Kai Ryssdal: As New Hampshire voters do that thing they do every four years about this time, good old free-market capitalism has become the key point of controversy in the Republican primary race. The more that former Massachusetts Governor Mitt Romney tries not to talk about it, the more we hear about private equity -- Romney's last job before politics.
New York bureau chief Heidi Moore explains what the brouhaha's all about.
Heidi Moore: Private equity seems like one of those arcane Wall Street businesses. But you’ve seen it in action if you’ve ever bought sneakers at the Sports Authority, grabbed Dunkin’ Donuts coffee or a whopper at Burger King. Those are companies owned by private equity firms.
The private equity business used to be called leveraged buyouts, the old "Barbarians at the Gate" who bought and broke up companies. But private equity has changed, according to David Stowell . He is the head of the Buyout Lab at Northwestern’s Kellogg School.
David Stowell: More recently, these have been investors who have not been raiders per se. These are investors who buy, fix up a company and then hopefully sell it for more than the price at which they purchased it.
Private equity firms target struggling companies, then buy them with borrowed money, provided by eager banks. The goal is to make the company profitable enough to pay off the loans. Donna Hitscherich is the director of the private equity program at Columbia Business School.
Donna Hitscherich: Everybody wins as long as you can pay the debt down. If you can’t pay the debt down, in a timely manner, that’s when we have problems.
That’s what happened with Simmons, that passed from one private equity firm to another so many times that it ended up stuffed with debt and went bankrupt. One publication wryly asked, ‘How many times can you flip this mattress?' Here’s Hitscherich again.
Hitscherich: Just like anything else, whether you’re buying a company or investing in individual stocks, sometimes they work out, sometimes they don’t work out.
There are success stories, too. Companies like the hospital operator, HCA, which struggled until it was taken over by Bain and other private equity firms and went public last year.
Even so, the political accusations around job creation are beside the point, says Stowell from Northwestern.
Stowell: It’s important to create jobs, but that’s not the principal purpose of a buyout fund.
The purpose of a private equity fund is to make money for its investors. And you may be one -- they include pension funds and college endowments. They've made such a clamor to get a piece of the profits that the private equity firms are now sitting on nearly $1 trillion -- ready to invest.
In New York, I’m Heidi Moore for Marketplace.