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.
In the name of emotional well-being, college students are increasingly demanding protection from words and ideas they don’t like. Here’s why that’s disastrous for education—and mental health.
Something strange is happening at America’s colleges and universities. A movement is arising, undirected and driven largely by students, to scrub campuses clean of words, ideas, and subjects that might cause discomfort or give offense. Last December, Jeannie Suk wrote in an online article for The New Yorker about law students asking her fellow professors at Harvard not to teach rape law—or, in one case, even use the word violate (as in “that violates the law”) lest it cause students distress. In February, Laura Kipnis, a professor at Northwestern University, wrote an essay in The Chronicle of Higher Education describing a new campus politics of sexual paranoia—and was then subjected to a long investigation after students who were offended by the article and by a tweet she’d sent filed Title IX complaints against her. In June, a professor protecting himself with a pseudonym wrote an essay for Vox describing how gingerly he now has to teach. “I’m a Liberal Professor, and My Liberal Students Terrify Me,” the headline said. A number of popular comedians, including Chris Rock, have stopped performing on college campuses (see Caitlin Flanagan’s article in this month’s issue). Jerry Seinfeld and Bill Maher have publicly condemned the oversensitivity of college students, saying too many of them can’t take a joke.
Demonizing processed food may be dooming many to obesity and disease. Could embracing the drive-thru make us all healthier?
Late last year, in a small health-food eatery called Cafe Sprouts in Oberlin, Ohio, I had what may well have been the most wholesome beverage of my life. The friendly server patiently guided me to an apple-blueberry-kale-carrot smoothie-juice combination, which she spent the next several minutes preparing, mostly by shepherding farm-fresh produce into machinery. The result was tasty, but at 300 calories (by my rough calculation) in a 16-ounce cup, it was more than my diet could regularly absorb without consequences, nor was I about to make a habit of $9 shakes, healthy or not.
Inspired by the experience nonetheless, I tried again two months later at L.A.’s Real Food Daily, a popular vegan restaurant near Hollywood. I was initially wary of a low-calorie juice made almost entirely from green vegetables, but the server assured me it was a popular treat. I like to brag that I can eat anything, and I scarf down all sorts of raw vegetables like candy, but I could stomach only about a third of this oddly foamy, bitter concoction. It smelled like lawn clippings and tasted like liquid celery. It goes for $7.95, and I waited 10 minutes for it.
In continuing to tinker with the universe she built eight years after it ended, J.K. Rowling might be falling into the same trap as Star Wars’s George Lucas.
September 1st, 2015 marked a curious footnote in Harry Potter marginalia: According to the series’s elaborate timeline, rarely referenced in the books themselves, it was the day James S. Potter, Harry’s eldest son, started school at Hogwarts. It’s not an event directly written about in the books, nor one of particular importance, but their creator, J.K. Rowling, dutifully took to Twitter to announce what amounts to footnote details: that James was sorted into House Gryffindor, just like his father, to the disappointment of Teddy Lupin, Harry’s godson, apparently a Hufflepuff.
It’s not earth-shattering information that Harry’s kid would end up in the same house his father was in, and the Harry Potter series’s insistence on sorting all of its characters into four broad personality quadrants largely based on their family names has always struggled to stand up to scrutiny. Still, Rowling’s tweet prompted much garment-rending among the books’ devoted fans. Can a tweet really amount to a piece of canonical information for a book? There isn’t much harm in Rowling providing these little embellishments years after her books were published, but even idle tinkering can be a dangerous path to take, with the obvious example being the insistent tweaks wrought by George Lucas on his Star Wars series.
When Kenneth Jarecke photographed an Iraqi man burned alive, he thought it would change the way Americans saw the Gulf War. But the media wouldn’t run the picture.
The Iraqi soldier died attempting to pull himself up over the dashboard of his truck. The flames engulfed his vehicle and incinerated his body, turning him to dusty ash and blackened bone. In a photograph taken soon afterward, the soldier’s hand reaches out of the shattered windshield, which frames his face and chest. The colors and textures of his hand and shoulders look like those of the scorched and rusted metal around him. Fire has destroyed most of his features, leaving behind a skeletal face, fixed in a final rictus. He stares without eyes.
On February 28, 1991, Kenneth Jarecke stood in front of the charred man, parked amid the carbonized bodies of his fellow soldiers, and photographed him. At one point, before he died this dramatic mid-retreat death, the soldier had had a name. He’d fought in Saddam Hussein’s army and had a rank and an assignment and a unit. He might have been devoted to the dictator who sent him to occupy Kuwait and fight the Americans. Or he might have been an unlucky young man with no prospects, recruited off the streets of Baghdad.
ISIS did not merely blast apart old stones—it attacked the very foundations of pluralistic society.
