The War on Private Equity

The book “Unintended Consequences: Why Everything You’ve Been Told About the Economy is Wrong” by Edward Conrad has created a shit storm in its wake as it seeks to defend the 1% and makes the argument that inequality benefits modern society. The book's main argument is that the rich provide capital and take risks which generally helps society innovate and create jobs.

While the book is not directly associated with any of the presidential campaigns, it has been at the forefront of the war on finance and private equity. It seems to me that it has become very trendy for people to trash private equity while having just learned about what it was a couple months ago.

The book has been brutally attacked by the New York Times and the like. Ed Conner, the author, is best known for his time as a managing director at Bain Capital where he worked with Mitt Romney and the book itself has become synonymous with the evils of private equity and its grip on the balls of American capitalism.

Do you guys feel like the anti-private equity sentiment will stick with the general public? Or are these recent headlines and arguments in the press merely a temporary short term trend which spiraled out of a slow point in the election campaign? If public sentiment really turns against private equity as it has against investment bankers, what effects (if any) would it have on how you relate to your job and how you bring up what you do to others?

 
trailmix8:
Bill Clinton, who I like more and more, talked last week about how the Obama admin is not correct in trashing the PE industry and Romney's Bain experience.

http://slatest.slate.com/posts/2012/06/01/bill_clintond_defends_mitt_ro… s_business_record.html

I've actually heard Obama speak in a fairly neutral or even positive tone about Romney's accomplishments at Bain. The only criticism Obama had (and is correct in pointing out) is that creating jobs in the private sector - and especially in PE - is very, very different from creating jobs and improving the economy as President.

 
AstonMartin:
I don't think the backlash against finance/wall st/PE is temporary at all
I definitely agree, but don't you think we should do something about it? Give those uneducated band wagoners an information session on why they are wrong. There should be a documentary or something called, "Why You Wouldn't Survive Without Wall Street."
 

This book surely isn't helping the case for PE.

I agree with a lot of what he said, such as, there needs to be an incentive (appropriate rewards) for taking risk. I also disagree with a lot of what he said, such as, bank bailouts being good and every financial product being beneficial (AAA rated sub-prime MBS were beneficial to only the ratings agencies and the sellers not to the buyers or the economy). The problem is that he comes across as in-your-face,"i'm rich because I took risks, you didn't take risks so that's your fault." Judging by the comments on that article, this book made things worse.

My WSO Blog "Unbelievably Believable" -- RG3
 
Best Response

My head is spinning with so many sarcastic responses against this BS sentimentality that I can't think of a cohesive response at the moment. I hope I'm not the only one who thinks this, but there's a zeitgeist of liberality floating about in that it's just "cool" to be liberal. So, if you're not politically inclined, you're de facto liberal. The consequence is that the average person will fall to the group and not think with their fucking head. "Someone says PE is bad? Well it must be bad then!" I'm in finance because I like finance. I couldn't give a flying fuck what people think of my job. If someone I knew judged me solely for being in finance, I would laugh so hard I'd probably end up spitting in their face, then tell them to stop being a zombie and actually use their brains instead of eating them.

/end rant

Although I do have to add that certain practices such as what melvvvar mentioned below are questionable, branding the entire thing as bad is just retarded.

 
Nabooru:
if you're not politically inclined, you're de facto liberal
You're sure about that? The only reason I worked with the liberals is because the last president was a fucking dunce.

Romney would do well to elevator pitch his way out of the defensive and onto pitching himself as a president. The fact that he's spending all his time defending himself on this one point while the president broadcasts his entire platform is working against him. "As a PE boss, I created many jobs despite what the anti-capitalism crowd says. I want those same benefits for the US public." BOOM DONE. Go on the offensive.

Is it true? I don't fucking know, that's just what I would do in position. He's getting out of a bind he shouldn't be in.

Fact is, he should have (1) seen this coming and (2) dealt with this a long time ago. He's a political amateur, and he should have staffed Karl Rove from day one. How is he going to fare in real time negotiations/conflict?

Get busy living
 
UFOinsider:
Nabooru:
if you're not politically inclined, you're de facto liberal
You're sure about that? The only reason I worked with the liberals is because the last president was a fucking dunce.

Just as an example, if you're an average college student with no political leanings, which way would you end up swaying? If everyone around you is touting the liberal horn and somehow it's "cool", chances are you're going to be that way too. I see it in college, community...

 

it would be more fair to attack specific PE practices, like scorched earth dividend recap deals that arb the credit quality of healthy firms for quick cash. but that would not intelligble to 99% of the electorate. it's easier to bash rich white guys.

 
melvvvar:
it would be more fair to attack specific PE practices, like scorched earth dividend recap deals that arb the credit quality of healthy firms for quick cash. but that would not intelligble to 99% of the electorate. it's easier to bash rich white guys.
.
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melvvvar:
it would be more fair to attack specific PE practices, like scorched earth dividend recap deals that arb the credit quality of healthy firms for quick cash. but that would not intelligble to 99% of the electorate. it's easier to bash rich white guys.

but how frequent is this really in PE? Isn't this an extreme case that RARELY happens? And doesn't someone have to be on the other end of that trade? What bank is dumb enough to lend the $ to the portfolio company with no strings attached so PE firm can write a huge dividend check (and any PE firm that is in the business of "gutting" firms)?

It sounds like cherry picking the cases that "look" bad, but as a GP to lmited partners, their fiduciary duty is to the LPs, not to the company or the employees (who usually depend on pension funds that are being invested by these "evil PE firms")....

