Opinion

Jack and Suzy Welch

Mr. Biden, here’s the truth about private equity

By Jack and Suzy Welch
May 30, 2012

Time was you worked in private equity and people just sort of shrugged when you mentioned it. You were in finance sort of; you invested in companies, you made deals. Whatever.

Now, you’re in private equity, and well, hello. You’re a heroic job creator – or no, wait, you take pleasure in firing people. You’re a savvy executive who knows how to grow the economy – or get outta here, you’re a vulture capitalist with leadership skills, as Vice-President Joe Biden recently put it, that are no better than a plumber’s.

Hello, indeed, and with all due respect to the vice-president, and certainly with no offense intended toward plumbers, we have a question.

Mr. Vice-President, where in the world are you getting your ideas about private equity?

Because we have an entirely different take, and we can tell you where ours comes from – experience, 20-plus years of working with PE firms and 11 years of working for one. And given that experience, and given how private equity is at the epicenter of the political debate now, we’d say it’s time for a reality check about what private equity really does and what kind of leaders it tends to produce.

Let’s start with what private equity firms do, which is actually very simple. They buy troubled companies with the intention of fixing them up. In time, they hope, that will result in a big payday when the new-and-improved business goes public or gets sold to an eager strategic acquirer. Yes, sometimes these turnaround efforts fail, and companies and jobs are lost. And yes, on occasion PE firms have bought in and overleveraged a business’s assets. Then, as a result of an economic downturn, the company has tanked, while the PE firm has gotten out whole.

But the norm is different. Typically, that’s not what happens. It’s just not. Indeed, research conducted under the auspices of the World Economic Forum in 2010 shows the practice of  “strip and flip” during PE-led turnarounds is rare. What’s far, far more common is this: PE firms buy “orphan” divisions that no longer are a good fit with their big corporate owners and have been left to fade away, or they snap up stand-alone businesses that have lost their way and are almost in the throes of death.

The key point here is that PE firms virtually never buy jewels – happy, fast-growing companies with glistening profits. After all, such companies have access to other kinds of capital; they don’t need private equity. And frankly, private equity is generally not in the business of polishing things up for a low-multiple return. It’s in the business of reinvention and rebirth, with fireworks at the end.

During this kind of overhaul, do jobs get lost? Unfortunately, in the early stages, they often do. It’s nearly impossible to massively improve productivity by keeping everything the same. But are companies saved? Again, yes. That’s the whole point of private equity. You’re trying to get a business from terrible to terrific, from dying to thriving. In the process, some jobs may go, but in the best-case scenario, with success down the road, many more will be created. And by preventing a company from going under, jobs will certainly be saved.

Now let’s talk about the leadership traits private equity’s most successful practitioners tend to exhibit.

Every private equity acquisition begins with a sophisticated negotiation between the PE firm, the corporate seller and the employees of the business being sold. Usually, several firms are vying for the business, but it’s not accurate to assume price is the sole determinant of who wins. Many times, just as critical is the case each private equity firm makes for itself, along with its ability to bring contentious stakeholders to a shared vision of the future. In short, most successful private equity managers have well-honed skills in the art of getting tough deals done.

Next, because of their familiarity with turning around broken companies, private equity managers usually have a very clear understanding of what it takes to establish a workable balance sheet, how to develop strategy and how to execute that strategy. Moreover, private equity managers tend to be very, shall we say, un-academic about these pursuits. In the private equity environment, fatheaded theories don’t get you very far. Realism does.

Top private equity leaders also are typically very good at talent management. You never hear that, but it’s true, and here’s why. Everything about a successful turnaround depends on people – picking the right ones to resurrect the broken company and placing them in the right jobs from top to bottom to get it all done. Think about it. In a well-run company, people make all the difference. Imagine how much more important they are in a rescue scenario. Which is why private equity people end up being smart about building great teams – and doing so quickly.

Finally, when you’re trying to save a company these days, rarely does the solution lie in hunkering down and keeping it local. Rather, to regain your health, you need to globalize your sourcing efforts, enter new markets, form a joint venture abroad or set up a foreign R&D operation. Thus private equity firms often goad their acquisitions into the borderless world, which explains why most successful PE leaders tend to have global mindsets about business, regulation, growth and geopolitics.

Which brings us back to Vice-President Biden’s remarks. Sophisticated negotiation skills, balance-sheet management, strategy development and implementation, talent selection and a global mindset sure seem like tools you’d want any president to carry, don’t they?

Only politics would say it ain’t so.

Jack Welch was the CEO of General Electric for 21 years and is the founder of the Jack Welch Management Institute at Strayer University. Suzy Welch is an author, speaker and the former Editor of the Harvard Business Review.

