Friday, May 29, 2015

In defense of private equity, and Romney

"Shareholder democracy.... just doesn't work anymore," says Andrew Greenberg

In defense of private equity, and Romney

Newt Gingrich- and President Obama-backers are using Republican presidential front-runner Mitt Romney's record as boss of private-equity buyout firm Bain Capital against him. That's provoked a ringing defense of "P.E." by Andrew T. Greenberg, managing partner at investment banking firm Fairmount Partners and chief executive of GF Data Resources, a Conshohocken firm that tracks private-equity deals.


Andrew T. Greenberg

Private equity has prospered, maybe to the point where a private equity exectutive will be our next President, because "shareholder democracy" - the whole post-World War II network of publicly-traded, regulated companies, owned by mutual funds and other broad-based investors - "just doesn't work anymore," Greenberg writes: 

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 and think about this industry is more positive – and more nuanced – than what you would gather from listening to the critique being triggered by Mitt Romney’s experiences at Bain Capital before entering politics.

This critique, which will only gain momentum if Gov. Romney wins the Republican nomination, represents an economic argument that is often raised in hard times but has ultimately always been rejected by the public at large and is the opposite of what current economic challenges demand.

Private equity investment has exploded in the past 20 years for a lot of reasons, but one is 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 many companies.

In many more 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.

The large institutional investors who give PE groups most of 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, and the results bear them out. “Over both the past five years and the past 10 years,” the Wall Street Journal reported last week, “private equity returns were more than double those of the S&P stock index and the Dow Jones Industrial Average,” according to Cambridge Associates, a global tracking firm.

So investors continue to gravitate toward private equity, including the public employee unions that have been among Romney’s strongest critics. The Journal quoted another tracking firm as reporting that public employee unions have about 11 percent of their assets invested in private equity, up from three percent a decade ago.

Gov. Romney’s abashed reaction when asked to defend his old firm’s record of job creation versus 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 of the 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 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.

Is it "the job of private business investors to generate jobs"? 

About this blog

PhillyDeals posts drafts, transcripts and updates of Joseph N. DiStefano's columns and stories about Philly-area business, which he's been writing since 1989.

DiStefano studied economics, history and a little engineering at Penn and taught writing at St. Joseph's. He has written thousands of columns and articles for the Inquirer, Bloomberg and other media, wrote the book Comcasted, and raised six children with his wife, who is a saint.

Reach Joseph N. at JoeD@phillynews.com, distefano251@gmail.com, 215.854.5194 or 302.652.2004.

Reach Joseph N. at JoeD@phillynews.com or 215 854 5194.

Joseph N. DiStefano