Read Peter Coy’s “Opening Remarks” in the latest Bloomberg Businessweek, and you’ll find the pros and cons linked to private equity firms such as Bain Capital, Mitt Romney’s former firm.
One of the least publicized among the positives id the potential benefit for people other than fat cats.
An analysis of 598 buyout funds that existed between 1984 and 2008 found that even after fees, their weighted-average returns to outside investors were 1.27 times the returns on the Standard & Poor’s 500-stock index over the same periods. That’s a huge margin. That performance wasn’t limited to just a few lucky years, either, according to the study by Steven N. Kaplan of the University of Chicago Booth School of Business, Robert S. Harris of the University of Virginia Darden School, and Tim Jenkinson of Oxford University’s Saïd Business School. The buyout firms underperformed the S&P 500 in only 5 of the 25 years. Kaplan says the funds’ outperformance is evidence that private equity firms genuinely unlock value through “strong incentives to management, strong oversight, and operational consulting.”
Why should ordinary Americans care about the financial success of private equity? They shouldn’t—unless they’re invested in it. According to Preqin, a London-based data provider, 25 percent of the dollars going to private equity funds from 2009 to 2011 came from public pension funds. That included teachers in Texas, California, and New Jersey.
A major downside Coy notes is the potential job loss, an aspect that has special relevance today.
The chief problem for Romney and for private equity is that it’s 2012. The virtues of creative destruction are abstract, while the reality of 8.5 percent unemployment is vivid. Romney’s résumé might have gone over better in 2000, when the unemployment rate was 4 percent and workers were confident that if they lost one job, another would pop up soon. Today there’s no such assurance—which is why people are voluntarily quitting their jobs at a lower rate now than even during the 2001 recession.
One argument Coy ignores — perhaps because it’s too abstract — is that the increased economic efficiency linked to private equity deals ends up freeing resources to flow into more productive areas of the economy. Regardless of the impact on jobs linked to companies tied to private equity firms, their efforts to root out inefficiency help divert misallocated capital to other uses. This means more jobs, though it’s impossible to pinpoint which companies — or even which sectors of the economy — will end up benefiting from job growth.