PHOTO: U.S. Vice-President Joe Biden gestures after giving a speech regarding the Obama administration’s foreign policy record at New York University in New York, April 26, 2012. REUTERS/Lucas Jackson

Comments
41 comments so far | RSS Comments RSS

Excellent clarification. If enough people see this, Obama and Biden will have to start discussing the real issues…

Posted by matthewslyman | Report as abusive
 

Terrible. This reads, nay, is about the most pro-private equity piece I have ever read. I admit that I haven’t read very many, but that doesn’t change the fact that this is basically an advertisement for private equity firms.

The failure here is what we’ve heard 1000 times already, doesn’t sound sexy, but just won’t go away, either: Government is not a business, and should not be thought of in the same way, and certainly not run the same way.

There is no business that *must* look out for the needs of all people withing a given geographic location, or even within its own walls. Someone doesn’t fit quite right, they are either shuffled around, or let go of. You can’t do that with government the way you do it with private business. You simply can’t, and it frankly shocks me a duo with as much business knowledge as I assume these two have would continue to parrot such an inaccurate line of thought.

Running government is not like running a business, nor is it like running a family. It is a fundamentally unique entity, and the longer people make such inaccurate and honestly, ignorant statements, the worse its going to get.

Posted by Adam_S | Report as abusive
 

Nice article but he starts to make the counter point against Romney when he starts with
“Finally, when you’re trying to save a company these days, rarely does the solution lie in hunkering down and keeping it local.”…
And then he goes on. That is Private Equity where the benefits and profits go to the top percent and not to the workers which Welch says are the key to the industry. According to the model of a PE firm the government and those connected to it would greatly benefit as they slimmmed down the local US workforce and ship the jobs overseas as Welch states:
“you need to globalize your sourcing efforts, enter new markets,…”
That is all well and good for the richest profit seeking individuals in the US but does nothing for infrastructure, defense or investing in this country. As others have pointed out, running a PE, even if they destroy a few companies, as rare as that may happen, can be certain that their profit isn’t affected as the government will bail out and compensate for pillaged pension funds and other “consultant fees” a PE can wrangle out of a failing purchase. If a PE buys a company, and that company flourishes then by all means reap the rewards but if they buy a company that fails, they should also suffer and not profit. Especially two times their investment for a weak investment pushes the taxpayer to make up the difference for employee benefits and pensions. Running a PE is an emotionless self centered position that does have it’s place in our capitalist system for many reasons listed. Running a country, in particular the US in this time of need and transition, as a PE is not in the interest of the well being of our country and the brave men and women who serve who are valued less as expendable low cost cogs in this country as a PE firm paradigm.

Posted by Saywhaaaaa | Report as abusive
 

@Adam_S

Speaking of “parroting such an inaccurate line of thought”…

You seem to have completely missed the entire point of the article. It’s not discussing whether the gov should be run as a business at all. It’s stating that the skills required to make it in PE would be beneficial to a president. It specifically states that the ability to find good people to work for you, the ability to balance a budget, and the ability to do more with less would be great for a president. I completely agree with them.

Now as for your “government is not a business” argument…

I guess my question to you is “how is it NOT like a business”? It takes in revenue via taxes, turns those resources into a service and then distributes it to the population. If the population likes the services the government is providing, they will return to the ballot and vote the same gov back in. Therefor, it is in the governments own interest to create as many happy people as possible…just like a business. The only difference is that government is obligated (legally) to provide certain services. So maybe its more like a regulated business…say a phone company.

Posted by CapitalismSays | Report as abusive
 

Caption for Biden picture.

“I once read part of a business book… this thick.”

;-)

Posted by DanFarfan | Report as abusive
 

I agree with CapitalismSays. Government is the business of the people. A business has to keep its customers happy and a government has to keep its people happy. Adam_S Have you heard of the Arab Spring? Some very unhappy customers there. Our government is different because it is a democracy. I view our senators and representatives as board members of a business. If they don’t make the right decisions the stock holders (citizens) throw them out.

While CapitalismSays has pointed out this article does highlight the skills needed to be a leader. But the article is more about shedding the stereotype of what a PE company is and does. Our present president seems to love to stereotype the rich and private equity firms as evil.

Posted by mike_andria | Report as abusive
 

As I understand, the PE mindset these days us very much long-term with hard, tough turnarounds. No wonder politicians don’t get it :(

Posted by Neilwal | Report as abusive
 

Thanks Jack and Suzy,
You both missed and made the point. There is no argument about the economic benefits of private equity. It is a prime contributor to the success of the free market, especially in the arena of “creative destruction”. The questions is “How applicable is that model to preserving a society?” What would the private equity solution look like? Would we spin off Texas in an IPO and fire all the unemployed American citizens? Business has it easy. It’s quantitative. Revenue – costs = profit, with some significant risks thrown in, but usually mitigated by the financial structure of the deal.
A society is qualitative; how do you put a price on being American or for that matter being French or Chinese? Yes, you could definitely put some price on a country based on GDP. You could also propose that at some point the cost of that society is beyond it’s means (say 14 trillion dollars), but history wouldn’t support you. Just look at countries that have been “written off”, China, Brazil, Vietnam, Eastern European countries, Yugoslavian spin-offs. It just doesn’t add up.

