A defense of private equity from another era

May 2, 2012

The current Businessweek cover shows a chainsaw-wielding Patrick Bateman-esque figure in behind a blood-red block typeface. The story itself, by Brendan Greeley, is about private-equity firm Monomoy Capital Partners and does little to justify the violent imagery. In fact,  the story seems to be an attempt at rehabilitating the image of a entire industry through the story of a very small player. The NYT’s Kevin Roose, who wrote about Monomoy in January, took to Twitter to call it an “absurdly flattering cover story”.

That description is right. There are no discussions of the darker sides of private equity, things like dividend recapitalizations, management shakeups, asset sales, exploitation of tax loopholes, or shockingly quick exits.

Instead, we get a fully MBA-approved description of Monomoy’s efficiency “boot camps” that preach “kaizen”, a Japanese management idea focused on continuous improvement that was developed by Toyota, and has recently been called into question. There are of course layoffs that accompany this strategy. But they are presented more like inevitable hurdles to success: “to survive, you cut people. To grow, you cut waste.”

The secret of Monomoy’s success, it would seem, is implementing Japanese management principles. In this sense, the back-to-the-80’s cover makes sense. For instance, there’s this description of the importance of clean toolboxes:

[It is] so spotless and so comprehensive that, he says, “Nascar would be proud.” He’ll show it to the maintenance staff at a plant and tell them, “If your toolbox looked like this, my machine wouldn’t be down.” By which he means Monomoy’s machine. Bray is a type-A obsessive masquerading as a good ol’ boy.

Monomoy’s executives say that they are able to find companies with $100-150 million in revenue and double, triple or quadruple EBITDA. I’m highly skeptical they do it with clean toolboxes or by turning a fax machine on a warehouse floor into a “bat phone”. One of Monomoy’s partners comes out and confirms that these sorts of incremental changes aren’t at the core of the firm’s financial success: “we’re pretty good at the other stuff, the financial restructuring, the lease restructuring, the union negotiations, the commercial side”.

If that “other stuff” is what Monomoy’s executives think explain their success, why did Greeley spend so much time writing about kaizen-driven operational improvements? Partially, it’s because Greeley was given access to, and participated in, Monomoy’s kaizen workshops.

More importantly, while the U.S. searches desperately for economic growth, this type of deeply optimistic portrait of management experts is soothing. Instead of focusing on specific factors that impact PE profitability, like tax treatment, the article focused on faddish consultant speak. But in reality, those outdated platitudes are not an accurate appraisal of the problems with the American economy — or, for that matter, how to fix them.

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