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

Jeremy Hobson Jan 23, 2012

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

Jeremy Hobson Jan 23, 2012

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.

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