Posted by MikeAlso | Report as abusive
 

Jack, Jack.
I love you- and have always followed you. But, let’s get serious. First of all, the study you want us to believe barely covers the US- 5% of the firms covered were based there. And, it makes NO difference if there are 300 leveraged buyouts that are really small and may work (because the firms doing them actually use real money) and 45 are large, use tons of borrowed money, sell stock to pay back their own investment, fully using other people’s money to make a profit- or not. BankUnited is a prime example of this kind of buyout- and it has Federal loan guarantees to boot.
It’s not that PE firms are bad- but that some of them give the rest of the industry a black eye, and smell to boot.

Posted by CerebrationsBiz | Report as abusive
 

Joe Biden would have tried to impress upon his audience the importance of acquiring leadership skills, designed to rise above and reach beyond those of a venture capitalist.
Having sound PE skills could well be useful to both though, to a President as well as to a venture capitalist but the effective use of it to either would be glaringly different. Provision of adequate services to people of the first can’t be compared with the provision of only the profit
of the second. Neither of course would be it right to compare the leadership pots of a plumber and that of a PE leader. Or that of a successful President.

Posted by kchopra | Report as abusive
 

The comments about the character skills look very good, and seem reasonable. Unfortunately, the job of President is so unique and complex that there seems to be no correlation between any particular background, education or experience that determines whether someone becomes an effective President or not. With the current hyper-partisanship environment, it would be very difficult for any President to use his negotiating skills to achieve good results. A PE operator can walk away if the deal cannot be done advantageously – the President cannot. The specific characteristics such as balance sheet management and talent selection also are very difficult to put into practice when Congress determines the budget and can allow or disallow the talent you want to bring in. Most effective Presidents in our history have been in the position of having a majority of their party in both houses of Congress. They can then use those leadership skills to actually do something. Otherwise they are hamstrung.

Posted by steve778936 | Report as abusive
 

Eloquent piece about one small tree in a much larger forest. Let’s keep the investors investing and the presidents presiding.

Posted by BloodSavage | Report as abusive
 

What would the private equity solution for the US look like. Spin off Texas with an IPO, fire all unemployed American citizens?

Posted by MikeAlso | Report as abusive
 

Private equity companies do not buy companies with the intention of fixing them up. You know, and now we all understand, that every PE clan buys companies with assets, which can be and are immediately monetized. Fixing companies up is hard work and it takes time, you should know that. Clearly some PE companies do that but they are by far the smallest of minorities if any.

Let’s be real here, when did you make decisions based on “business hope”? I could probably recite, word for word, what you said about “business hope” and how GE should deal with it. Sometimes their efforts to fix the company fails and jobs, pensions, hopes and dreams are lost? Only sometimes?

Absolutely, PE companies take their time to fix what assets they scavenged because long-term gains are much more important than short-term cash and because people’s lives matter. Absolutely! Would any PE companies take the profits and let society deal with the human and social destruction? Never, not a PE company in US, ever! And, if by any chance that happens, it can only be attributed to uncontrolled economic downturn, which is forcing them to do dump whatever is left, take salary cuts and do whatever possible to soften the social blow. Absolutely, just ask any PE company CEO when was the last time he or she took a salary cut.

The key point, although not your key point, is that PE companies buy companies which have assets difficult to monetize without creating pain and social disruption which the parent companies are not willing to face. So a PE company from away lands in, takes hold of the assets and starts surgery, discarding the parts in a community about which they don’t care. What PE companies do you know which did this in the very neighborhood where the PE kings reside? Jack, give us some credit, please!

I do however understand that you absolutely believe that jobs do get destroyed, and without going into why this is just wrong and not the norm, let’s agree that, you have a clear vision and reputation on this subject.

The acquisition and negotiation process is anything but common or similar. Jack, creativity; remember the concept you value so much? You know better than most, that no two deals are the same but the common thread is, and you know this better than anyone, short-term money, as much as legally possible. And please don’t describe some honest competing environment where companies compete and the most qualified wins. Please don’t treat us like some silly naïve people. Some of us learned from you at GE.

Talented managers in PE companies are fairytales and you know that. Did you ever higher anyone as a manager from any PE company when you were king of GE? Even GE manages, trained and groomed by you, can’t do a good job at PE business. Shall we discuss Bob Nardelli?

