Saturday, February 04, 2012
By Andrew T. Greenberg
I work with private equity firms every day, as an investment banker and as head of a company that collects and publishes information on the transactions they complete.
What I know about this industry is more positive — and more nuanced — than what you would gather from listening to the critique being triggered by former Massachusetts Gov. Mitt Romney’s experiences at Bain Capital. This critique represents an economic argument often raised in hard times but ultimately rejected by the public at large.
Private equity investment has exploded in the past 20 years, in part because of the fraying of investor confidence in public equities — the stock market. The public model still works for raising money for and giving individuals the chance to buy into companies. In many circumstances, though, the old concept of “shareholder democracy” — with accountability enforced by research analyst reports, public accounting firms, annual shareholder meetings and proxy votes — just doesn’t work anymore.
Large institutional investors that give private equity groups their money — pension funds, endowments, insurance companies — believe they get better performance out of private managers whose economic interests can be more closely aligned with theirs. “Over both the past five years and the past 10 years,” The Wall Street Journal reported recently, “private equity returns were more than double those of the S&P stock index and the Dow Jones Industrial Average.”
So Mr. Romney’s abashed reaction when asked to defend his old firm’s record of job creation vs. job loss reminds me of the old line about the court witness who stammers when the prosecutor says, “Sir, I accuse you of monogamy!”
It isn’t the job of private business investors to generate jobs.
Most people I know in the field are decent, caring individuals who hope to create or save as many positions as possible when they take over a company. But their own job is to create value for their investors by creating more efficient, stable businesses.
Politicians on the other side of this issue have over the years developed a soothing vocabulary for elbowing business owners and managers toward “win/win solutions” that really amount to subjugating their best judgment to the politicians’ other values and priorities.
Business owners who take public subsidies and benefits are bound to play by these rules, but most private investors don’t and shouldn’t be.
Most of us would feel personally for men and women losing their jobs in a failing business, but we wouldn’t want our retirement funds to be spent propping up jobs unsupported by a business rationale. The would-be social engineers are targeting millionaires, but they’re using the nest eggs of teachers, nurses and telephone linemen with which to do it.
President Barack Obama has already begun his own attack on heedless wealth, financial gamesmanship and economic disparity as evidence per se of economic unfairness.
The American people have never gone for it. They’d rather correct market excesses and missteps than substitute the changing whims of politicians for the admittedly imperfect instincts of those putting their own money on the line.
Andrew T. Greenberg is managing director of Fairmount Partners and CEO of GF Data Resources LLC, both in West Conshohocken, Pa. He was state secretary of commerce from 1991 to 1994.
First published on February 4, 2012 at 12:00 am