 12 million people in the United States.

Companies with private equity ownership employ 12 million people in the United States. Image: Unsplash/sol

Megha Bansal Rizoli
Director, Employer Mobilization, Jobs for the Future (JFF)
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Future of Work

  • Private equity firms generate vast economic output – nearly 12 million jobs in the United States and 6.5% of the country’s gross domestic product amounting to $1.4 trillion.
  • Strategies designed to improve job quality for workers could raise the value of portfolio companies under private equity firms by driving growth, scale and innovation, and higher returns on investments upon exit.
  • Private equity firms could embed strategies to improve job quality throughout the investment lifecycle, build inclusive career pathways and advance employee ownership models.

Leaders across the learn-and-work ecosystem have been discussing the need for a cross-sector effort to increase the number of quality jobs in the US economy. As this rising national conversation has taken place, a new and potentially impactful ally has emerged: private equity firms.

Because their companies employ nearly 12 million people, private equity firms could significantly impact the push to create quality jobs if they pursue growth strategies that prioritize investing in talent. And their efforts could have ripple effects that benefit workers and other businesses throughout the United States.

The business case

The private equity industry has grown significantly in recent years, with the number of funds in the United States more than doubling to 19,000 in five years, global assets under management reaching $12.8 trillion and cash committed for investing (“dry powder”) reaching $3.7 trillion.

This growth and increased competition have put private equity firms under pressure to perform well, differentiate themselves from competitors and deliver value to their institutional investors. Today, private equity must find new strategies beyond cost-cutting, efficiency improvements and financial engineering to deliver long-term value while navigating an evolving economy and a complex labour market.

Talent is often the prime differentiator between a growing and stagnant business. Ultimately, private equity firms want to maximize returns on their investment, so to differentiate themselves, they should consider the talent they employ due to their ownership control in their portfolio companies.

Strategies designed to improve job quality for workers – increasing compensation, expanding benefits packages and adopting equitable and inclusive talent management practices, for example – could raise the value of those companies by improving employee recruitment, performance, engagement and retention, ultimately driving growth, scale and innovation, and higher returns on those investments upon exit.

Investments in talent will improve job quality and drive value for workers, portfolio companies, private equity firms and institutional investors. That’s an “everyone wins” solution.

The business case for private equity investment in quality jobs for workers.
The business case for private equity investment in quality jobs for workers. Image: Jobs for the Future (JFF)

The opportunity for impact

Due to their equity stake and ownership control in companies and the terms of their deals, private equity firms have more influence over the companies in their portfolios than other types of investors. Their positive influence could create new quality jobs and ripple effects throughout the economy.

In 2020, companies owned by private equity firms employed nearly 12 million people in the United States (an increase of almost 3 million from 2018). They generated 6.5% of the country’s gross domestic product (GDP) – $1.4 trillion. Furthermore, private equity firms can be critical catalysts of small and midsize business activity – in 2020, 86% of the companies they invested in employed 500 or fewer workers and about one-third employed 10 people or less.

Repositioning private equity as a multiplier of impact in the emerging effort to improve job quality for millions of workers would leverage private equity’s potential for substantial impact.

3 levers for driving job quality

Jobs for the Future (JFF) research has found that there are three levers that private equity firms could use to propel the companies in their investment portfolios to become better engines of equitable economic advancement and job quality for workers:

1. Embed practices to improve job quality across the investment lifecycle

Private equity firms often consider job creation a core metric of company potential and performance but assessing job quality is just as important. Private equity firms can play a critical role in designing quality jobs at portfolio companies by making sure that at every stage of the investment lifecycle – from sourcing to due diligence to ownership to exit – they emphasize the importance of employment policies and practices that ensure jobs meet workers’ needs and create sustainable long-term value for the companies and the firm.

For example, using metrics that assess job quality – e.g. employee turnover rates, compensation and benefits, and professional development and advancement opportunities – during the sourcing and diligence phases would help a private equity firm understand a company’s potential for growth.

Such a strategy would also help increase employee engagement, reduce employee turnover and attract top talent, which can be a competitive advantage and cost-saver. Furthermore, incorporating job quality strategies and measurements into a responsible exit strategy would ensure investments transcend company ownership.

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2. Build inclusive career pathways

Secondly, private equity firms should urge the companies in their portfolios to build inclusive career pathways – so that quality jobs are accessible to employees of all backgrounds – by implementing more inclusive talent practices that can also be a major driver of revenue, cash flow and performance.

For example, place-based hiring strategies, which focus on recruiting people from specific regional labour markets, can help to diversify talent pipelines by expanding opportunities for residents who are members of populations underrepresented in quality jobs. Skills-based talent practices can help companies match employee capabilities to business needs more accurately and efficiently while building a more diverse, inclusive and productive workforce – by removing degree requirements from job descriptions and building internal career advancement pathways according to skill, for example.

Apprenticeship and other work-based learning models can also expand and diversify the pipeline of workers qualified for quality jobs by offering internal opportunities to advance and learn new skills on the job. Diversification and internal career pathways should also extend to executive leadership roles and board seats, which influence portfolio companies’ operations, policies and practices most.

3. Advance employee ownership models

Finally, private equity firms should implement employee ownership models in portfolio companies that promote long-term value creation and employee investment as the fundamental drivers of growth and innovation. A shift to employee ownership holds promise for driving substantial improvements in both job quality and financial performance.

Studies have shown that companies with significant levels of employee ownership often outperform others, resulting in enhanced employee engagement and motivation and improved productivity. There is also more success in attracting and retaining talent and tax and business culture benefits, adding to a company’s financial success.

Models can take various forms, including broad-based employee ownership, employee stock ownership programmes, worker cooperatives and employee-owned trusts. All aim to broaden decision-making and control within organizations. In particular, employee ownership programmes represent an important step toward amplifying employee voice and agency, which can be critical to driving equity in the workplace and improving working conditions, especially when employee input plays a key role in informing strategy and decision-making.

Private equity firms are well positioned to create more opportunities for US workers to pursue quality jobs and their potential for impact is significant – for themselves and across the country.

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