You are correct, PE companies these days do what all other corporations do, “globalize”, i.e. outsource jobs outside US, eliminating benefits, cashing pension funds and sell hard assets. You did that at GE, GE continues to do it now, and so do most if not all of PE companies.

Which bring us to the closing statements. For whatever reason, you think that we can buy this bedtime story when the reality is a grotesque nightmare.

PE companies do what they are created to do and that is, make short -term huge amounts of money by privatizing the profits and socializing the costs and, in the process destroy lives and communities. And they do that because it’s not their job to take care of the society, it’s the government’s job. However, they bought the government to reduce their taxes, which would have paid for their social destruction. Their victims are on their own without a social safety net, which they intentionally and systematically paid politicians to dismantle. And then, some of them want to run for public office while, they have you write fairytales such as this one.

And regarding Joe Biden, you should leave him alone; he is a public servant and a taller man than you will ever be. Pick somebody on your side of the railroad tracks like, Donald Trump or Bernard Ebbers.

And you are right, only politics would say it ain’t so. What else could anyone use to describe fairytales? It’s either that or religion, isn’t it?

Posted by grand | Report as abusive
 

Some of the comments surprise me. Government IS a business. While it does have boards of directors (elected officials) that are political, it must receive revenue and provide a product. There are many ways that it is different than most businesses but that doesn’t change the fact that it is a business. It’s when government is not seen as a business and doesn’t follow basic business practices that it gets into trouble. Think of it as a business with a wobbly board of directors.

Weak businesses that are about to fail can be successfully rescued and PE firms are sometimes the ones that do that. Sometimes it is just a change in upper management. Sometimes it is just hiring the right middle manager or right bank or right marketing firm or whatever fixes the weakness. PE firms are very aggressive getting experienced personnel in place quickly to address those issues but an experience manager may have the same solutions, just usually not on a scale that the PE firm provides.

Looking at the current government in Washington, the average citizen knows that it is weak and needs to be turned around. Its books need to be balanced, wasteful or duplicate services need to be eliminated, labor costs and future expenses need to be examined, its core mission redefined.

The skills that a successful PE leader has learned are exactly what the president should understand. A solution-driven management approach is exactly what the president should require of himself and his administration. Of course, the president needs more than just those skills, which is why choosing a president should be on the skills that the “applicant” brings to the table.

Unfortunately, the current president doesn’t know that government is a business and has no business skills or even a rudimentary understanding. He doesn’t have an understanding of history to provide a foundation for decision making. And he certainly doesn’t understand that a successful business is team-based, not adversarial driven. Such adversarial managed businesses are the subject of reality shows that have to turned around quickly.

Government IS a business.

Posted by sharla76 | Report as abusive
 

Mr. Welch might want to realize that the skills of a businessman seldom transfer well into politics, especially at the national level. Successful businessmen are used to getting things done, for telling people to do this and that…and for firing people who get in their way.

The only way a President can do that is if he absolutely controls both houses. Otherwise, his ‘take charge’ attitude simply goes absolutely nowhere.

Big difference between politics and business, because one is measured by money, and the other by re-election and special interests. Negotiation is all well and good when you have the same ultimate objective as the other party. when the other party has the dual aim of NOT sharing your objective, AND making sure that you don’t get credit for passing anything…

Well, that doesn’t seem like anything a PE guy has experience with.

==RED

Posted by REDruin | Report as abusive
 

A lot of talk about how different running a government is and not much talk about the issue raised by the authors, which is the need to use reality (not theory) in making decisions and picking good people (with experience) to lead. We put in a leader that had none of the above and he surrounded himself with theorists, why? No mention that Romney has both real experience as a leader of an enterprise, and executive government experience as a governor. Substantially more than Obama had when elected, and some would argue more than has been demonstrated by Obama since. If you voted for Obama, given his experience, then any criticism of Romney regarding experiences that qualify him are suspect.

Posted by JTinNC | Report as abusive
 

The people we elect as leaders are supposed to possess a vision for how to keep this country an amazing place where people from around the world want to live. This can not be accomplished with money alone. Ask yourself what values you have as an American. What do you love? When you have time off, where do you go? What do you do? These intagibles are what makes us American. Maybe you spend your free time devising ways to make money off struggling companies. I dont. Until I hear something from Romney that indicates he is anything more than a successful investor, I dont want him making ANY decisions regarding my life. We could let the less-fortunate die, pillage every natural resource, and reduce the population of the US to a few million successful investors and consider this country a successful business. However, I have a better idea of what is important to me, I feel confident I have a better idea of what is important to my compatriots, and it is more than money. Mr and Mrs Welch, here is the truth about America. Its bigger than your money.

