This November’s presidential election will, first and foremost, be a referendum on President Obama’s first-term performance. But assuming that Mitt Romney wins the GOP nomination, it also will be a referendum on private equity, and if the industry’s values and actions are consistent with those of American voters.
And I’m worried about the latter. Not because of my own political preferences, but because I do not believe most Americans will be adequately equipped to make an informed judgment.
Yesterday I fact-checked the anti-Romney “documentary” published by a PAC supporting Newt Gingrich. The number of errors was staggering, even for a piece of political propaganda. And I’ve already discussed Romney’s deceitful “net” jobs creation number, and how folks like Obama advisor David Axelrod have misstated the fundamental structure of private equity funds.
My final straw came this morning, when Yale Law School professor Jonathan Macey wrote a Wall Street Journal op-ed titled How Private Equity Works. In it, he writes:
"Because private-equity firms are, by definition, equity investors, they make money only if they improve the performance of their companies. Private equity is last in line to be paid in case of insolvency. Private-equity firms don't make a profit unless their companies can meet their obligations to workers and other creditors.”
I’ll just be charitable and suggest that Professor Macey – and the WSJ op-ed page editors – are ignorant as to the existence of dividend recaps (i.e., the way PE firms can make money even if their equity is wiped out).
What we need is an honest debate about the merits and demerits of private equity, in the context of American capitalistic ideals. That means getting everyone’s cards out on the table, not just those cards that various constituents wish to turn over.
Private equity executives should publicly talk about their investment activities, their goals when entering companies and their successes and failures. Limited partners should discuss how private equity investments have benefitted or hurt their beneficiaries. Portfolio company CEOs – current and former – should explain the changes directed by their sponsors, including difficult decisions that might have hurt individual employees.
I’m not talking about self-serving advertisements. I’m talking about an honest explanation of how the sausage gets made. I know private equity is private for a reason, and that many of its participants are loathe to discuss the inner workings. But there is something larger at stake here than your own personal comfort: The future of American leadership depends, in part, on your willingness to help voters understand the good, bad and ugly of private equity.
To that end, I’m officially offeringu a forum to do so. Either as individuals or as representative of your organizations. All private equity stakeholders: Buyout professionals, limited partners, service providers, portfolio company executives and employees.
What follows are three basic questions, and I will publish all responses on this website. If you believe my questions are too limiting, please feel free (no, encouraged) to add whatever you feel is required. All I ask is that you be honest. It’s what we need:
- 1. What is the ideal objective of private equity in the American economy?
- 2. How is private equity designed to meet that objective?
- 3. Please give specific examples of both how it has lived up to and failed to meet that objective.
You can reply to these questions by sending emails to firstname.lastname@example.org. Thank you in advance for your participation.