Name: Thomas May
Company: Stifel Nicolaus
Before I get into the questions I would like to explain to you why I got into private equity. There are obviously many ways to get rich, especially working in finance, but there are very few opportunities to get rich and create something meaningful.
Growing up I always idolized Warren Buffett because he could spot an undervalued company, infuse it with capital and improve the operations, and make that company much more profitable in the end. In doing that, he created economic value and was paid handsomely for it. That is simply it, I want to buy a company that isn't doing as well as it could, improve it, and sell it for a ton of money.... Lather, rinse, repeat. Unfortunately for me, it takes a great deal of education and proving yourself to make these investment decisions let alone convince people to give you money to do so, so all I do is the accounting side of it. For now.
What is the ideal objective of private equity in the American economy?
The ideal objective of a private equity firm or any other company participating in the American economy is to make money. The ideal outcome of a private equity transaction from my observation is for a private equity firm to buy a company at a great price, streamline its operations (or wherever they felt the company was lacking), and realize a large profit when they sell the company.
How is private equity designed to meet that objective?
Private equity firms meet that objective by being cautious about their investments (some take years to make) by doing extensive due diligence so that they know everything about the company. By the time that they make these investments, PE firms already have revenue goals, ways of getting to these goals and even ideas for how they will turn this company for a profit in the near (or distant) future. A more important aspect than that though is the human capital inside a private equity firms. Any good PE firm has an extensive list of seasoned and proven professionals who can successfully advise (or run) one or more companies at a time.
Please give examples of both how it has lived up to and failed to meet that objective.
Any time that a private equity firm has made money off of selling a company, and where the company can be left autonomous without other debilitating mistakes, then I consider that success. What a company does after they are off of their PE crutch is up to management. Where they fail in my opinion is when they do not make money off of a company. In many cases that means that the firm failed to improve the company and therefore could not sell it at a better price than they bought it for.
In aggregate, private equity helps build companies. No, they can't all be winners but when they are they create so much good that nitpicking a lost job here and there because a company was at one point backed by private equity is ludicrous. I say to the financially uneducated, take my word for it, go on complaining about other financial instruments that you don't understand such as derivatives, and leave private equity alone.
When you swipe your credit card in Wal-Mart, thank Platinum Equity for supplying the funding so that US Robotics could provide their machines. When you step into a Dunkin' Donuts for a cup of coffee in the morning, thank The Carlyle Group for providing the funding so that you won't go to work tired. When you go to the doctor for just about any illness, it is likely that they will prescribe you a medicine developed by a private equity backed biotech firm. Private equity is tangible, real, and helpful.
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