Posted by LT01 | Report as abusive
 

I’ve been frustrated that both sides of the aisle have conflated “strip and flip” with all private equity. Romney’s practice of saddling companies with insurmountable debt and using borrowed money to enrich himself (…actually maybe that DOES give him the experience to run the US government) is troubling. But while attacking this practice, the Democrats should not demean the good work that can result from more responsible strategies by labeling Romney as “private equity” and Republicans should not be able to cover up Romney’s strategy of grifting companies by associating it with the good work that other private equity practitioners do.

Posted by recessappt | Report as abusive
 

For all the posting that our Fed government should not be run like a business… with balanced budgets, cost controls, efficiency and productivity, qualified people in leadership positions…

Ya think?

Posted by Rightyatbat | Report as abusive
 

“Let’s keep the investors investing and the presidents presiding.”

Substitute “taxpayers” for investors and you almost have it right.

How our Govt spends our hard earned dollars is the focus of this election, as it was in 2010.

And the investors are going to fire the current President.

Posted by Rightyatbat | Report as abusive
 

Whenever I see and article start with “Here is the Truth”

I want to run and hide.

This is the “truth” from big business, big money. There is also a truth from the people who are laid off and who have had their pension funds and health car plans raided and destroyed.

That truth is equal to the big business truth.

As a person who has worked in big business, small business, been union, salary and management. I know one thing for certain, I don’t want a Venture Capitalist being my President.

Posted by Karm99 | Report as abusive
 

I think we can credit Obama with being an exemplarary business man. Take a look at his campaign and it certanily is a business. Think about the team of operations, finanacial, legal, and pr personnel he has put together. Think of the grass roots operations he has running in virtually every state. Think about the amount of money that has been invested in his “business”. And there is a big difference between his business experience and Romney’s. He built his from scratch some 6 years ago.

Posted by MikeAlso | Report as abusive
 

This article isn’t about how best to run government. The point of the article is to counter the baseless demonization of PE by the administration. They can’t run on their record, so they are looking for any angle to drag Romney through the mud, hoping a lot of it sticks.

The administration has engaged in divisive demagoguery. From the Chamber of Commerce to doctors lopping off arms, to insurance companies, to the police, to Wall St., to owners of private planes, to Catholics, to private equity.

All this rhetoric Obama supposedly does as a champion of the poor, yet since making grand promises upon taking office the situation for the poor has not improved and there are far more poor now than there were then. His policies stifle growth and his rhetoric makes investors nervous.

Meanwhile, Obama hypocritically seeks counsel and donations from the people he vilifies. It is beyond disappointing to see how truly small scale his economic thinking is and how unprepared he is to tackle real issues, instead relying on “Chicago” style cronyism and division. A lot of people hoped that change meant something quite opposite of what has been delivered.

Posted by odetocentipede | Report as abusive
 

By any matter of measurement, Obama has surrounded himself with very experienced people at almost all levels. Detracting from that is not wise…the problem many have is that most of these people are chosen by a Democratic president, and they deride the choices as incompetent with the wonders of hindsight saying they could have done better, when anyone with half a brain knows otherwise.

I looked up the President’s Cabinet and it turns out about half of them were actually businessmen themselves (regardless of spiteful email spam saying otherwise), the rest are either lifelong politicians or bureaucrats…people who are very good at their jobs in other ways. There are people giving advice to Obama who are on the far right and on the far left; again, not what the email hate-spam implies.

Successful businessmen don’t do well as Presidents, because they can’t get rid of the opposition. Congressmen are beholden to their own districts, NOT to the nation as a whole. And the nation as a whole tends to vote their own people back in, and then lambast all the other idiots in Congress.

The only way to get around this restriction is term limits, which would allow people to do the right thing without worrying about re-election, i.e. ‘I’m not going to be re-elected, I can do what needs to be done.’

In this era of polarization, I don’t see that happening, and given how far to the right Romney is campaigning, and how moderate Obama has been going, I don’t see the situation getting any better. Romney would cause even more polarization then Obama has, if he abides by even half of the things he is saying to get elected…and I’m sorry, the majority of the nation sits in the middle of the spectrum, not at one end.

The problem a PE guy has to face is that he is stuck with what he is stuck with. He can’t outsource, Congress isn’t going anywhere; he can’t downsize, Congress still isn’t going anywhere; he can’t wave profits under greedy noses to get people to go along with him; he can propose but not mandate, it’s Congress that approves laws.

A businessman is going to find it very, very hard to operate under such conditions, especially someone based around a profiteering background. To be successful in Washington is all about compromising with people you often don’t like, who don’t like you, and not getting what you want, but what you have to live with. It’s very inefficient, but it’s what has to be done.

==RED

Posted by REDruin | Report as abusive
 

When I read this article; it appears to suggest The Welch’s would like to outsource our government to a lower cost country to save us. Reminds me a SNL skit in which two Senators wanted to build a fence between the US & Mexico to keep illegals out, but could not afford it. Another Senator had a brilliant idea – he knew a group of guys that would build the fence for 30 cents on the dollar.

