The role of private equity in the U.S. economy

Republican presidential hopeful Mitt Romney holds a campaign rally in Ormond Beach, Fla., January 22, 2012. Romney has suffered criticism for his time at the private equity firm Bain Capital.

Jeremy Hobson: The exit polling from South Carolina shows the upset victory by Newt Gingrich over the weekend is thanks in part to a new campaign narrative by Gingrich and his supporters -- a narrative that attacks Mitt Romney's time at the private equity firm Bain Capital.

Announcer: Mitt Romney became CEO of Bain Capital the day the company was formed. His mission: to reap massive rewards for himself and his investors.

Man: Mitt Romney, them guys. They don't care who I am.

Well Mitt Romney's campaign is already running an ad in Florida to counter that narrative and highlight the economic upsides of private equity. We are going to take the politics out of it for a moment and focus on the industry.

Adam Blumenthal is the founder and managing partner of the private equity firm Blue Wolf and he's with us now from New York. Good morning.

Adam Blumenthal: Good morning Jeremy.

Hobson: Let's start with what it is that you do -- which has come under attack recently. Describe to me what it is that a private equity guy like yourself does?

Blumenthal: Well, Jeremy, what we do is: look for companies which have a complicated set of problems; that maybe they have gotten out of touch with their market, or they're underperforming in some other way. And we use capital which pension funds, primarily, have entrusted to us, mixed with our own money.

And we buy those companies, and we work over a three to five to seven year period of time to try to turn them around -- have the companies become more valuable. And ultimately, we sell them to somebody who will be a long-term owner.

Hobson: Do you care in that process if the company ultimately survives or not?

Blumenthal: We care very much. Usually the companies that are firm buys, their long-term future is not at all certain when we get there. And what our business is -- and our goal -- is to make those companies grow; make them thrive, fix their problems, and have them be long-term survivors.

Hobson: It does seem that a lot of the criticism that's been directed at the private equity industry is becomes it seems some private equity people don't have employment in mind -- they don't care if the company that comes out on the other end has 100 employees or 50.

Blumenthal: Well, what any management team or what any set of owners really want to do is make the company grow, thrive, and be more valuable. In general, when you do that, employment grows -- but not always. We sometimes get involved with companies which have had their sales fall in half, and nobody's adjusted the employment. And the reality is, you can't survive; and if you want to survive, you have to get things lined up.

Hobson: Do we need private equity in this economy, or is it just something that speeds up the process of fixing companies that are not doing that well -- do we need it, or not?

Blumenthal: We do need it. Many companies that we've seen, they can't adapt to change quickly enough, where the short-term focus of quarterly earnings leads to an inability to make decisions that are important for the long run. And for companies in those kinds of situations, they'll never get fixed, unless somebody like us gets involved and organizes things appropriately.

Hobson: What do you make of the criticism, being called "vulture capitalists" -- or "barbarians," even?

Blumenthal: I think that it's easy to find examples of anything that any industry does that didn't work out well. I think the overwhelming reason that pension funds and universities and the sovereign wealth funds all over the world invest in private equity is we're able to -- by focusing on very specific niches -- make companies be worth more than they were before. In general, our economy is better because people are focused on doing that.

Hobson: Adam Blumenthal is founding and managing partner with Blue Wolf Capital Partners, a private equity firm. Adam Blumenthal, thanks so much.

Blumenthal: Thank you.

About the author

Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead.
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I continue to find people fascinating. Your article on the role of Private Equity and your subsequent interview with Adam Blumenthal make my view of them all the more so, especially after reading the posted comments.

In my first career, law enforcement, I spent of lot of time listening to those not in it, tell me how it should be done. If a policeman shot someone, they shoudn't have. If they didn't, they should have. In all cases, I always asked; "Have you ever been in that position?" Most thoughtful people would reflect on that question, and understand there was no way they could really comment on it intelligently. And that was that.

Since the Presidential debates and the focus on Romney, Bain Capital, and what role companies like this play in our business community, I have listened to many people characterize Private Equity members as "vultures", and worse. Again, I have asked the same question, in a different format, "Have you ever been involved with them"? The answer has always been the same. It is no. When they admit that, I tell them I have. And then I tell them the facts, from the evidence that I have personally witnessed.

After retiring from law enforcement and running a crime lab, I founded a company in the building materials industry. We grew it to 60 million in sales and became the dominant player in our market. Then came the crash and we struggled to re-structure as fast as we could. The size of our sellable market decreased 80 percent. Notwithstanding all this, we survived by self-funding, pay cuts and lay-offs. We couldn't close locations fast enough. Nothing we did seemed to keep pace with the descent of the market, and though our bankers felt sorry for us, the regulators ensured they could be of no help. It was then, that I personally sought out Private Equity. I'm glad, (as are our employees) that I did. That was a year ago.

Today, the company has a clean balance sheet, is hiring back employeees as it grows and is doing acquisitions. People who were concerned about their jobs are now concerned on processes and procedures for growth and value. There is a new feeling in the air, one of hope and not fear, one that has a future ,where one was unsure before. It is a far cry from what I witnessed in the past four years. My only wish is that I'd done it sooner.

In the past few months I've entered our facilities and shook hands with employees we've hired back. Without Private Equity, I wouldn't have hired anyone back. I would have layed everyone else off.

From someone who's actually lived through it.

Chad Barton

Venture, vulture and vampire capital.

