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.
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.
Orr:Wait a minute. There’s a royal wedding—and nobody dies a horrible death? A man is beheaded—and we can all agree that it was for the best? What the hell show am I watching? I came here for Game of Thrones, baby, not Wizards of Waverly Place.
I kid, of course. Given David Benioff and D.B. Weiss’s tendency to take George R. R. Martin’s material and render it even more bloody than it already was, I’m actually mildly relieved that they didn’t throw in a random homicide just to spice up the nuptials of Margaery and young Tommen, First of His Name.
Freddie Gray's death on April 19 leaves many unanswered questions. But it is clear that when Gray was arrested in West Baltimore on the morning of April 12, he was struggling to walk. By the time he arrived at the police station a half hour later, he was unable to breathe or talk, suffering from wounds that would kill him.*
Gray died Sunday from spinal injuries. Baltimore authorities say they're investigating how the 25-year-old was hurt—a somewhat perverse notion, given that it was while he was in police custody, and hidden from public view, that he apparently suffered injury. How it happened remains unknown. It's even difficult to understand why officers arrested Gray in the first place. But with protestors taking to the streets of Baltimore since Gray's death on Sunday, the incident falls into a line of highly publicized, fatal encounters between black men and the police. Meanwhile, on Tuesday, a reserve sheriff's deputy in Tulsa, Oklahoma, pleaded not guilty to a second-degree manslaughter charge in the death of a man he shot. The deputy says the shooting happened while he was trying to tase the man. Black men dying at the hands of the police is of course nothing new, but the nation is now paying attention and getting outraged.
A magnitude 7.8 earthquake struck Nepal early on Saturday, centered 10 miles below the surface, less than 50 miles from the capital of Kathmandu. At least 2,200 are already reported to have been killed by the quake and subsequent avalanches triggered in the Himalayas. Historic buildings and temples were destroyed, leaving massive piles of debris in streets as rescue workers and neighbors work to find and help those still trapped beneath rubble. Below are images from the region of the immediate aftermath of one of the most powerful earthquakes to strike Nepal in decades. (Editor's note, some of the images are graphic in nature.)
Soon, thousand of police officers across the country will don body-worn cameras when they go out among the public. Those cameras will generate millions of hours of footage—intimate views of commuters receiving speeding tickets, teens getting arrested for marijuana possession, and assault victims at some of the worst moments of their lives.
As the Washington Post and the Associated Press have reported, lawmakers in at least 15 states have proposed exempting body-cam footage from local open records laws. But the flurry of lawmaking speaks to a larger crisis: Once those millions of hours of footage have been captured, no one is sure what to do with them.
I talked to several representatives from privacy, civil rights, and progressive advocacy groups working on body cameras. Even among these often allied groups, there’s little consensus about the kind of policies that should exist around releasing footage.
Take a walk along West Florissant Avenue, in Ferguson, Missouri. Head south of the burned-out Quik Trip and the famous McDonalds, south of the intersection with Chambers, south almost to the city limit, to the corner of Ferguson Avenue and West Florissant. There, last August, Emerson Electric announced third-quarter sales of $6.3 billion. Just over half a mile to the northeast, four days later, Officer Darren Wilson killed Michael Brown. The 12 shots fired by Officer Wilson were probably audible in the company lunchroom.
Outwardly, at least, the City of Ferguson would appear to occupy an enviable position. It is home to a Fortune 500 firm. It has successfully revitalized a commercial corridor through its downtown. It hosts an office park filled with corporate tenants. Its coffers should be overflowing with tax dollars.
Hours after a major earthquake wreaked havoc across his country, Nepali Information Minister Minendra Rijal appeared at a news conference on Saturday to announce that schools would be closed for the next five days. "We never imagined we'd face such devastation," he said.
But for geologists, Saturday's disaster—which has claimed over 2,400 lives—was sadly predictable.
"Physically and geologically what happened is exactly what we thought would happen," James Jackson, head of the earth-sciences department at the University of Cambridge, told the Associated Press.
Blessed with stunning natural scenery, Nepal is a popular tourist destination that attracts hundreds of thousands of travelers each year. But the source of the country's beauty is what makes it particularly vulnerable to earthquakes. Much of Nepal's population lives in a valley beneath the Himalayas, a mountain range formed by collisions between the Indian and Central Asian tectonic plates. These collisions—which occur when the Indian plate slides underneath its much larger neighbor—are what cause earthquakes. According to The Washington Post, a chunk of the earth measuring 75 by 37 miles shifted 10 feet in 30 seconds on Saturday, destroying much of what lay atop the surface.
In a few weeks, millions of college students will enter the real world with dreams of finding work that's meaningful and challenging—and preferably lucrative enough to live roommate-free in a major city. As they embark on their job searches, recent graduates are frequently given the vague advice to "go out and network."
But what exactly should this networking entail? What does one say to a perfect stranger whom one has cajoled into "grabbing coffee," while also telepathically conveying one's desire for a job?
Science has one piece of advice, which is this: Ask them for advice.
Far from inconveniencing or annoying the advice-giver, research shows that asking for advice appears to boost perceptions of intelligence.
In her new book No One Understands You and What To Do About It, Heidi Grant Halvorson tells readers a story about her friend, Tim. When Tim started a new job as a manager, one of his top priorities was communicating to his team that he valued each member’s input. So at team meetings, as each member spoke up about whatever project they were working on, Tim made sure he put on his “active-listening face” to signal that he cared about what each person was saying.
But after meeting with him a few times, Tim’s team got a very different message from the one he intended to send. “After a few weeks of meetings,” Halvorson explains, “one team member finally summoned up the courage to ask him the question that had been on everyone’s mind.” That question was: “Tim, are you angry with us right now?” When Tim explained that he wasn’t at all angry—that he was just putting on his “active-listening face”—his colleague gently explained that his active-listening face looked a lot like his angry face.
I’m not a dog person. I prefer cats. Cats make you work to have a relationship with them, and I like that. But I have adopted several dogs, caving in to pressure from my kids. The first was Teddy, a rottweiler-chow mix whose bushy hair was cut into a lion mane. Kids loved him, and he grew on me, too. Teddy was probably ten years when we adopted him. Five years later he had multiple organs failing and it was time to put him to sleep.
When I arrived at the vet, he said I could drop him off. I was aghast. No. I needed to stay with Teddy.As the vet prepped the syringe to put him to sleep, I started sobbing. The vet gave me a couple minutes to collect myself and say goodbye. I held Teddy's paw until he died. Honestly, I didn't think I was that attached.