PE is not the answer. Equitable taxation, without personal or corporate loopholes and efficient government that scales cost – is.

Posted by MikeR512 | Report as abusive
 

Tell the Welsh’s to stop being apologists for the 99%. Honest private equity makes an investment and applies it’s accumulated knowledge to make a sick company better but it does it with its’ capital at risk. Vulture capitalists take over a company, charges management fees and sucks out it’s original investment through special dividends and then runs the company into the ground to get tax write offs and leaves the workers, their health care and pensions and the local communities swinging in the wind. Bain subscribed to the Gordon Gecko “Greed is Good” philosophy and they along with other vulture capitalists have left a trail of cheated workers and tax loopholes from the 80′s when they gutted the U.S. Steel industry and beyond.

Posted by windsurf | Report as abusive
 

“RED ruin,” I think you have a fundamental misunderstanding of why some people like the idea of a successful, pro-business president.

But I am curious… what in Obama’s background caused you to vote for him?

His legal experience working with ACORN?
His community organizing?
His 2 years in the Senate (as opposed to 4 as a governor)?

You seem to offer Obama as the obvious alternative to the “unqualified” Romney. Yet, when I look at the “Obama recovery” I see little to recommend it. http://blog.american.com/2012/03/the-eco nomic-case-against-obamanomics-in-13-cha rts/

Posted by Mtbwalt | Report as abusive
 

Essentially everything that the Welchs state is true. Except…

The goal of a private equity owned turnaround is to get the stumbling company in shape for a monster loan. That debt – assumed by the company – is what allows the private equity firm to make a profit. The bigger the debt, the bigger the profit to the private equity firm as they say, “Good-bye and good luck in paying off that loan. Our hearts are with you!”

Oops! Welchs, you didn’t tell the whole truth.

Oh, and by the way, Congress has enacted all sorts of special tax benefits and perquisites to those private equity firms and their owners, many of which would be illegal for other firms or individuals, otherwise called tax evasion. This is the Tenth Percenters Club wet dream.

Welchs: Guess what. You left out the juiciest parts.

Posted by ptiffany | Report as abusive
 

Government sure isn’t a business and government should stay completely out of business. Government should not provide loans to business, subsidize business, or bail out business. How many of our problems would be solved if government stayed out of business and stuck to what government should do, protect life, liberty, and property by running the military, the courts, and maintaining infrastructure.

The ignorance of most Americans about business is appalling. This is why it is so hard to find a good employee today. A stunningly high percentage of adults see as business as something that issues a paycheck. They nave no idea how to start one or run one to generate a profit.

The people who know business are a select group in this country. Recognize their expertise and thank your lucky stars they are in the United States because they are the reason you can find a job and get a paycheck.

Posted by Andujar | Report as abusive
 

A lot of talk about how different running a government is and not much talk about the issue raised by the authors, which is the need to use reality (not theory) in making decisions and picking good people (with experience) to lead. We put in a leader that had none of the above and he surrounded himself with theorists, why? No mention that Romney has both real experience as a leader of an enterprise, and executive government experience as a governor. Substantially more than Obama had when elected, and some would argue more than has been demonstrated by Obama since. If you voted for Obama, given his experience, then any criticism of Romney regarding experiences that qualify him are suspect.

Posted by JTinNC | Report as abusive
 

Mr. Welch: with all due respect, the so-called qualities you describe the PE executives have describes the top 1% of the industry. Once you drop below the Tier 1 Bain Capitial, Carlyle, Texas Pacific, you are lucky if you can find anybody in a PE firm who has ever run a business, yet they have no problem putting 30 MBA’s with even less experience on BOD to tell seasoned executive what they should be doing. The fact is, most PE firms results and IRR’s are below acceptable industry averages and anything but consistent over a period of time.

In point of fact, under the Tier 1, other than financially engineering a balance sheet, most are not armed with the skill sets you attribute to them.

The most egregious part of private equity you seem to have conveniently avoided. The financial game is rigged for them against the “free market entrepreneur. (1) PE firms get leverage of 5:1 whereas an entrepreneur is lucky to get 2.5:1; (2) PE firms are not required to sign a personal guarantee, an entrepreneur has to pledge everything. (3) A PE firm is allowed to remove its capital almost immediately, an entrepreneur is tied up; (4) if a company goes bankrupt, the PE firm walks away and the bank’s shareholders are left holding the bag. If a entrepreneur’s business goes bankrupt, in most cases, they lose everything. (5) a PE Firm gets a 2% up-front fee so large pensions and insurance companies can park their money. An entrepreneur gets no such cushion. (6) a PE firm usually get 20% of the carry and ultimately a better IRR than the large investor. An entrepreneur cannot build this model. (6) Over the last 5 years,PE firms average returns do not justify the risks taken.

