Name: Jason E. Wilson
Company: Prospect Capital Management
What is the ideal objective of private equity in the American economy?
To make money for investors, period. This is called the "profit motive." There are only two certain ways for the owners (i.e., shareholders) of a company to make money in a PE deal: (i) either sell the company for more than you bought it or (ii) pay out an amount in dividends greater than the amount of capital you invested in the first place. Anyone, including those who think they've found a "gotcha" with dividend recaps, as if they're some dirty little secret for which PE firms should apologize, who argues for anything other than the profit motive truly doesn't understand PE or any type of investing for that matter.
How is private equity designed to meet that objective?
There are all types of PE funds, but I'll describe the two main types. The first type is a fund that just uses "financial engineering." This is generally thought to involve a company borrowing an imprudent amount of debt relative to the amount of equity capital invested in the company. This is literally no different than a homeowner taking out a mortgage to buy a house. But let's discuss the situation in which a company has to declare bankruptcy because it took on too much debt that banks were willing to lend under their own recognizance. First, it is ridiculous to say with certainty that excessive debt alone caused the bankruptcy. Have you ever heard of the economic cycle? What about competition from a faster, smarter competitor? Managers are not omniscient.
Yes, sometimes lots of employees get let go if the business is shrunk or closed altogether. But layoffs are part of evolution that is just as real in the business world as it is in nature. That is, survival of the fittest. No one is guaranteed employment in this world. You think you're owed a (better) job? Just wait and see how long hanging onto that entitlement mindset corresponds to the length of your unemployment.
The second type of fund is one that believes in operational improvements (e.g., improving operating margins or the total amount of free cash flow). Why would we begrudge anyone who has the talent and foresight to make improvements in a company and then realize a profit for doing so?
All the employees at that improved company benefit from the improved competitiveness of their company. They are potentially rewarded with greater certainty of employment and/or compensatory benefits. Everybody wins, including the government, which sees more payroll and corporate taxes and also sees fewer dependent upon government assistance. Do you know who invented this second type of fund? Mitt Romney did with Bain Capital.
Please give specific examples of both how it has lived up to and failed to meet that objective.
My goal isn't to tally up all of the businesses and jobs that were created or saved (sounds like the Democrats' defense of the stimulus) due to PE. My point is to try to show that we are all adults who must rely upon our God-given talents to make informed decisions whenever we transact. Whether it's a PE fund buying a company, a bank lending to finance a dividend recap of a sponsor-owned company, or a mutual fund manager hoping to buy low, sell high and collect some dividends along the way, the point is that the profit motive is a normal, healthy thing.
You will never find an investor to finance a company whose motivation is to provide for the social good at the expense of profit. If you do, then you have a charity, not a business.
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