Posted at Investors' Business Daily
Private equity firms have a bad reputation. They're called "predators," "job killers" and "vultures." Consider the recent attacks on Mitt Romney in an Obama campaign advertisement. We're told that because of Bain Capital — Romney's former firm — steel workers lost jobs and health care benefits. Pensions were slashed.
One worker calls Bain a "vampire" that "sucked the life out of us." Another adds that they "walked away with a lot of money that they made off this plant." Hurling similar accusations in his New York Times column, Paul Krugman condemns Bain for having "destroyed good jobs."
Although focused on Bain Capital, these attacks raise important questions about the private equity business as such. Do these firms profit without caring whether their acquisitions survive? Do they eliminate good jobs?
Private equity firms typically invest in relatively mature companies, aiming to later resell their shares at a profit. In most cases, they apply their extensive knowledge of corporate and financial restructuring to improve their acquisitions, similar to how Gordon Ramsay uses his culinary expertise to save struggling restaurants on "Kitchen Nightmares."
Skype was purchased by a private equity firm named Silver Lake, which subsequently recruited a new management team, resolved litigation with the company's founders, forged strategic partnerships with key players like Verizon and Samsung, and oversaw the launch of Skype mobile and Skype Connect. These improvements allowed Silver Lake to resell Skype for a whopping gain of some $3 billion.
Domino's Pizza is another private equity success. After buying out Domino's, Bain refinanced the company, launched a new marketing campaign, rolled out new products, and modernized its stores. Revenues grew for the last five years that Bain was in charge, and the pizza chain went from being ranked last among its competitors in taste, to receiving high taste marks.
Do private equity firms focus on their own earnings at the expense of the long-term survivability of their acquisitions? To the contrary, they have every incentive to focus on their acquisition's survivability because they want to resell it at a profit.
It's much easier to sell a company that is in position to profit for many years than one that is likely to fail in a few months. And the fact that private equity firms have been reselling companies at a profit to willing buyers for decades demonstrates their success at improving companies.
Sure, there are examples of companies that went bankrupt after an attempted reorganization by private equity — GS Technologies, Simmons Bedding, etc. Maybe these failed because the business was unsalvageable. Or maybe the private equity firm couldn't figure out a suitable reorganization.