The bottom line, there are many entrepreneurs who could run circles around the skill sets you so generously attribute to these executives if given an even playing field.

Finally, there is something amiss when a PE firm has a better return/upside than either the investor or the management team who are the real contributors to wealth creation. Last time I looked, PE partners run nothing, build nothing, and are doled out generous rewards that truly don’t require the sophisticated business acumen you describe.

Cheers

Posted by dsilbe01 | Report as abusive
 

@Adam_S,

The fact that the piece is pro-Private Equity doesn’t make it wrong. You should argue against the points it makes rather than discredit it merely because it happens to make a point you’re suspicious of or don’t like.

Regarding your substantive point, it’s true that Government is unlike any private business. However, the point the article isn’t making isn’t that they should be run the same way. Rather, it’s simply pointing out the skills it takes to succeed in private equity and suggesting that they might also be useful in being president.

While businessmen don’t have to look out for everyone in an entire country, they do have to look out for a diverse group of stakeholders from shareholders to employees to creditors, etc. And only a very simplistic view of business would suggest that you can fire your problems away in business but can’t in government. The truth is that it’s about making tough choices. People who have never faced the possibility of failure in the private world may not be as good at making those tough calls because they can persist under the delusion that they can simply make everyone happy. They don’t have the real threat of bankruptcy to snap them into reality. They can just raise the debt ceiling and, if all else fails, find someone to raise taxes on.

I don’t think the authors of this article fail to realize any of this. They realize that being president is unlike anything else. They just think that Romney’s experience better prepares him for the presidency than Obama’s. If government is unlike running a business or a family, it’s certainly unlike the things Obama has done in his private life–low-level attorney, community organize, student editor, instructor, etc.

Beyond all this, let’s not forget that Romney also has experience as a chief executive in government, while Obama’s only experience was as a legislator.

Posted by danmm | Report as abusive
 

It’s true that executive management skills and financial literacy are necessary for a successful president today. However, any executive leadership position can provide those, given the increased financial complexity of almost any American institution today, be it military, non-profit, educational, public sector administrative etc.

Where the Welches go wrong is in failing to understand that a political leader must have above all a thorough understanding of, almost a second instinct for, the fears, hopes and values of the people he wishes to lead. In contrast to private equity negotiations, a president doesn’t make “deals” with the public; he persuades the people, inspires them, shows them the road forward.

Does anyone really believe that the private equity candidate has a deep understanding of Americans’ fears, hopes and values?

Each year, hundreds of thousands of US households are stiffed by private for-profit health insurers on the basis of an invented concept, found nowhere else in the advanced world, of a “pre-existing condition.” These good people face financial ruin, for no other reason than our elites’ bipartisan desire to preserve the profits of a US health insurance industry that is notorious for wretched service and poor corporate governance.

The private equity candidate recently said he thinks the problem with Americans being denied benefits is that these fellow citizens of his are trying to pull a fast one. In other words, that what to the rest of the civilized world appears as an inexplicable and casually cruel American freak is actually right, just and normal.

From the standpoint of a hard-nosed P/E guy, or a corporate cost-cutter, perhaps this perspective makes sense (though one wonders what Romney would say if someone accused his family of trying to scam health benefits based on his wife’s “pre-existing condition”). But a prospective US president needs to adhere to a higher standard of leadership.

For nearly four years now we have witnessed a supposed great orator fail, again and again, to persuade anyone to move in a direction other than the one he or she was disposed to follow. The previous president’s persuasive skills and grasp of the public pulse were also poor.

Posted by thibaud | Report as abusive
 

An excellent explanation about how private equity works and how it works. Skip the stuff about Joe Biden; don’t bother trying to follow that thought process. This is a useful explication of PE from a man (with his cowriter wife) who has built plenty of businesses.

Posted by Doug8765 | Report as abusive
 

Reuters should put in hold headlines “This is a polical endorsement of a 1%er supporting another 1%er”. Welch has been a Republican spokesman for years, as he should be since Reagan tax changes to lend/lease provided GE $billions in business – another nice stab to that “free enterprise” schtick we get all the time from the right.

Private equity uses loans from banks (which of course are funded by individual, insured deposits) to buyout a functional company. the PE partners pay themselves huge dividends while they slap the ‘reorganized’ company with tons of debt. In many cases the debt levels cannot be maintained and the company goes into receivership. Employees lose jobs; government loses tax revenue; the US economy loses a viable company but PE partners walk away with huge profits at a 15% tax rate.

Guess who got those rules written into law – lobbyist of GE.