I just don't see it and feel like it's an easy target to point to the small % # of investments that went south after a dividened recap, instead of looking at the incredible returns some of these investments generated for the pension & endowment funds...let alone the thousands of jobs on net some of these investors have created by efficiently allocating capital and growing these businesses at rates that woudl (in many cases) not have been possible without the expertise and equity infusion.

 
melvvvar:
it would be more fair to attack specific PE practices, like scorched earth dividend recap deals that arb the credit quality of healthy firms for quick cash. but that would not intelligble to 99% of the electorate. it's easier to bash rich white guys.

Where can I learn more about scorched earth dividend recap deals? They sound so sinister.

Competition is a sin. -John D. Rockefeller
 
anaxi:
It seems to me that it has become very trendy for people to trash private equity while having just learned about what it was a couple months ago

I would argue 95% of the people who 'learned' about PE recently still don't have a clue what it is. This includes students, academics, media and mot people in general.

For example, hearing mainstream reporters say "Romney's time as a venture capitalist at Bain Capital..." just shows that the non-finance guys need to eat lunch with a few more of us before they should have the right to register their 'informed' opinion.

"If you want to succeed in this life, you need to understand that duty comes before rights and that responsibility precedes opportunity."
 

ask your common NYT reader to define private equity or to name a private equity firm other than Bain Capital and they'll be stumped. unfortunately, many people believe private equity is synonymous with the "corporate raiders" from the 80s. looking at private equity's historical track record, it's easy to debunk the theory that PE firms simply cut headcount (on balance, the number of employees stays roughly the same after 3 years), and in general, PE firms do a relatively good job at making portfolio companies more efficient and productive. even though the tax regime has allowed private equity firms - in particular leveraged buyout firms - to outperform the market, providers of capital would have stopped pouring funds long ago in PE if those firms were not actually creating value. in my opinion, that's just how the market rolls.

Capitalist
 

I read an article regarding this from Term Sheet the other day that said people will gradually - and are starting to - understand better what the fuck PE firms actually do thanks to consistent efforts from PE council and etc, and this Romney and Bain shit show will eventually dissipate.

I wouldn't say 99% of Americans are so fucking stupid that they won't get the point until the end just because of their resentment against the rich.

Though some, blinded by their pointless hatred against the Wall Street, would be stuck with this sentimentality, I think it won't stick to the "general" public down the road (at least not to the majority of the public).

And, now that they know the public is wary of their 'evil' activities, wouldn't this shit show make even "evil" PE shops more geared towards making an actual improvement on portfolio comps, instead of utilizing leverage for their own benefits such as dividends or management fees for GP?

 

I also think much of the resentment comes from dual-morality that wealthy financiers currently live in.

For example: If you are Bain and you LBO with 5% equity and 95% non-recourse high yield and you default, that's just business. You're a risk-taker; it's bound to happen. It's actually GOOD for the economy that they take these risks, even if they default on their loans. Besides, no one could have foreseen such a deep recession. You're a risk-taker. An innovator. A job creater. A Master of the Universe.

If you are a middle-class homeowner, and you bought a home with 5% down and defaulted, you deserve it. You're sub-human because you don't live up to your obligations. It doesn't matter if there is a deep recession, you should have ample savings to pay your mortgage, even if you lost your job. You're the reason this economy sucks. You're a terrible person. A freeloader. Garbage.

It almost the exact same scenario but it's a different set of morals. And notice the wealthy demand they be treated according to scenario 1 and that the rest of the plebs get scenario 2.

Let's just be honest with ourselves: financiers go through life picking up the free options. That's the game. Try to take as much upside for ourselves and while ensuring the downside is external (be it lenders, clients or taxpayers.) So let's just cut the "oooh, why are they mad???? I don't get it..." shtick. We all know why we got into this industry.

 
Spalding Get Your Foot Off the Boat:
@ Khansian - would you say that a community organizer / professor is better qualified to "create jobs as President"?

Sidenote - presidents don't create jobs, private risk takers do.

This is a great point. The president is merely setting the stage to encourage the risk takers, which can be done, sometimes easily, through policies. Obama is shooting himself in the foot with Obamacare but doesn't seem to care. Small business owners in this country don't feel safe making the investments they need to grow their businesses. I deal with these folks often and have heard what they have to say. Their fear has nothing to do with IB or PE...they just don't know what to expect "next year".

Neil Cavuto made a great point when speaking with Conard when he mentioned how nobody in this country bats an eye when a kid wearing a hoodie gains or loses a few billion dollars overnight, but they get their panties in a bunch when someone like Mitt Romney starts a company from nothing, invests in enterprises, grows companies, creates jobs and increase wealth for many people and they vilify him. Furthermore, why do people get so worked up over what Mitt or his ilk do with private funds while turning a blind eye to the half billion of taxpayer funds that got flushed down the drain with Solyndra?

Regards

"The trouble with our liberal friends is not that they're ignorant, it's just that they know so much that isn't so." - Ronald Reagan
 

This isn't really surprising to me. Nobody had heard of ibankers before 2008. Suddenly, Goldman is a vampire squid sucking the American people dry. The media can make any industry look bad if they cherry pick cases.

For instance, "Madoff defrauded a lot of people" ergo "Hedge funds are a threat to middle America". It is just hysterics.

I don't mean to sound like a Fox News wonk, but the media does have a pretty strong liberal bias. With a PE executive going up against the president, it was almost guaranteed to happen. It doesn't hurt that finance was already unpopular, and PE falls under that umbrella.

 

Most people fail to see that PE actually invests retirement plans for teachers, etc.. The avg person who attacks PE doesn't even know that his/her own money is invested in it.

People have no ability to think for themselves so I can't say whether the attack on PE is short or long-term. Hopefully, it dies out after November.

 

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