And that’s when the fun starts. Once the buyout is completed, the private equity guys start swinging the meat axe, aggressively cutting costs wherever they can - so that the company can start paying off its new debt - by laying off workers and cutting capital costs. This process often boosts operating profit without a significant hit to the business, but only in the short term; in the long run, the austerity approach makes it difficult for companies to stay competitive, not least because money that would otherwise have been invested in expansion or product development - which might increase revenue down the line - is used to pay off the company’s debt.
Kosman wrote The Buyout of America: How Private Equity Is Destroying Jobs and Killing The American Economy’, which has a killer chapter on Bain Capital. Go read it.
If attacks against private equity are ever going to be effective, those making the attacks need to make a clear distinction between predatory, "bad" PE (like outlined in the above post) and helpful, "good" PE (which certainly does exist).
I've seen many debt-ridden, basketcase banks (particularly in Asia) that no reputable financial entity wanted to touch get turned around by PE. I think there is a clear role for PE to be useless -- eg., turning around borderline bankrupt companies. PE vultures are much less good for society. But I'm not sure how the two could be distinguished.
#1 Posted by Noah Body, CJR on Thu 24 May 2012 at 04:19 AM
Well, one way to determine the good from the bad is to see which ones are putting up their own money to buy the company and run it like an valued property (like a good investor) and which ones are sticking their companies with LBO debt and waliking away from their liquidated properties.
And the real problem with private equity and LBO's is that they not only stick companies with debt that drags on their ability to economically perform (debt that which produced nothing except an exchange of owners) but that the debt then becomes a means to reduce tax liabilities.
Which means not only do these tricks rob employees and pensioners as the company streamlines in order to handle their debt infusion, but the state gets robbed of tax revenue which becomes transfered to prvate hands as debt service.
They're like the cordyceps of democratic, capitalist societies.
#2 Posted by Thimbles, CJR on Thu 24 May 2012 at 01:22 PM
For more, see Dean Baker
http://www.cepr.net/index.php/blogs/beat-the-press/david-brooks-gets-private-equity-wrong-for-the-team
and Kruggie
http://krugman.blogs.nytimes.com/2012/05/23/was-greed-good/
#3 Posted by Thimbles, CJR on Thu 24 May 2012 at 01:26 PM
Ye know them by their deeds
#4 Posted by Edward Ericson Jr., CJR on Thu 24 May 2012 at 01:28 PM
Good read:
http://www.slate.com/blogs/moneybox/2012/05/21/with_walkback_corey_booker_has_it_right_on_private_equity.html
"The private equity industry is a perfectly legitimate line of work that, like most industries, consists of a mixture of socially beneficial work and not-so-beneficial exploitation of pernicious lacuna in the tax and regulatory system. But if you don't like the way the tax code subsidizes corporate debt, then your complaint is with the U.S. Congress not with leveraged buyout guys...
Maybe Romney is a master turnaround man, and maybe a turnaround man is exactly what this country needs. But to the extent that Romney really made his money through financial engineering practices that are more about extracting value from enterprises than about fixing them, the argument is much less clear. I don't think there's anything necessarily wrong with the value-extracting model of corporate takeovers. People who do it shouldn't be locked away or anything. It's a big old world out there and there's room for lots of different business models. But that is a different business model from the turnaround model and it's different in a way that's clearly relevant to Romney's argument about himself. We don't need to demonize the industry to see that when you take a clear-eyed look at what many private equity firms are all about, there's no reason to think that success in the industry is a great preparation for effective political leadership."
Good watch:
http://UpwithChrisHayes.msnbc.msn.com/_news/2012/05/20/11780220-dissecting-romneys-record-at-bain-capital?lite
#5 Posted by Thimbles, CJR on Thu 24 May 2012 at 06:26 PM
One thing that we also really have to question in this age of Infrastructure Trusts and Sovereign Wealth Funds is what is the legtimimate role of government in our public lives?
Because it seems that we're raising money so that private interests can build and control our formerly public infrastructure (water projects and the like), since the government cannot raise the required funds through taxes or bonds, and yet we expect government to build new sports facilities and to subsidize private ventures which really aren't the public's business since those investments serve a private market.
