Mitt Romney's private equity record is suddenly the talk of the GOP presidential contest. What do we know about the industry he helped to create?
With Mitt Romney on the march towards the Republican presidential nomination, chances are we're all going to be hearing a lot about the world of private equity for the next 11 months. The GOP frontrunner is already getting tarred by his primary rivals for his time running Bain Capital, where he helped write the playbook on how to buy up companies, rebuild them for maximum value, and flip them for a tidy profit.
Was Romney just running a corporate chop-shop? Or was he pioneering a new way to unlock the worth in American business? Whatever the answer, the blueprint he helped design has been massively influential. In 2007, investors had plunked more than $200 billion into funds like Bain.
Academics have scrutinized the broader economic effects of private equity and what it does to companies, industries, workers, and investors. Here's a brief guide to help you answer the question: Is private equity good or bad for the economy?
Do private equity buyouts hurt workers?
Yes, then no.More workers get fired in the aftermath. Then more get hired.
In the nightmares of unions and Occupiers, a private equity buyout works something like this: A firm run by men wearing Brioni suits snaps up a helpless corporation, fires as many workers as it can, lards their new asset up with debt, and then sells it off for as much profit as possible. The employees suffer. The fat cats make bank.
The reality, as illustrated in a 2011 study from researchers at the University of Chicago, Harvard, and the U.S. Census Bureau, is more complicated. The paper examined what happened to workers at 3,200 companies targeted in private equity acquisitions between 1980 and 2005. Companies did tend to fire more workers in the years after a buyout compared to competitors in their industry. But they also tended to hire more new workers. They also were more likely to sell off divisions or buy up new ones. As a result, companies involved in a private equity deal saw much, much more turnover -- or "job reallocation" as the academics put it -- but only a net decrease in employment of about 1% compared to other businesses.
In other words, it's creative destruction, but chronologically, it works out more like destructive creation. Employees are fired. Then new ones are hired. The chaos and change is undoubtedly brutal for those who get caught up in it, but the stereotype of massive net job losses isn't necessarily accurate.
Do private equity firms drive companies into bankruptcy?
The data isn't complete, but some indicators say no.
Some criticize private equity firms for leaving companies in worse financial shape than when they were purchased. In its recent look at Romney's record regarding 77 companies he worked with at Bain, the Wall Street Journal said that 22% of them filed for bankruptcy reorganization or closed up shop within eight years of the fund's initial investment. However, it's unclear whether those numbers are normal for private equity on the whole.
Steven Kaplan of the University Chicago and Per Stromberg of the Stockholm School of Economics reviewed a sample of more than 17,000 private equity transactions to see how funds exited the deals. Only about 6% ended in either bankruptcy or reorganization, giving them a yearly default rate that was lower overall than the average corporate bond issuer.* That feat was especially impressive, considering that many private equity firms, including Bain, specialize in turning around troubled or risky businesses.
The analysis did not include bankruptcies that occurred after a private equity firm sold off its stake. Does that matter? Depends. You might say a private equity firm can't be held responsible for what happens to a business after they cede control. But these businesses matter to private equity's record if you suspect firms are more likely to offload companies that aren't working out.
Does private equity make the whole economy more efficient?
Possibly. Industries with lots of private equity activity actually see faster growth.
Whether or not private equity helps most businesses, it seems to have a positive effect on the wider business climate. Looking at 20 industries in more than two dozen countries between 1991 and 2007, a research team from the Stockholm School, Harvard, and Columbia University found that industries with private equity activity grew 20% faster than other sectors. After running several mathematical checks, the paper concluded it was unlikely that private equity funds were simply investing in industries that were already primed for faster growth. Rather, they concluded that the lessons from private equity firms taught entire industries to be more efficient.
Do investors make money?
Not as much as you might think. They might be better off putting their money in stocks.
In 2005, The University of Chicago's Kaplan and Antoinette Schoar of MIT looked at whether investors who pour their billions into private equity got their money's worth. The answer: Not so much. Looking at data from 1980 through 2001, the researchers found that, after the managers took out their fees, investors actually made slightly less on private equity deals than they could have by investing in an S&P 500 index fund. Some funds were much more profitable than others. In the big picture, though, stocks won out.
But the fees make all the difference. Private equity firms are known to regularly take a 20% cut of profits. Lo and behold, once the researchers accounted for fees, private equity thoroughly outperformed stocks. Apparently, quite a lot of value winds up with the private equity guys, themselves.
*There was a big gap in the data, however. The research sample marked the outcome of 11% of the private equity deals as "unknown." As
Kaplan and Stromberg noted, there might have been more bankruptcies
lurking within that group of unknowns. A previous study found
that 23% of the large private equity transactions that took public
companies private during the 1980s ended in bankruptcy.
What use is there today for one of the oldest virtues?
As many Americans go about their days, I imagine they have two little angels perched on their shoulders, whispering conflicting messages about happiness and material wealth. One angel is embodied by James Altucher, a minimalist self-help guru recently profiled by The New York Times. Altucher claims to have only 15 possessions, after having unburdened himself a few months ago of 40 garbage bags’ worth of stuff and never looking back. As I read about Altucher, I rolled the numbers 15 and 40 over in my mind, thinking about the belongings in my bedroom and the garbage bags under my kitchen sink.
