Does PE kill jobs and ruin the economy?
http://www.nypost.com/p/news/business/ad_mitt_mis…
Clearly, neither the NY Post or this author is that reputable, but it strikes at a more fundamental question that I've been wondering about: does private equity--the promised land for so many of us monkeys--bankrupt its companies and kill jobs?
I think it does bankrupt companies and kill some jobs, but it helps more companies and creates more jobs as a whole. That's what I've heard but I'm not sure how accurate that is, but the fact that funds get 20-30% returns signals that these companies are improving right?
As a whole I believe PE helps. BUT>>> they do force efficiency, which leads to lost jobs sometimes but also allows us to create products or services at affordable prices.
Old style PE was good for the economy as they made the economy more efficient, many of new style PE deals just arbitrage low cost of debt and try to time the market while milking the company for cash and underinvesting in capex, marketing and r&d. having said that in many deals there is a genuine partnership between management teams and PE guys - but too many of the recent deals were driven by too much cheap capital sloshing around
the value add is different depending on which level you look at. if you look at the individual who was pushing papers 40 hours a week for a salary who now is out of a job, then its not good. but for company it usually comes out even and the investors and the fund come out ahead, as does society as a whole
PE gets a bad rep because people love to vilify wealth & power. Statistically, PE sponsored deals go bankrupt just as often as non-PE deals. Not significantly more, or less. PE companies also lose employees in the initial couple years, but employment growth outpaces non-PE companies after the initial cuts have been made. Sure, you have to trim the fat at first, but once a company is lean, it'll grow quicker than its peers. In the end, makes companies more competitive, and in any competition there are winners and losers.
I can try and post up some studies in the morning that support this. Any news article you read about PE is usually anecdotal evidence rather than statistics, so seeing the statistics about PE is pretty refreshing.
Slacker, that would be great to read - please share :)
Obviously a very biased source but some interesting thoughts to chew on nonetheless...
http://www.pegcc.org/just-the-facts/private-equity-fact-and-fiction/
Recently I had the chance of hearing quite an interesting and genuine discussion on the topic. I was working on a DD for an add-on acquisition to a portfolio company of a well known fund. As I was waiting to meet with one of the Cs of the portfolio company, I heard him talk to his equivalent from the target. Here is a snapshot of the conversation:
Target: So, you’ve been working with these PE guys for some time now. What do you tell me about them?
Portfolio: Well, I would say that it has been an “experience”. These guys are nothing like what you are used to. They’re control freaks. They will want to know exactly what you want to do, how, when, why, and so on. They will call you 24/7 and challenge you on anything. But if you can get over being pinned to the wall by someone 20 years younger than you, well, you’ll get results that you did not even dream of.
Target: That sounds tough. But what do you mean with results?
Portfolio: I mean, here we are, after having grown X% in Y years (I don’t want to give out actual numbers, but it was a lot in a short time), and about to acquire a company almost our size to then expand in new markets, launch new products and so on. The way we worked before being acquired, this would have taken a decade…
Make what you want of this conversation, but I think it shed some light on what a fund that actually partners with management can do for a company.
Right the above conversation assumes that the growth and acquisition will make sense in 2 year's time... there are very few PE guys who add real value to companies- and yes 20 and 30 year olds mostly dont have a clue how to run a company, just because you read 20 HBS cases doesn't make you an expert
PE firms generally do worse than venture capital firms as they're debt financed. But I wouldn't say they're ruining the country - even if they were wholly destructive ventures (which they're not) they encourage companies not to hold excess capital for a LBO or mismanage their PR so that the stock is undervalued.
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