Let's get our terms straight:
Venture capitalists invest in new or early stage companies with promise and make their money from helping the companies grow and get acquired or go public. Vulture capitalists, like vultures, feed on the dead, finding undervalued dead or dying companies and acquire them for their assets, often mostly real estate but also divisions, product lines, intellectual property like patents or brands, and profit from the breaking up and sale of those assets.
What you call "private equity" are generally "vampire capitalists" who look for the living viable companies that are usually undervalued or more valuable broken up, suck all the lifeblood out of them in terms of selling off assets and charging big management fees, make giant profits then discard the lifeless bodies.
I'm a serial entrepreneur and have friends who do turnarounds. I can tell you stories-horror stories!

I hope pension holders were listening closely to this broadcast. Mr. Blumenthal gave a pretty accurate account of what vulture capitalists do—use other people’s money to create value for investors in an environment rife with moral hazard. This is why 401ks have been so aggressively marketed for the last twenty years—a nice big, fat pool of unprotected, uninsured capital to plunder, as well as the privatization of Social Security by other means. Hence, Mitt Romney increases his financial worth to a quarter-billion dollars while employees watch their jobs go to China and their pensions evaporate when “things don’t work out well.” They always work out well for the financial industries, though, because if they don’t, well, future generations of taxpayers are there to bail them out (with S.S. and public services being blamed in the bargain). We need private equity firms like we need more securitization, off-exchange trading, and Gordon Gecko in the White House.

I find that the interview with the Private Equity fund executive did not meet Hobson's claim of "leaving politics out of it." Yes, the executive is not a candidate for office nor a "politician," but that does not mean his views are either objective (what Hobson seems to imply) or apolitical. Indeed, the executive has a vested interest in seeing to it that the public views private equity funds as entities that work for the economic good, in contrast to the criticisms leveled against them by various public figures. Whether or not private equity firms constitute an economic good or not is an issue that can and should be discussed; however, interviewing the executive who runs one such fund, and claiming that such an interview yields an apolitical view (implying a sense of objectivity), is not effective journalism. If one interviews a vested interest in the industry, then one should contrast that interview with another that features a critic of private equity funds. Otherwise, one can try to approach "experts," but even "experts" (e.g., academic economists) tend to be divided on such issues (as well as influenced by politics). In the end, one cannot get "apolitical" views on major economic issues, even if the politics involved may be subtle and/or complex. Economics is, by virtue of its very nature and its vast implications, always political because it impacts the nature and function of power in a society. In this specific instance, it is clear that Hobson was just pitching softballs to the private equity world. If economic entities and businesses are in the habit of hiring "historians" (i.e. Gingrich), maybe Hobson thinks he has a future being hired as a corporate journalistic consulting. This interview was more advertising than journalism, and it was quite political. Shame on Hobson.

Ref: Jeremy Hobson’s interview with Adam Blumenthal of Blue Wolf, regarding Venture, Vulture Capitalist, Private Equity firms.
I would like to hear an explanation as to why Venture Capital firms are able to collect fees and post profits at a tax rate equal to that of a common person investing in the stock market? I understand that the money used is technically an investment in a particular business, but at what point does that investment turn into an asset? I would argue that once the original company is broken down into individual parts or has its corporate status changed in any way the money involved in that particular investment should find its way into a tax bracket the same as any other business is subject to. If I take a piece of metal and turn it into a usable product which is sold for a profit I pay 30-35% on that profit. Why would an entire company be any different?

“I think the overwhelming reason that pension funds and universities and the sovereign wealth funds all over the world invest in private equity is we're able to -- by focusing on very specific niches -- make companies be worth more than they were before.”

Donors should not allow not-for-profit institutions of higher learning to invest their endowments in the high-risk ventures that private-equity firms undertake. The lure of unrealistic returns on high-risk investments inflicted painful losses in university endowment portfolio value in the wake of the financial crisis of 2008.

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"what any management team or what any set of owners really want to do is make the company grow, thrive, and be more valuable." What he should have said was "and/or be more valuable." He clearly dodged the fact that the focus on short-term returns has nothing to do with growing and thriving. As we've suffered, we've seen plenty of companies become weak and die, while, in the short-term, cutting jobs made them more valuable. The take-over folks essentially have insider knowledge of what they are about to do, and so profit doubly as they destroy an American company.

Ref: Jeremy Hobson’s interview with Adam Blumenthal of Blue Wolf, regarding Venture, Vulture Capitalist, Private Equity firms.

BBC has a segment I hear on my radio called “Hard Talk”. If you hear it you will understand the segment’s name.
I am disappointed again to conclude that APM & NPR fail to take the dare and ask the hard questions. I must conclude BBC trumps our public radio and media in being brave enough to ask the hard questions.

Jeremy Hobson’s interview with the Venture Capitalist, private equity firm founder and managing partner of Blue Wolf, Adam Blumental, on 1/23/12, Monday morning, is another example.

Now let me make the point that Hobson’s interview questions and Blumenthal’s answers were fine as far as they went. On the upside, the value venture capitalists & private equity firms offer our society were clearly covered. But the question that hung in the air but was not asked was the real reason the term Vulture Capitalists is often echoed through out our news media.

So I will ask that question hypothetically, “Mr Blumenthal, is it ethical and moral to purchase a company that is or could be predictably made profitable but whose assets broken apart and sold quickly are worth more than the purchase price, if in doing so hundreds, perhaps thousands, of jobs will be lost and communities will be disseminated?

Perhaps another way of looking at this moral dilemma is to consider a family that depends on the wonderful apple tree in the back yard, but being the toughest son I want to chop it down to sell the wood so I can buy myself a new bike. Now make no mistake, there are plenty of trees in the forrest. But this one is so close and so easy and no one in this family can stop me. When I look out the back window and see that apple tree I see my new bike and I see it now. Why should I work a little harder, wait a little longer or make a little less so the family can continue to have apples? I have no moral obligation to restrain my desire and opportunity.

Or do I?

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