The other angel is Tyler Brûlé, the editor in chief of the fantastically high-end lifestyle magazine Monocle and a columnist for the Financial Times. He is the sort of writer who tosses off such lines as “I zipped along the autostrada through the Val d’Aosta with the ever-trusty Mario (my Italian driver for the past 20 years) at the wheel” with little regard for how privileged and pretentious he sounds (especially in his superfluous parentheticals). Still, there is something, I’m a little ashamed to say, that I envy about Brûlé’s effortless cosmopolitanism—which, it’s hard to miss, is only made possible by unusual wealth.
Why the WikiLeaks revelation about a “pay-to-play” deal with Morocco is a quintessential Clinton controversy
The chief complaint that critics make about the Clinton Foundation is that the former and perhaps future presidents engaged in a “pay-to-play” scheme, whereby donors—many of them foreign governments—would contribute money to the charity in exchange for access to Bill or Hillary Clinton, or worse, beneficial treatment from the State Department.
On Thursday, hacked emails from WikiLeaks suggest that is precisely what happened when the king of Morocco agreed to host a Clinton Global Initiative summit and give $12 million, but only if Hillary Clinton attended the May 2015 meeting.
“No matter what happens, she will be in Morocco hosting CGI on May 5-7, 2015,” Huma Abedin, a top Hillary Clinton aide, wrote in a November 2014 email to several other advisers, including campaign chairman John Podesta. “Her presence was a condition for the Moroccans to proceed so there is no going back on this.”
Choosing a president isn’t easy in this election, but here are three ways a principled conservative might vote.
The day of decision is nearing. All the talk fades, and one mark must be made beside one box on the ballot. Many Republicans are agonizing. They reject Donald Trump; they cannot accept Hillary Clinton. What to do?
I won’t conceal, I’m struggling with this question myself. I’ve listened to those Republicans, many my friends, who feel it their duty to stifle their anger and disappointment, and vote for Trump; to cast a protest vote for the Libertarian Gary Johnson or the independent Evan McMullin; or to cross the aisle and vote for Hillary Clinton as the lesser evil. On the way to my own personal answer, I found it helpful to summarize the best case for each of these options.
Emphasize the word “best.” If your case for Trump rests on the assumption that America is hurtling toward national doom, if your case for McMullin rests on the hope of tossing the election into the House of Representatives, if your case for Hillary argues that she is a large soul eager to work cooperatively with those who think differently from her. I’d say you are not thinking very clearly. Despair and fantasy are misleading counselors.
Narcissism, disagreeableness, grandiosity—a psychologist investigates how Trump’s extraordinary personality might shape his possible presidency.
In 2006, Donald Trump made plans to purchase the Menie Estate, near Aberdeen, Scotland, aiming to convert the dunes and grassland into a luxury golf resort. He and the estate’s owner, Tom Griffin, sat down to discuss the transaction at the Cock & Bull restaurant. Griffin recalls that Trump was a hard-nosed negotiator, reluctant to give in on even the tiniest details. But, as Michael D’Antonio writes in his recent biography of Trump, Never Enough, Griffin’s most vivid recollection of the evening pertains to the theatrics. It was as if the golden-haired guest sitting across the table were an actor playing a part on the London stage.
“It was Donald Trump playing Donald Trump,” Griffin observed. There was something unreal about it.
Everything you think you know about those 13 days is wrong.
On october 16, 1962, John F. Kennedy and his advisers were stunned to learn that the Soviet Union was, without provocation, installing nuclear-armed medium- and intermediate-range ballistic missiles in Cuba. With these offensive weapons, which represented a new and existential threat to America, Moscow significantly raised the ante in the nuclear rivalry between the superpowers—a gambit that forced the United States and the Soviet Union to the brink of nuclear Armageddon. On October 22, the president, with no other recourse, proclaimed in a televised address that his administration knew of the illegal missiles, and delivered an ultimatum insisting on their removal, announcing an American “quarantine” of Cuba to force compliance with his demands. While carefully avoiding provocative action and coolly calibrating each Soviet countermeasure, Kennedy and his lieutenants brooked no compromise; they held firm, despite Moscow’s efforts to link a resolution to extrinsic issues and despite predictable Soviet blustering about American aggression and violation of international law. In the tense 13‑day crisis, the Americans and Soviets went eyeball-to-eyeball. Thanks to the Kennedy administration’s placid resolve and prudent crisis management—thanks to what Kennedy’s special assistant Arthur Schlesinger Jr. characterized as the president’s “combination of toughness and restraint, of will, nerve, and wisdom, so brilliantly controlled, so matchlessly calibrated, that [it] dazzled the world”—the Soviet leadership blinked: Moscow dismantled the missiles, and a cataclysm was averted.
