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.
It’s the cloudless map’s first major makeover since 2013.
More than 1 billion people use Google Maps every month, making it possibly the most popular atlas ever created. On Monday, it gets a makeover, and its many users will see something different when they examine the planet’s forests, fields, seas, and cities.
Google has added 700 trillion pixels of new data to its service. The new map, which activates this week for all users of Google Maps and Google Earth, consists of orbital imagery that is newer, more detailed, and of higher contrast than the previous version.
Most importantly, this new map contains fewer clouds than before—only the second time Google has unveiled a “cloudless” map. Google had not updated its low- and medium-resolution satellite map in three years.
Critics claim British voters were unqualified to decide such a complicated issue. But democracy itself isn’t the problem.
It’s easy, in retrospect, to characterize David Cameron’s decision to hold a referendum on Britain’s EU membership as a colossal blunder, at least from the prime minister’s perspective. The idea was reportedly conceived at a pizza restaurant at Chicago O’Hare airport, an inauspicious place to hatch plans of international consequence. Cameron, by many accounts, promised to stage the vote not because he believed in it, or took it especially seriously, or felt the public was demanding it, but because he wanted to appease right-wing “euroskeptics” in his party ahead of the 2015 election. It worked. Cameron won that election, and soon found himself campaigning for Britain to remain in the European Union. Then a majority of Britons voted to do just the opposite. A disgraced David Cameron now finds himself without a job and his country temporarily without its bearings, in a jolted world. Blunders don’t get much bigger.
It happened gradually—and until the U.S. figures out how to treat the problem, it will only get worse.
It’s 2020, four years from now. The campaign is under way to succeed the president, who is retiring after a single wretched term. Voters are angrier than ever—at politicians, at compromisers, at the establishment. Congress and the White House seem incapable of working together on anything, even when their interests align. With lawmaking at a standstill, the president’s use of executive orders and regulatory discretion has reached a level that Congress views as dictatorial—not that Congress can do anything about it, except file lawsuits that the divided Supreme Court, its three vacancies unfilled, has been unable to resolve.
On Capitol Hill, Speaker Paul Ryan resigned after proving unable to pass a budget, or much else. The House burned through two more speakers and one “acting” speaker, a job invented following four speakerless months. The Senate, meanwhile, is tied in knots by wannabe presidents and aspiring talk-show hosts, who use the chamber as a social-media platform to build their brands by obstructing—well, everything. The Defense Department is among hundreds of agencies that have not been reauthorized, the government has shut down three times, and, yes, it finally happened: The United States briefly defaulted on the national debt, precipitating a market collapse and an economic downturn. No one wanted that outcome, but no one was able to prevent it.
Three Atlantic staffers discuss “The Winds of Winter,” the tenth and final episode of the sixth season.
Every week for the sixth season of Game of Thrones, Christopher Orr, Spencer Kornhaber, and Lenika Cruz discussed new episodes of the HBO drama. Because no screeners were made available to critics in advance this year, we'll be posting our thoughts in installments.
Millions of men in the prime of their lives are missing from the labor force. Could a big U.S. housing construction project bring them back?
Something is rotten in the U.S. economy. Poor men without a college degree are disappearing from the labor force. The share of prime-age men (ages 25-54) who are neither working nor looking for work has doubled since the 1970s.
The U.S.’s labor participation rate for this group of men is lower than every country in the OECD except for Israel (an outlier, because of the high number of non-working Orthodox Jewish men) and Italy (an economic omnishambles). Today, one in six prime-age men in America are either unemployed or out of the workforce altogether—about 10 million men.
So, this is the 10-million-man question: Where did all these guys go?
According to a report from White House economists released last week, non-working prime-age men skew young, are less likely to be parents, are disproportionately black and less educated, and are concentrated in the South.
American society increasingly mistakes intelligence for human worth.
As recently as the 1950s, possessing only middling intelligence was not likely to severely limit your life’s trajectory. IQ wasn’t a big factor in whom you married, where you lived, or what others thought of you. The qualifications for a good job, whether on an assembly line or behind a desk, mostly revolved around integrity, work ethic, and a knack for getting along—bosses didn’t routinely expect college degrees, much less ask to see SAT scores. As one account of the era put it, hiring decisions were “based on a candidate having a critical skill or two and on soft factors such as eagerness, appearance, family background, and physical characteristics.”