It's important to remember some of these lessons of the past:
http://www.nytimes.com/2003/02/10/us/as-cities-move-to-privatize-water-atlanta-steps-back.html
Because it seems some of us are determined to repeat those mistakes in future:
http://www.theatlanticcities.com/politics/2012/04/chicago-approves-its-infrastructure-bank-cities-across-country-watch-and-wait/1848/
#6 Posted by Thimbles, CJR on Thu 24 May 2012 at 10:46 PM
More Hayes on PE and how it offers political officials a post political career.
http://upwithchrishayes.msnbc.msn.com/_news/2012/05/26/11895584-is-private-equity-inherently-bad
and some newish news on an oldish player:
http://www.theglobeandmail.com/report-on-business/carlyle-group-ipo-raises-just-671-million/article2420366/
"Private equity firm Carlyle Group LP proved a tough sell with investors on Wednesday, raising $671-million (U.S.) in an initial public offering that was slightly below a pricing range already seen as modest.
Carlyle, which has taken many of its portfolio companies public since its founding in 1987, marketed the original range as conservative and having to drop it further made for a stark contrast with the excitement that surrounded the Blackstone Group LP IPO five years ago."
These are good names for reporters to remember, Pete Peterson, G H Bush, Steven Schwartzman, Colin Powell etc.. wise
#7 Posted by Thimbles, CJR on Sun 27 May 2012 at 01:54 PM
Steven Schwarzman is a funky story:
http://www.slate.com/articles/business/moneybox/2007/06/the_golden_ass.html
Especially since this stuff was before his "Taxes on private equity are like Hitler invading Poland" stuff.
And on pe and debt as tax arbitrage, here's Chris Hayes again.
http://upwithchrishayes.msnbc.msn.com/_news/2012/05/26/11895587-how-romney-made-money-off-debt?lite
This is how you do informative discussions, informative journalism, folks.
#8 Posted by Thimbles, CJR on Sun 27 May 2012 at 02:00 PM
Speaking of interesting discussions:
http://www.nextnewdeal.net/rortybomb/can-private-equity-firms-bain-do-whatever-they-want-companies-they-buy
"The blue line is profits, the solid red line is payouts. As Josh Mason noted (my bold), "In the pre-neoliberal era, up until 1980 or so, nonfinancial businesses paid out about 40 percent of their profits to shareholders. But in most of the years since 1980, they’ve paid out more than all of them...It was a common trope in accounts of the housing bubble that greedy or shortsighted homeowners were extracting equity from their houses with second mortgages or cash-out refinancings to pay for extra consumption. What nobody mentioned was that the rentier class had been doing this longer, and on a much larger scale, to the country’s productive enterprises."
...
Instead of simply carving a figurine or starting a BBQ, private equity uses its stick to game 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. Do you find this critique convincing? What else is missing?"
Perhaps it's the contribution to inequality tilted to the .01% which allows these people to extract policies from our politics which benefit them and their buddies...
such as the policy of nobody going to jail when they break the law.
#9 Posted by Thimbles, CJR on Sun 27 May 2012 at 04:01 PM
7 out of 9 comments, Thimbles?
Seriously?
#10 Posted by padikiller, CJR on Sun 27 May 2012 at 10:29 PM
Sure, why not?
If people found the topic interesting, then they can get into some more detail in the links and excerpts provided.
If not they can scroll.
It's not like I've prevented anyone from taking the podium - several hours between most posts, 300 to 400 chars per post, different material that is topically related in each post. It's not like the multiple, repetitive, 100 post long slog fests you've put up about "Climategate!!!11!".
Where's the complaint?
#11 Posted by Thimbles, CJR on Mon 28 May 2012 at 02:17 AM
"Because it seems that we're raising money so that private interests can build and control our formerly public infrastructure (water projects and the like), since the government cannot raise the required funds through taxes or bonds, and yet we expect government to build new sports facilities and to subsidize private ventures which really aren't the public's business since those investments serve a private market."
David Cay Johnston talks about corporate socialism.
http://blogs.reuters.com/david-cay-johnston/2012/06/01/how-corporate-socialism-destroys/
We need to create the contrast between how elites are asking PE, SWF, and multinational corporations to take ownership of public services, while entrepreneurs are with their hand out asking for capital for private development.
This is becoming bizzarro world.
#12 Posted by Thimbles, CJR on Sat 2 Jun 2012 at 09:25 PM