A neuropsychological approach to happiness, by meeting core needs (safety, satisfaction, and connection) and training neurons to overcome a negativity bias
There is a motif, in fiction and in life, of people having wonderful things happen to them, but still ending up unhappy. We can adapt to anything, it seems—you can get your dream job, marry a wonderful human, finally get 1 million dollars or Twitter followers—eventually we acclimate and find new things to complain about.
If you want to look at it on a micro level, take an average day. You go to work; make some money; eat some food; interact with friends, family or co-workers; go home; and watch some TV. Nothing particularly bad happens, but you still can’t shake a feeling of stress, or worry, or inadequacy, or loneliness.
According to Dr. Rick Hanson, a neuropsychologist, a member of U.C. Berkeley's Greater Good Science Center's advisory board, and author of the book Hardwiring Happiness: The New Brain Science of Contentment, Calm, and Confidence, our brains are naturally wired to focus on the negative, which can make us feel stressed and unhappy even though there are a lot of positive things in our lives. True, life can be hard, and legitimately terrible sometimes. Hanson’s book (a sort of self-help manual grounded in research on learning and brain structure) doesn’t suggest that we avoid dwelling on negative experiences altogether—that would be impossible. Instead, he advocates training our brains to appreciate positive experiences when we do have them, by taking the time to focus on them and install them in the brain.
Science says lasting relationships come down to—you guessed it—kindness and generosity.
Every day in June, the most popular wedding month of the year, about 13,000 American couples will say “I do,” committing to a lifelong relationship that will be full of friendship, joy, and love that will carry them forward to their final days on this earth.
Except, of course, it doesn’t work out that way for most people. The majority of marriages fail, either ending in divorce and separation or devolving into bitterness and dysfunction. Of all the people who get married, only three in ten remain in healthy, happy marriages, as psychologist Ty Tashiro points out in his book The Science of Happily Ever After, which was published earlier this year.
Social scientists first started studying marriages by observing them in action in the 1970s in response to a crisis: Married couples were divorcing at unprecedented rates. Worried about the impact these divorces would have on the children of the broken marriages, psychologists decided to cast their scientific net on couples, bringing them into the lab to observe them and determine what the ingredients of a healthy, lasting relationship were. Was each unhappy family unhappy in its own way, as Tolstoy claimed, or did the miserable marriages all share something toxic in common?
It isn’t the only democratic institution that finds itself in danger.
Four years ago, as a speechwriter for President Obama, I commissioned a binder full of women.
A little context. It was the morning of the Al Smith Dinner, the election-year tradition in which both parties’ nominees don white-tie attire and deliver comedy monologues to New York City’s elite. Our opponent, Governor Mitt Romney had recently used the words “binders full of women” while discussing gender parity in government. Eager to mock the clumsy phrase, I asked a staffer on the advance team to put together a prop.
But our binder never saw the light of day. Obama nixed the idea. I remember being disappointed by the president’s decision, and wondering if POTUS was phoning it in. Of the jokes that did make it into the final draft, one in particular stood out for its authenticity.
First there was McCain’s caving to Bush’s signing statement on his own torture bill, then his selection of an extremely unqualified and unvetted running mate, then he backed Trump until nearly the bitter end—even after Trump insulted his POW experience and his fellow vets with PTSD. And now, a shameless betrayal of constitutional principle that would have gotten far more attention this week if Trump hadn’t one-upped McCain with all his incendiary “rigged” rhetoric. Reader Don explains:
I don’t know if your readers have seen this yet, but it seems that McCain has announced that his fellow GOP Senators will not confirm any Supreme Court nomination by Clinton. Trump is an ignorant, narcissistic, nasty piece of work. But McCain used to be a guy who remembered and honored (at least sometimes) the old bipartisan traditions of the Senate. His statement is just outrageous and inexcusable. What he’s basically saying is that only Republican presidents get to appoint Supreme Court Justices.
I understand that their thinking is that they don’t want the bias of the Court to shift from conservative to liberal. But the Court has shifted back and forth over the years, and we have managed to survive those changes. Apparently, today’s Republican Party feels that the country somehow won’t survive a Democratic administration or a liberal Supreme Court.
We have what might be described as an asymmetric politics. One party disagrees with the other party’s policy domestic policy positions, but recognizes the legitimacy of an opposition party and accepts that the other party is patriotic and loyal to the country. The other party rejects the legitimacy and loyalty of the other party. The efforts to de-legitimize former President Clinton, President Obama, and likely future President Hillary Clinton are part of this effort. The refusal of the GOP Congress to allow Obama any legislative accomplishments was another part of it. I expect that a GOP House will adopt the same obstructionist tactics starting in 2017.
People predict that the U.S. population will continue to get younger, better educated, and less white. I hope our political experiment lasts long enough to see that day.
The candidates are back on the campaign trail, following the third, and final, debate on Wednesday night.
It’s Saturday, October 22—the election is now less than three weeks away. Donald Trump and Hillary Clinton are back on the campaign trail to deliver their final pitch to voters, ahead of Election Day. We’ll bring you the latest updates from the trail, as events unfold. Also see our continuing coverage: