If we’re going to fight all year about the Larger Significance of private equity, it would be nice if we could move beyond dueling cartoons. The clash between “Bain personifies capitalism’s heartless evil run amok” and “Bain exemplifies the ‘creative destruction’ that is capitalism’s genius” offers little insight for those not already addled by ideology. Since a subtler assessment of private equity’s pros and cons stands no chance of finding expression on the campaign trail, let me offer an idiosyncratic guide to the terrain as the Bain wars heat up.
The first thing to appreciate is that Barack Obama is the real private equity king in this race, not Mitt Romney. Obama’s restructuring of the auto industry displayed, on a much grander scale, precisely the kind of tough-minded business calls Romney says are private equity’s specialty. With help from ex-private-equity maven Steven Rattner (and a staff filled with other private equity refugees), Obama fired management, shed workers, slashed costs, revamped operations, restructured the balance sheet and fashioned new strategies. When the dust cleared, Obama had positioned General Motors and Chrysler to move forward as viable firms.
A senior fellow at the Center for American Progress and the host of the new podcast “This...Is Interesting,” Miller writes a weekly column for The Post.
So Obama doesn’t need any lectures in creative destruction from the GOP. He creatively destroyed more in a few months than Romney did over his entire career as an investor. But he did so with public goals in mind. That meant having Uncle Sam provide the bridge loans the market wouldn’t offer in the scary climate after the financial crisis (a step Romney wrongly opposed, and now pretends didn’t matter). As a result, Obama’s de facto private equity chops saved the industry.
Truth is, the unsentimental restructuring that Obama brought to Detroit was an example, writ large, of the contribution private equity made in its early days. Back in the 1980s, the landscape was littered with bloated corporate conglomerates run more for their managers’ benefit than for shareholders’. Pioneering private equity buyouts helped rationalize many of those firms in ways that helped revitalize the U.S. economy.
But the enormous personal wealth those early transactions generated also led countless copycats to chase their pot of gold. As the field became flooded with Henry Kravis wanna-bes, the world of private equity changed.
For one thing, intense competition for deals bid prices way up. If that early generation of dealmakers identified undervalued firms and improved them, the 1990s and 2000s were characterized more by auction sales – a process that’s great for the firm being sold, but which often led PE firms to overpay in order to put their burgeoning resources to work.
Why did PE firms have so much cash to put to work? A flat stock market and an era of endlessly low interest rates made pensions funds, university and foundation endowments, and other institutional investors desperate for higher returns. When David Swensen, the influential chief of Yale’s endowment, blessed the idea of diversifying into new asset classes like private equity, the floodgates opened and PE funding soared.