I am an analyst at a PE fund-of-funds. My job requires me to develop an intimate understanding of not only the firms within industry, but the industry as a whole. We invest in large and mid-cap buyout, venture, and distressed opportunities. Needless to say, I've been fortunate to gain a considerable amount of exposure.
What is the ideal objective of private equity in the American economy?
It would be ignorant to assume that the primary objective nature of private equity firms is to change the world. The real objective is really very simple -- to make money. But let's not use this notion to paint the industry with a negative image; most businesses exist to make money for stakeholders. Not only is money the most tangible measure of one's successes and accomplishments, but it is the medium by which we survive.
Now, before I go into some rant that sounds like something you would read in an Ayn Rand novel, it's important to consider the realities of what goes on. The media tries to present private equity (to an assuming world) as a business that thrashes companies only to fill Steven Schwarzman's pockets. This is hardly the case and counterintuitive to the main objective.
Keep in mind, PE guys love what they do and, most of the time, are the best at whatever they are doing. It is no coincidence that the execs at the top oil and gas PE shops are former managing directors of Goldman Sachs in its Energy & Power group who studied Petroleum Engineering in their undergrad before working at a top tier managing consulting firm and then going on to an Ivy League business school -- a resume that would rival those of the CXO's at GLOBAL LARGECAP Oil Co. If we assume that these guys are really good at what they do and they really love doing it, they are likely doing more good than harm when they take on operating roles at the portfolio companies.
How is private equity designed to meet that objective?
Value creation must occur to make money. Not everyone executes the touted dividend recaps; they actually engage a process that makes the companies more valuable in the eyes of the market. As the media so elegantly suggests, this sometimes yields job losses. This is seldom the case because the reality is there are a number of reasons other than being "over-staffed" that would cause a company to need a capital infusion from private investors.
PE shops buy into businesses because they see the potential to contribute more value to the market than the company currently is generating or, in some cases, it is on a path to destruction and the operating skills of the PE guys are desperately needed. Either way, value creation occurs. Think of the counterfactual: The markets suffer from lost potential and the struggling companies are mismanaged into the ground (where ALL the jobs are lost). There is an opportunity cost to neglecting the operating savoir-faire of the PE guys. Value creation means growth, and more times than not, growth requires a new operating repertoire and human/knowledge capital.
Please give examples of both how it has lived up to and failed to meet that objective?
Their existence is a testament to the degree to which PE firms have met this objective. If they were not successful, the market would require that they cease to exist. Often times this is the case; a number of major players have fallen short of their previous track records. If the mighty aren't successful, the mighty will fall.
Newt GingrichGingrich earned hundreds of thousands of dollars from private equity.
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