Rathbun: Private equity or public?Written by Gary Rathbun | | GaryRathbun@PrivateWealthConsultants.com
There has been much discussion lately about Bain Capital and the evils of private equity, especially when a presidential candidate was involved. Not to mention an additional evil when that presidential candidate is a Republican. The trouble is, most people are not really sure what a PE firm does so they tend to believe the mainstream media or at the very least the campaign ads.
Those of you who are regular readers of my column know that I often use the analogy of a physician to explain different situations. If a person is healthy with no problems whatsoever, then a doctor is not needed and the doctor really doesn’t want to see you. If, however, a person is sick or not feeling well, they seek out a doctor and usually the doctor wants to see them to try and make them healthier.
Private equity firms are similar to the above situation. There are many companies out there that are not doing well and need some “medicine,” if you will. Medicine in the form of capital, qualified personnel, managerial expertise, access to new markets or economies of scale; private equity firms can provide these and many more remedies for ailing companies.
One of the common criticisms going around is that a PE firm will buy a company, fire all the employees that it can, sell off profitable assets and essentially trash the rest.
Let’s take a look at some of these criticisms and see if there is any truth to be had. First of all, a firm does not have to sell itself to a PE firm. Just as a person does not have to go to a doctor. If a person does not feel well he can simply try to function with the illness or just lie down and die. So far, the government does not make you go to the doctor if you are not feeling well, likewise with a company. No one forces the company to sell to a PE firm.
If a company is sick, it can seek capital and expertise elsewhere. The trouble is, aside from the federal government, no one wants to lend or invest money in a sick company to try to make it healthy again, with the exception of a PE firm or rich individual acting like a PE firm on his own.
The next criticism is that a PE firm will fire all the employees that it can to increase the efficiency of the company without regard to the number of jobs previously held. The goal of a PE firm is to make the company healthy and profitable. It does not measure its success by the number of jobs created. Back to our physician analogy, one could make the case that a physician is cruel and heartless for cutting open a person to fix what is wrong, instead of just treating the symptoms.
Government on the other hand is happy to treat the symptoms without actually curing anything since it measures success by the number of jobs saved. I guess you can do that if you are using someone else’s money and don’t have a bottom line to worry about.
Compare the results of a PE firm like Bain Capital to the outcome of Solyndra. A tremendous amount of taxpayer money was wasted and no jobs were created or saved and no viable product was produced. Whereas, a PE firm like Bain Capital has saved and created lots of jobs by restructuring companies to a healthy, profitable state.
In conclusion, not every company that a PE firm buys and tries to make healthy and profitable succeeds. Not every patient a doctor treats survives, but for the most part both have more wins than losses.
Next time we will look at General Motors, the poster child of government intervention and we will see what actually happened.
Gary L. Rathbun is the president and CEO of Private Wealth Consultants Ltd. He can be heard at 4:06 p.m. every day on “After the Bell with Brian Wilson and the Afternoon Drive” and at 6 p.m. Wednesdays and Thursdays throughout Northern Ohio on “Eye on Your Money.” He can be reached at (419) 842-0334 or e-mail him at firstname.lastname@example.org.