Posted by Acetracy | Report as abusive
 

mtbwalt,
Actually, I voted for Obama because the horror of having Sarah Palin as VP overwhelmed all other reservations. My personal thought was having a young, energetic black president who would have the added onus upon him of proving that a black man could be a good president would be better then this far-right jingoism and lack of brains coming off the Republican camp.
I also consider the Republicans losing the presidency to be one of the greatest and most subtle political manuvers in history. Just look at all the crap he inherited…there is nobody who was going to have a great four years in office coming straight off a stock market crash with the underlying economic weakness. I respect the cold-blooded judgement of the Republicans for handing the mess to a Democratic president and the first black man to hold the office just so they could blame him for everything that went wrong. Sheer genius.

As for his political experience…come on, walt, the traditional parade to high office is state senator/rep, maybe national senator/rep, governor, president.
He BUCKED THE SYSTEM. That is a totally American Dream, apple pie, mom, show what one man can do Republican kind of thing. He broke every establishment on both sides of the political coin by making it into office.

In this election, Obama is playing the moderate. He has repeatedly proven he can reach across the aisle, but the Republican Party is being held hostage by the Tea Party, and the Democrats are backlashing against that extremism.

Romney kowtowing to the extremist members of his own party isn’t going to fix that situation at all. The Democrats can villify him and block everything he does just as easily as is happening to Obama…and if Obama is elected, he doesn’t have to worry about getting re-elected.

Remember that there is a huge outcry against how Wall Street has infiltrated every single presidential administration for the last thirty years. Letting one of them BE the president? That isn’t going to fly too well, either.

Romney has no experience being the moderator where he has no power to bear. Congress is not his employees, not his shareholders. If they don’t like what he has to offer, they can shut him down and he has NO power to do anything about it.

As for your examples of Obama’s experience – Obama made Senator, which is experience on Capitol Hill. That’s extremely valuable experience for any PResident.
Working as a community organizer and legal counsel is valuable political experience.
ACORN has a lot of egg on its face for some isolated incidents, doubtless why you brought it up. Did he do anything wrong while at ACORN? Has ACORN done a lot of good things, which don’t get media coverage?

So, I’ll take the moderate who might actually be able to get things done vs. the extremist who is going to do nothing but repeat the gridlock of the last four years. The insanity that has gripped the Republican Party the last four years has completely turned me off on them.

Hell, man, I’m from Michigan, and Obama did what five Michigan governors have been unable to do…he BROKE THE UAW. Forget the bailout, if he hadn’t done that, we wouldn’t have an auto industry. How much more pro-business can you get then a union buster?

==RED

Posted by REDruin | Report as abusive
 

PE…………another word for leverage and laying it off on the public.

Posted by gerardsmith1962 | Report as abusive
 

Thanks for the right wing pap.
Corporate America is raping Main Street with the help of big finance.
Investors without conscience are the primary cause of revolutions in the end.
Some of you get it, pity the authors of this piece didn’t.

Posted by lotuslandjoe | Report as abusive
 

This basically does nothing more than advertise PE.

Now before all the finger-wagging Reps call me a blind, unsustainable Socialist, let me explain. I have nothing against private equity. Indeed, I find it a credible, and efficient part of the market. The basic idea to buy failing companies and improving them is a good way of saving money that would have been spent in bailouts.

I also admire Romney’s oustanding success at Bain Capital. I am reliably told by an NY economist expert that that kind of success- 80%, I think, was unheard of at the time, and we are well aware of the economic times during the 80′s.

However, let us not mock Biden. Well, I don’t because I support neither the GOP nor Obama. Private equity, like all businesses, is not perfect. The other side of Romney’s success story is that companies had to file for bankruptcy, and many small businesses were laid off, or thrown under the bus.

While this is a minority, it could be more siginificant under other private equity firms. For a man who says that he supports small businesses, this is not a good thing to have on his record.

I feel that Biden is a little melodramatic in his terminology, description of Romney. We must also point out that he ahs NEVER held a job in private equity, and neither has Obama. Therefore we can question his authority on the matter.

However, Romney cannot take the PE attitude into government office, as Obama has rightly pointed out. You cannot be indifferent to the people who lose out because of PE when President, and just point to some who are doing well. The economy must attempt within reasonable means to work for all.

Here, the Democrats have a point. Not to mention the remarks of a previous commentator, who stated that goverment loses tax revenue-which is ordinary, hardworking people’s contributions, and a lot of these PE owners do not even pay enough tax!

I say do not vilify PE, but do not glorify it either.

Posted by MizzCommentator | Report as abusive
 

I’m going to make this short. Mr. VP sure sounds like a Klingon to me, about almost everything. Is this the person who would go looking for Jon Corzine for the answers to hard questions. Is this not also the person that was talking about watching FDR on television giving his “fire-side chats” before telivisions where common in american homes. This guy is more of a “want a be” then his boss.

Posted by sneaker46 | Report as abusive
 

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