The 2010s, in contrast, are a terrible time to not be brainy. Those who consider themselves bright openly mock others for being less so. Even in this age of rampant concern over microaggressions and victimization, we maintain open season on the nonsmart. People who’d swerve off a cliff rather than use a pejorative for race, religion, physical appearance, or disability are all too happy to drop the s‑bomb: Indeed, degrading others for being “stupid” has become nearly automatic in all forms of disagreement.
The party's presumptive nominee and the Republican National Committee are working together to avoid a revolt at the July convention, according to The New York Times.
Only a few weeks ahead of the Republican National Convention, Donald Trump is preparing for what’s likely to be a charged event, as some Republicans look to upend the gathering. How? The Republican National Committee and the Trump campaign are threatening to keep those who are not in favor of the party’s nominee from taking speaking slots at the gathering, according to The New York Times.
It’s the culmination of a heated primary season that began with 17Republican presidential candidates and that, over time, narrowed, as Trump swept states across the nation. And right now, it’s unclear if some of those who exited the race will be permitted to speak at the convention, given Trump’s conditions. Take Senator Ted Cruz: He dropped out of the race in May, and he still has not endorsed Trump. But as the Times notes, however much Trump may want to bar the Texas senator, it may not be possible for him to keep Cruz from speaking. That’s because, since Cruz “won a majority of delegates in at least eight states, he would probably be able to have his name entered into nomination, guaranteeing him a speech under party rules.”
The rapper has said celebrities shouldn't be disrespected, and yet here are nine minutes of naked Taylor Swift.
On one of the great issues of the day, Kanye West has long made his position clear: Celebrity lives matter. He’s said that famous people are “treated like blacks were in the ’60s, having no rights.” He’s railed against how it “is OK to treat celebrities like zoo animals.” He’s vowed “to raise the respect level for celebrities so that my daughter can live a more normal life.”
The rapper says his new video, for “Famous,” is “a comment on fame.” It’s basically nine minutes of night-vision camera leering over sleeping naked bodies made to uncannily resemble—ready?— Taylor Swift, Bill Cosby, Caitlyn Jenner, Amber Rose, Ray J, Kim Kardashian, Chris Brown, Rihanna, Donald Trump, Anna Wintour, George W. Bush, and, yes, Kanye West. Watching it, you think of leaked sex tapes and the violation they represent. You think of how celebrities are the foremost victims and beneficiaries of voyeurism. You think of how famous people are, well, people. You think of tattoos and implants and hairpieces and snoring. You think, perhaps most of all, of West’s reputation as a jackass.
It’s not because they’re inherently harsher leaders than men, but because they often respond to sexism by trying to distance themselves from other women.
There are two dominant cultural ideas about the role women play in helping other women advance at work, and they are seemingly at odds: the Righteous Woman and the Queen Bee.
The Righteous Woman is an ideal, a belief that women have a distinct moral obligation to have one another’s backs. This kind of sentiment is best typified by Madeleine Albright’s now famous quote, “There is a special place in hell for women who don’t help each other!” The basic idea is that since all women experience sexism, they should be more attuned to the gendered barriers that other women face. In turn, this heightened awareness should lead women to foster alliances and actively support one another. If women don’t help each other, this is an even worse form of betrayal than those committed by men. And hence, the special place in hell reserved for those women.
A Yale law professor suggests that oft-ignored truth should inform debates about what statutes and regulations to codify.
Yale law professor Stephen L. Carter believes that the United States would benefit if the debate about what laws ought to be passed acknowledged the violence inherent in enforcing them.
Law professors and lawyers instinctively shy away from considering the problem of law’s violence. Every law is violent. We try not to think about this, but we should. On the first day of law school, I tell my Contracts students never to argue for invoking the power of law except in a cause for which they are willing to kill. They are suitably astonished, and often annoyed. But I point out that even a breach of contract requires a judicial remedy; and if the breacher will not pay damages, the sheriff will sequester his house and goods; and if he resists the forced sale of his property, the sheriff might have to shoot him.
This is by no means an argument against having laws.
It is an argument for a degree of humility as we choose which of the many things we may not like to make illegal. Behind every exercise of law stands the sheriff – or the SWAT team – or if necessary the National Guard. Is this an exaggeration? Ask the family of Eric Garner, who died as a result of a decision to crack down on the sale of untaxed cigarettes. That’s the crime for which he was being arrested. Yes, yes, the police were the proximate cause of his death, but the crackdown was a political decree.
The statute or regulation we like best carries the same risk that some violator will die at the hands of a law enforcement officer who will go too far. And whether that officer acts out of overzealousness, recklessness, or simply the need to make a fast choice to do the job right, the violence inherent in law will be on display. This seems to me the fundamental problem that none of us who do law for a living want to face.