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.
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 1,100 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.)
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.
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.
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.
Four hours after learning about Saturday's devastating earthquake in Nepal, I received a Facebook notification I had never seen before: Sonia, a journalist friend based in northern India, was "marked safe." An hour later, the same notification about a different friend popped up. Then another. Soon, several of my friends wrote that they, too, had learned via this strange new notification that their friends in Nepal were okay.
A few hours later, the mystery was solved. On Saturday afternoon, Facebook CEO Mark Zuckerberg announced on his timeline that the notifications came from Safety Check, a service the company launched last fall. "When disasters happen, people need to know their loved ones are safe," he wrote, "It's moments like this that being able to connect really matters."
After more than a year of rumors and speculation, Bruce Jenner publicly came out as transgender with four simple words: “I am a woman.”
“My brain is much more female than male,” he explained to Diane Sawyer, who conducted a prime-time interview with Jenner on ABC Friday night. (Jenner indicated he prefers to be addressed with male pronouns at this time.) During the two-hour program, Jenner discussed his personal struggle with gender dysphoria and personal identity, how they shaped his past and current relationships and marriages, and how he finally told his family about his gender identity.
During the interview, Sawyer made a conspicuous point of discussing broadly unfamiliar ideas about gender and sexuality to its audience. It didn't always go smoothly; her questions occasionally came off as awkward and tone-deaf. But she showed no lack of empathy.
The editors of Smithsonian magazine have announced the winners of their 12th annual photo contest, selected from more than 26,500 entries. The winning photographs from from the competition's six categories are published below: The Natural World, Travel, People, Americana, Altered Images and Mobile. Also, a few finalists have been included as well. Captions were written by the photographers. Be sure to visit the contest page at Smithsonian.com to see all the winners and finalists.
Our patient—we’ll call him W.B.—is a 56-year-old father of three who, until last year, had always been healthy. He had worked his entire life, in jobs ranging from automotive repair to sales, taking great pride in providing for his family, even though doing so had recently meant combining three part-time positions. All of that ended in February 2014, when he was diagnosed with amyotrophic lateral sclerosis, or ALS, commonly known as Lou Gehrig’s disease. A neurodegenerative disease characterized by progressive muscle weakness, ALS leads to the loss of all voluntary movement, difficulty breathing, and, in the end, death.
W.B.’s life was turned upside down by the diagnosis. But once the initial shock passed, he began researching his condition intensively. He learned that he was unlikely to survive five years, and that in the meantime his quality of life would diminish dramatically. With limited options, many patients retreat. But, quite bravely, W.B. had other ideas. After much consideration, he decided that if he was going to die, he would like to try to save another person’s life in the process, even if that person was a stranger. And so last May he approached the University of Wisconsin’s transplant program, where we are surgeons, as a prospective organ donor.
Lots of conservatives talk a good game about how citizens should resist federal control and devolve power to local governments. Few of them are willing to put their convictions into action in quite the same way that Sheriff Joe Arpaio is.
The man who calls himself "America's toughest sheriff" was already in trouble with Uncle Sam, on trial for contempt of court in a U.S. district court. It was only once that was under way that Arpaio and his lawyer apparently had the idea to sic a private investigator on the wife of the federal judge hearing his case. That shows toughness. It shows a willingness to use unorthodox tactics to resist federal interference. It's also not especially bright.
Reporters in the courtroom describe a somewhat shocking scene. Lawyers had completed their questioning when Judge Murray Snow announced he had some questions for Arpaio. After a series of queries, Snow asked: "Are you aware that I've been investigated by anyone?"
“People skills” are almost always assumed to be a good thing. Search employment ads and you will find them listed as a qualification for a startling array of jobs, including Applebee’s host, weight-loss specialist, CEO, shoe salesperson, and (no joke) animal-care coordinator. The notion that people smarts might help you succeed got a boost a quarter century ago, when the phrase emotional intelligence, or EI, entered the mainstream. Coined in a 1990 study, the term was popularized by Daniel Goleman’s 1995 book . Since then, scores of researchers have shown how being in touch with feelings—both your own and other people’s—gives you an edge: compared with people who have average EI, those with high EI do better at work, have fewer health problems,and report greater life satisfaction.