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.
For some, abandoning expensive urban centers would be a huge financial relief.
Neal Gabler has been a formative writer for me: His Winchell: Gossip, Power, and the Culture of Celebrity was one of the books that led me to think about leaving scholarship behind and write nonfiction instead, and Walt Disney: The Triumph of the American Imagination was the first book I reviewed as a freelance writer. To me, he exemplifies the best mix of intensive archival research and narrative kick.
So reading his recent essay, "The Secret Shame of Middle-Class Americans," was a gut punch: First, I learned about a role model of mine whose talent, in my opinion, should preclude him from financial woes. And, then, I was socked by narcissistic outrage: I, too, struggle with money! I, too, am a failing middle-class American! I, too, am a writer of nonfiction who should be better compensated!
Don’t expect Hillary Clinton to stay above the fray in the general election—her campaign plans “sustained and brutal attacks” on Donald Trump.
As they look ahead to the general election, some commentators envision a campaign in which Donald Trump attacks viciously and Hillary Clinton makes a virtue of her refusal to stoop to his level. “I think Trump’s method will be to turn on the insult comedy against Hillary Clinton,” declared GOP consultant Mike Murphy earlier this week. “Her big judo move is playing the victim.” Vox’s Ezra Klein speculated earlier this year that “Trump sets up Clinton for a much softer and unifying message than she’d be able to get away with against a candidate like [Marco] Rubio.”
I doubt it will play out that way. Rope-a-dope isn’t Clinton’s style. When facing political threats, her pattern has been to strike first—and with great force.
Nearly half of Americans would have trouble finding $400 to pay for an emergency. I’m one of them.
Since 2013,the Federal Reserve Board has conducted a survey to “monitor the financial and economic status of American consumers.” Most of the data in the latest survey, frankly, are less than earth-shattering: 49 percent of part-time workers would prefer to work more hours at their current wage; 29 percent of Americans expect to earn a higher income in the coming year; 43 percent of homeowners who have owned their home for at least a year believe its value has increased. But the answer to one question was astonishing. The Fed asked respondents how they would pay for a $400 emergency. The answer: 47 percent of respondents said that either they would cover the expense by borrowing or selling something, or they would not be able to come up with the $400 at all. Four hundred dollars! Who knew?
The newly discovered worlds are now the most promising targets in the search for life among the stars—and the race to take a closer look at them has begun.
The robot telescope settles on its target, a star that sits closer than all but a tiny fraction of the tens of billions of stellar systems that make up the Milky Way. Its mirror grabs light for 55 seconds, again and again. The robot telescope—called TRAPPIST—will observe the star for 245 hours across sixty-two nights, making 12,295 measurements. Eleven times, it will see the star dim, ever so slightly. This dip in luminosity, called a transit, has a straightforward astronomical explanation: It’s a planet passing in front of the star, blocking just a bit of its light. In this case, the transits tell us that 3 planets orbit the star.
“So what?” you might think.
Astronomers have been spotting planets around distant stars for years now, using the transit method, among others. Not a month goes by without a headline, touting the discovery of new “exoplanets.” But these planets are different, and not only because they’re near. Like the Earth these planets could potentially permit liquid water to persist on their surfaces—which is thought to be a key pre-condition for the emergence of life. Today, when their discovery is published in Nature, they will instantly become the most promising planets yet found in the search for life among the stars.
Three Atlantic staffers discuss “Home,” the second episode of the sixth season.
Every week for the sixth season of Game of Thrones, Christopher Orr, Spencer Kornhaber, and Lenika Cruz will be discussing new episodes of the HBO drama. Because no screeners are being made available to critics in advance this year, we'll be posting our thoughts in installments.
It’s a paradox: Shouldn’t the most accomplished be well equipped to make choices that maximize life satisfaction?
There are three things, once one’s basic needs are satisfied, that academic literature points to as the ingredients for happiness: having meaningful social relationships, being good at whatever it is one spends one’s days doing, and having the freedom to make life decisions independently.
But research into happiness has also yielded something a little less obvious: Being better educated, richer, or more accomplished doesn’t do much to predict whether someone will be happy. In fact, it might mean someone is less likely to be satisfied with life.
That second finding is the puzzle that Raj Raghunathan, a professor of marketing at The University of Texas at Austin’s McCombs School of Business, tries to make sense of in his recent book, If You’re So Smart, Why Aren’t You Happy?Raghunathan’s writing does fall under the category of self-help (with all of the pep talks and progress worksheets that that entails), but his commitment to scientific research serves as ballast for the genre’s more glib tendencies.
A professor of cognitive science argues that the world is nothing like the one we experience through our senses.
As we go about our daily lives, we tend to assume that our perceptions—sights, sounds, textures, tastes—are an accurate portrayal of the real world. Sure, when we stop and think about it—or when we find ourselves fooled by a perceptual illusion—we realize with a jolt that what we perceive is never the world directly, but rather our brain’s best guess at what that world is like, a kind of internal simulation of an external reality. Still, we bank on the fact that our simulation is a reasonably decent one. If it wasn’t, wouldn’t evolution have weeded us out by now? The true reality might be forever beyond our reach, but surely our senses give us at least an inkling of what it’s really like.
Even as the militant group loses ground in Iraq, many Sunnis say they have no hope for peace. One family’s story shows why.
Falah Sabar heard a knock at the door. It was just before midnight in western Baghdad last April and Falah was already in bed, so he sent his son Wissam to answer. Standing in the doorway was a tall young man in jeans who neither shook Wissam’s hand nor offered a greeting. “We don’t want you here,” he said. “Your family should be gone by noon tomorrow.” For weeks, Wissam, who was 23, had been expecting something like this, as he’d noticed a dark mood taking hold of the neighborhood. He went to get his father, but when they returned, the stranger was gone.
Falah is tall and broad-shouldered, with salt-and-pepper hair. At 48, he was the patriarch of a brood of sons, daughters-in-law, and grandchildren. He sat down with Wissam to talk things through. They had been in Baghdad for just three months, but that was long enough for the abiding principle of refugee life to imprint itself on Falah’s psyche: Avoid trouble. When Wissam had managed to find a job at a construction firm, Falah had told him to be courteous, not to mix with strangers, and not to ask too many questions. If providence had granted them a new life in this unfamiliar city, it could snatch that life away just as easily.
The problem with Americans’ household budgets isn’t that people are too dumb to save, but that the system asks too much of them.
From taking out loans to pay for higher education to investing for retirement, Americans are shouldering enormous levels of personal financial responsibility—more so than ever before. At the same time, financial products have both proliferated and become much more complex. Americans now face an Alphabet (and Numbers) soup of saving and investment options (401(k)s, 529s) and a head spinning array of credit options (credit cards, mortgages, home-equity loans).
While Americans are not expected to manage their own legal cases or medical conditions, they are expected to manage their own finances. To be sure, the rise of the independent and empowered consumer rests on the belief that they have the requisite knowledge to be up to the task. But is it reasonable in such a system to expect people to succeed? Economists examining financial literacy would say no.