First, please let’s get this thing right.
The Atlantic was rescued twice by private equity. It would be folded if not for PE.
Second, journalists choose their words deliberately but often don’t have a clue as to what they are talking about. All venture capital startup funding (responsible for Google, Facebook, Apple, Netflix, Amazon) was private equity.
If you look back at this previous The Atlantic article, “The Demise of Toys R Us,” you will see the current one above is pure hypocrisy.
Here is the earlier article from the same publication in a slightly different (2012) political era:
Private Equity Is a Force for Good
There is little dispute that private equity firms, on average, provide good returns, although the evidence is not…
Here is the conclusion from the article:
“Private equity provides attractive returns for their investors. Second, the effect of private equity buyouts on employment in target firms is, on average, quite small. The venture capital side of private equity almost certainly has a positive effect on employment. Third, private equity buyouts accelerate the process of creative destruction: old jobs disappear more rapidly, new jobs get created more rapidly, and productivity growth increases as a result. In this respect, private equity looks like a potent form of capitalism.
Governor Romney’s defenders have argued that critics of his role at Bain Capital are really attacking capitalism itself. Given the academic evidence, we would have to agree.”
And now, my take.
I agree with the first Atlantic article, btw.
Private equity simply means funds used in a transaction that are not regulated by the SEC. There is nothing sinister or murky about private equity. If you and a friend pool your money and buy a small lemonade stand, that’s private equity. If you choose to raise money by registering to sell shares to the public, that is public equity. That’s the difference.
The part about Mitt Romney and Bain is misguided.
First, be careful not to parrot the politicians, who speak out of both sides of their mouths.
Private equity is among the largest donors to Democratic campaigns, so it’s hypocrisy. Secondly, the capital that private equity raises to buy companies are from (primarily) large labor union pension funds. So the people that put them in business are the progressive unions sounding off the loudest.
In a private equity transaction, as in a private equity company takes over a business, one of two things have happened: 1) the debt holders own the company (meaning there is no value left) or 2) the shareholders have sold it out of impatience. Either way, the company wasn’t going to survive in its current form.
As to the cutbacks and restructuring, remember that the private equity people answer to their shareholders who want a specified return in a short (maximum 10 year) period of time. Blaming private equity for tearing down a company and selling off the parts that have value is like blaming the demolition company for wrecking an unsafe building then selling the fixtures.
It’s true, private equity makes a boatload of money. That’s a fair target if you are into that sort of criticism. But take that up with the economists, because private equity makes money by taking risks no one else is willing to do. Otherwise, companies would just fix themselves.
If there’s a side to private equity I don’t agree with, it’s the carried interest rule in which PE managers pay capital gains and not income tax on their income. This isn’t a huge deal in terms of the American economy, just a fairness thing. Otherwise, full steam ahead. PE to the rescue.