A Bit 'o Random Musings on Politics, Religion, and Anything Else That Passes Through My Crazy Head

Monday, July 16, 2012

P.E. (not the class in school)

Private Equity.  What do those two words evoke for you?  Fear and loathing of corporate greed?  A misty eyed view of the invisible hand that inexorably leads towards efficient allocation of economic resources?  Or, more commonly: "What?"  Of course, if you have been following the Presidential campaign, you know that Private Equity has become a story because it's part of Mitt Romney's background.

Governor Romney founded and worked at Bain Capital, a private equity firm.  Here's my understanding: essentially Bain Capital would buy stock in privately-held companies.  They would pick companies which they thought had potential to grow and expand, and use their business expertise to help them grow.  After improving the business for several years, Bain would then sell the company (hopefully, at a profit).  The company that Mitt Romney likes to use as an example is "Staples," the office supply chain.  That was an early investment for Bain which paid off.

Seems non-controversial - until you look at the non-success stories.  One of the big criticisms of private equity is that it emphasizes "quick turnarounds" at the expense of long term goals - PE firms buy and sell companies relatively fast, which may lead them to employ an ax instead of a scalpel.  PE firms sometimes do things like fire a lot of people or load up a company with debt before selling it off.  These types of measures may not be in the long term best interests of the company the PE firm is buying.  People who run the PE companies also have incentives to maximize their own profit and they don't have to worry about what happens to the company after they sell it.

I don't think private equity is good or bad, really.  It's a tool, and like any tool, it can be misused.  I do worry that Mitt Romney does not seem troubled by the havoc he terms "creative destruction."  The destruction caused by capitalism is massive and disruptive - it truly destroys lives through layoffs and business failures.  The question is whether what it creates is "worth it" - is the destruction caused by this particular breed of capitalism outweighed by the positive economic growth it creates?

Personally, the answer for me is no.  I think private equity is not a builder of long term economic growth.  It emphasizes all the wrong things, and I think it fosters a "get rich quick" mentality.  We need economic growth for the long haul, and I don't think private equity has that focus, drive and discipline to get us there.  Private equity isn't to blame for every economic problem we have, and I'm certainly not saying that Mitt Romney is evil.  I just don't think his private equity background makes him the arbiter of all that is right for the economy.

Sorry, this post was kind of lame.  Better thought out next week, I promise.

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