If the ruined ruins of Palmyra could speak, they would marvel at our shock. After all, they have been sacked before. In their mute and shattered eloquence, they spoke for centuries not only about the cultures that built them but also about the cultures that destroyed them—about the fragility of civilization itself, even when it is incarnated in stone. No designation of sanctity, by God or by UNESCO, suffices to protect the past. The past is helpless. Instead these ruins, all ruins, have had the effect of lifting the past out of history and into time. They carry the spectator away from facts and toward reveries.
In the 18th century, after the publication in London of The Ruins of Palmyra, a pioneering volume of etchings by Robert Wood, who had traveled to the Syrian desert with the rather colorful James Dawkins, a fellow antiquarian and politician, the desolation of Palmyra became a recurring symbol for ephemerality and the vanity of all human endeavors. “It is the natural and common fate of cities,” Wood dryly remarked in one of the essays in his book, “to have their memory longer preserved than their ruins.” Wood’s beautiful and meticulous prints served as inspirations for paintings, and it was in response to one of those paintings that Diderot wrote some famous pages in his great Salons of 1767: “The ideas ruins evoke in me are grand. Everything comes to nothing, everything perishes, everything passes, only the world remains, only time endures. ... Wherever I cast my glance, the objects surrounding me announce death and compel my resignation to what awaits me. What is my ephemeral existence in comparison with that of a rock being worn down, of a valley being formed, of a forest that’s dying, of these deteriorating masses suspended above my head? I see the marble of tombs crumble into powder and I don’t want to die!”
Heather Armstrong’s Dooce once drew millions of readers. Her blog’s semi-retirement speaks to the challenges of earning money as an individual blogger today.
The success story of Dooce.com was once blogger lore, told and re-told in playgroups and Meetups—anywhere hyper-verbal people with Wordpress accounts gathered. “It happened for that Dooce lady,” they would say. “It could happen for your blog, too.”
Dooce has its origin in the late 1990s, when a young lapsed Mormon named Heather Armstrong taught herself HTML code and moved to Los Angeles. She got a job in web design and began blogging about her life on her personal site, Dooce.com.
The site’s name evolved out of her friends’ AOL Instant-Messenger slang for dude, or its more incredulous cousin, "doooood!” About a year later, Armstrong was fired for writing about her co-workers on the site—an experience that, for a good portion of the ‘aughts, came known as “getting dooced.” She eloped with her now ex-husband, Jon, moved to Salt Lake City, and eventually started blogging full time again.
Encouraging a focus on white identity is a dangerous approach for a country in which white supremacy has been a toxic force.
Donald Trump and the disaffected white people who make up his base of support have got me thinking about race in America. “Trump presents a choice for the Republican Party about which path to follow––” Ben Domenech writes in an insightful piece at The Federalist, “a path toward a coalition that is broad, classically liberal, and consistent with the party’s history, or a path toward a coalition that is reduced to the narrow interests of identity politics for white people.”
When I was growing up in Republican Orange County during the Reagan and Bush Administrations, lots of white parents sat their kids in front of The Cosby Show, explained that black people are just like white people, and inveighed against judging anyone by the color of their skin rather than the content of their character. The approach didn’t convey the full reality of race as minorities experience it. But it represented a significant generational improvement in race relations.
The Islamic State is no mere collection of psychopaths. It is a religious group with carefully considered beliefs, among them that it is a key agent of the coming apocalypse. Here’s what that means for its strategy—and for how to stop it.
What is the Islamic State?
Where did it come from, and what are its intentions? The simplicity of these questions can be deceiving, and few Western leaders seem to know the answers. In December, The New York Times published confidential comments by Major General Michael K. Nagata, the Special Operations commander for the United States in the Middle East, admitting that he had hardly begun figuring out the Islamic State’s appeal. “We have not defeated the idea,” he said. “We do not even understand the idea.” In the past year, President Obama has referred to the Islamic State, variously, as “not Islamic” and as al-Qaeda’s “jayvee team,” statements that reflected confusion about the group, and may have contributed to significant strategic errors.
Though it wasn’t pretty, Minaj was really teaching a lesson in civility.
Nicki Minaj didn’t, in the end, say much to Miley Cyrus at all. If you only read the comments that lit up the Internet at last night’s MTV Video Music Awards, you might think she was kidding, or got cut off, when she “called out” the former Disney star who was hosting: “And now, back to this bitch that had a lot to say about me the other day in the press. Miley, what’s good?”
To summarize: When Minaj’s “Anaconda” won the award for Best Hip-Hop Video, she took to the stage in a slow shuffle, shook her booty with presenter Rebel Wilson, and then gave an acceptance speech in which she switched vocal personas as amusingly as she does in her best raps—street-preacher-like when telling women “don’t you be out here depending on these little snotty-nosed boys”; sweetness and light when thanking her fans and pastor. Then a wave of nausea seemed to come over her, and she turned her gaze toward Cyrus. To me, the look on her face, not the words that she said, was the news of the night: