Private equity does a lot of public good

Marketplace Staff Feb 8, 2007

Private equity does a lot of public good

Marketplace Staff Feb 8, 2007

KAI RYSSDAL: Yesterday we told you the Blackstone Group has sealed a deal to buy Equity Office Properties for $23 billion. Blackstone’s now the country’s biggest commercial office space landlord. It’s also the latest target for critics of private equity deals. They say CEOs of publicly held companies are selling out without keeping shareholders in mind. That all private equity firms want to do is strip their purchases down and sell ’em off. Commentator Matthew Bishop sees it a different way.

MATTHEW BISHOP: Private equity is one of the best things happening in business today.

Far from asset-stripping, private equity firms mostly do a much better job of building strong companies than the alternative — the public equity you see in action every day on the New York Stock Exchange.

Public equity suffers from that paralyzing disease: short-termism. Share traders are obsessed with every piece of news about a company.

Public company bosses live in terror of doing anything that will cause the share price to drop. Boards are trigger-happy, firing CEOs in record numbers for the wrong reasons.

But bosses at private firms can manage for the long-term. They don’t have to worry about the short-term ups and downs of the stock market.

That means they can take the sort of tough, short-term, profit-reducing decisions that tend to scare public shareholders.

Decisions like closing underperforming businesses or investing heavily in new factories and products.

Private equity is also better than public equity at holding bosses to account.

True, bosses often get much better paid by private equity than by public companies — which, as we all know, pay them well enough.

That does create a conflict of interest when the boss of a public company considers selling the firm to private equity.

But if shareholders in public companies don’t like the price offered for their shares by private equity, they don’t have to sell.

Unlike public companies, private equity only pays bosses well when they perform well, not when they fail.

Building better companies is creating vast quantities of wealth for those who invest in private equity.

The biggest investors in private equity, by far, are public pension funds.

That’s right, that’s your retirement nest egg. It’s time to stop criticizing private equity. As they say, love it or leave it.

RYSSDAL: Matthew Bishop’s the chief business writer at The Economist magazine.

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