Private equity has always been polarizing. When it came of age in the 1980, it was linked in the public mind with the corporate raiders of that era, who launched hostile takeover bids for public companies, often arguing that they should be broken up.
Buyout (aka private equity) firms rarely made hostile bids, preferring to ally with management. But they were seen as one more force for upheaval in the economy and, indeed, when they won control of a company, they frequently sold off assets and laid off workers. They were accused of “stripping [assets] and flipping [i.e., quickly selling]” companies.
In the eyes of the buyout mavens (and corporate raiders) themselves, they were merely rescuing companies from complacent managers who weren’t stewarding their assets properly for their shareholders. Imposing more discipline on these businesses not only created profits for the buyout funds’ investors, the buyout people maintained, but created more wealth in the economy at large in the process.
The debate lives on, with books like last year’s The Buyout of America, by our friend and former Deal colleague Josh Kosman, and an on-going campaign by the Service Employees International Union (SEIU) to challenge takeovers by private equity firms.
King of Capital takes issue with their stereotypes. Private equity won’t save the economy. But neither will it destroy it, we argue. And, in fact, it can be an important alternative, transitional form of ownership that can allow a company to undergo change they could be hard to achieve under another form of ownership — particularly as a public company. Contrary to the stock criticisms, executives at private equity-owned companies say they can take a longer-term perspective, a luxury that public company managers don’t have because they have to answer to institutional investors (mutual funds, hedge funds and so on) that are focused on short-term results.
Even when private equity firms don’t improve a business, there’s nothing wrong with making a buck by buying at a trough in the market and selling at a peak, as they often do.
And the growing body of academic research, canvassing thousands of private equity investments, shows that they don’t fail at rates much different from companies in general, so the argument that private equity is bad for the economy, doesn’t hold up, we argue.
To get a flavor for the poles of the debate, compare Josh Kosman’s site and the SEIU’s with that for the industry’s lobbying group, the Private Equity Growth Capital Council (until recently the Private Equity Council).