Counterparties: Private equity’s public relations

By Ben Walsh
May 24, 2012

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After Cory Booker’s Meet the Press mishap, Noah Smith asks a great question: What does an economy without private equity look like? Smith says we should “sic the pirates on the zombies” of corporate Japan, where there isn’t an active PE industry, productivity is low and labor costs are high.

In the US, the private equity industry’s advocacy arm continues to focus on PE’s role as a job creator, releasing another in a series of videos showcasing job growth after a PE acquisition. But Steven Rattner notes that job creation isn’t the industry’s primary goal. Private equity, he says, seeks profit first and “any job creation [is] a welcome but secondary byproduct”.

The most recent research, Peter Coy writes, indicates that “having your company acquired by a private equity firm is like living through a national recession”. Ezra Klein looks at that research and argues that Mitt Romney should have learned from his time at Bain that a strong social safety net is as important as economic growth.

Mike Konczal lays out the the major strains of criticism against private equity and concludes that it “[games] tax law while cashing out short-term value, leaving others in the firm worse off and the firm itself more prone to collapse and less able to produce long-term value”. The Epicurean Dealmaker counters, saying that a successful PE deal generally ends with selling to a new buyer, and if the PE firm leaves the company as a shell of its former self, it probably won’t have made much money on the deal. – Ben Walsh

On to today’s links:

Long Reads
The philanthropic complex: Capitalism’s risk manager – Jacobin

TBTF
A simple proposal that could end too big to fail – Barry Ritholtz

EU Mess
Yes, the European crisis could drag down America’s economic growth – WSJ
The lawyer who engineered Greece’s default represents sovereigns because “it’s just more fun” – Reuters
European PMIs could be terrible again, and even German confidence is sinking – Bloomberg
Greece’s oligarchs: Paying few taxes, giving relatively little to charity – NYT
Buiter: Greece will leave the euro zone on Jan. 1, 2013 – Business Insider

New Normal
Detroit is shutting off nearly half of its streetlights to combat budget problems – Bloomberg

Facebook
“Facebook is an unprecedented synthesis of corporate and public spaces” – New Yorker

Defenestrations
HP will lay off 27,000 workers by 2014 – Reuters

Grim
Ruin your day by seeing how many more hours you work than the OECD average – BBC

Wonks
Should stocks trade in increments of $.0001? – Marginal Revolution

5 comments

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Working for a PE-acquired firm is like entering a permanent “crunch time” workplace ethic. PE sets the earning targets, management is simply put in charge of seeing those targets hit, and the staff is forced to do whatever it takes to hit those numbers. Guys like Romney never even meet the people who are for all intents/purposes under their employ… and the next layer down is under strict mandate to meet goals “or else”. Quality of life issues have no impact on management policy, to the extent that in most situations that’s what’s impacted (negatively, drastically) to change profit (positively, marginally). What winds up happening in most cases is that workers are asked to do “more with less”. Less headcount, less office infrastructure, less free time, less creative input, less flexibility, less tolerance of organized labor, less benefits, less amenities, etc. Since everyone works on a yearly salary and actual worker “efficiency” doesn’t really matter, and since all those cost-saving moves impact their well-being, workers become less efficient to the point where they work 50% more… for nearly the same results.

(Previous generations of managers knew that these policy shifts resulted in false efficiencies, but today’s generation of management is apparently judged by scalp count, and they are arrogant f**kers indeed)

So, why do PE firms make money on many of these companies? Because buying companies with solid growth targets, functional work environments, and good business prospects usually results in increased profit, DUH. And if those prospects don’t pan out and your costs of acquisition cut into your bottom line, you can turn the screws on management/staff to pull out stronger near-term profits at the expense of sustainability, since few large organizations can work in indefinite crunch-time conditions. If all hope is lost and you can’t manage your way out of a jam, you run up the company credit card, take your dividend, and pass the whole mess onto someone more ruthless than you are (“cancel Christmas!”, literally) until bankruptcy judges need to get involved. Or you can write it off and shut it all down. You need to maximize your DOLLAR value on the transaction. HUMAN value is not considered because it’s regarded as negligible. That’s truly a modern, novel, and frankly ridiculous concept.

Would you buy a warehouse full of hundred dollar bills, mulch it all up, and sell it as wood pulp? If not, then why would you buy a company full of educated, trained workers, make their working conditions stressful and abusive and unhealthy, and shove them out the door so that you can only gain the residual benefit of the work they did before you entered the situation? You’ll be left with branding and a supply/production/sales cycle. If the industry has any potential, you’ll get your ass kicked sooner rather than later. All that’s left for you is to toe the line between “lawful debt financing” and “management fraud”, which is not hard because our civil courts are starved and weak. Well, good luck you unethical piece of dog excrement.

Posted by BrianVan | Report as abusive

It seems like there is a definitional issue here. The private equity industry considers all types of control investment in private companies. When everyone else speaks about private equity — and particularly when people speak about Bain & Romney — they are speaking about leveraged buyouts in particular. That’s where all the funky stuff goes down.

Posted by Snyderico | Report as abusive

“sic the pirates on the zombies” of corporate Japan, where there isn’t an active PE industry, productivity is low and labor costs are high.”

Exactly how many JAPANESE want their country converted into the US?

When I look at Japan I see a country whose population is healthier than that of the US, which seems a whole lot more socially, secure, which is largely happy with the country. This country of low productivity and high labor costs seems to have no problem sustaining its economy and providing for its citizens’ needs.

What I see, when I see people like Noah Smith talking about Japan is people who are furious that a country that refuses to buy into their (economics-informed) model of human behavior can still thrive and prosper. Rather than admit that their model of humanity is broken, people like Smith would rather claim that Japan simply isn’t the success story it clearly is.

Posted by handleym99 | Report as abusive

@handleym99 Japan is a country that has been surviving on the razor’s edge for 25 years, and has a national debt the size of America’s despite an economy less than half the size of America’s. The only reason they haven’t capitulated and become a third world country is they arae so nationalistic the population continue to buy all the new debt and roll-overs to keep the country afloat. If America only had 5% foreign participation in the T-Bill market (like Japan does) they’d have been sunk on the day after the Bush tax cuts were signed. Japan is not America, it’s much worse.

Posted by CDN_Rebel | Report as abusive

Great post on solving TBTF, thanks for linking

Posted by thispaceforsale | Report as abusive