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.
The plight of non-tenured professors is widely known, but what about the impact they have on the students they’re hired to instruct?
Imagine meeting your English professor by the trunk of her car for office hours, where she doles out information like a taco vendor in a food truck. Or getting an e-mail error message when you write your former biology professor asking for a recommendation because she is no longer employed at the same college. Or attending an afternoon lecture in which your anthropology professor seems a little distracted because he doesn’t have enough money for bus fare. This is an increasingly widespread reality of college education.
Many students—and parents who foot the bills—may assume that all college professors are adequately compensated professionals with a distinct arrangement in which they have a job for life. In actuality those are just tenured professors, who represent less than a quarter of all college faculty. Odds are that students will be taught by professors with less job security and lower pay than those tenured employees, which research shows results in diminished services for students.
New research confirms what they say about nice guys.
Smile at the customer. Bake cookies for your colleagues. Sing your subordinates’ praises. Share credit. Listen. Empathize. Don’t drive the last dollar out of a deal. Leave the last doughnut for someone else.
Sneer at the customer. Keep your colleagues on edge. Claim credit. Speak first. Put your feet on the table. Withhold approval. Instill fear. Interrupt. Ask for more. And by all means, take that last doughnut. You deserve it.
Follow one of those paths, the success literature tells us, and you’ll go far. Follow the other, and you’ll die powerless and broke. The only question is, which is which?
Of all the issues that preoccupy the modern mind—Nature or nurture? Is there life in outer space? Why can’t America field a decent soccer team?—it’s hard to think of one that has attracted so much water-cooler philosophizing yet so little scientific inquiry. Does it pay to be nice? Or is there an advantage to being a jerk?
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.
In any case, people have probably heard the phrase in reference to something gone awry at work or in life. In either setting, when the shit does hit the fan, people will tend to look to the most competent person in the room to take over.
And too bad for that person. A new paper by a team of researchers from Duke University, University of Georgia, and University of Colorado looks at not only how extremely competent people are treated by their co-workers and peers, but how those people feel when, at crucial moments, everyone turns to them. They find that responsible employees are not terribly pleased about this dynamic either.
Science: Humblebragging doesn’t work. If you want to brag, just brag. Even better, just complain.
"Nothing is more deceitful," said Darcy, "than the appearance of humility. It is often only carelessness of opinion, and sometimes an indirect boast." - Jane Austen
Praise and sympathy: They are two of life’s essentials, the oxygen and carbon dioxide of social interaction. The first is most directly elicited by bragging, and the second, by complaining. The humblebrag—e.g. I’m exhausted from Memorial Day weekend; it’s soooo hard to get out of Nantucket—sits at the center of these competing needs. It is a boast in sheepish clothing, kvelling dressed in kvetch. And, like nearly all forms of multi-tasking, the drive to satisfy two goals at once typically results in double-failure.
Orr: “It’s a pleasure to meet you, Your Grace. My name is Tyrion Lannister.”
At last! I know I speak for quite a few book readers when I say that pretty much the only thing that kept me going through the eleventy thousand discursive, digressive pages of George R. R. Martin’s fifth tome, A Dance With Dragons, was the promise of Tyrion finally meeting up with Daenerys Targaryen. And, of course, after eleventy thousand pages, it never happened. So on behalf of myself and everyone else who sacrificed sleep, work, family, and friends waiting for this moment, let me say thank you, David Benioff and D. B. Weiss. Bonus points for what seemed to be a cameo by Strong Belwas (a book character who was written out of the show) as the nameless fighter who freed Tyrion from his chains.
A preoccupation with safety has stripped childhood of independence, risk taking, and discovery—without making it safer. A new kind of playground points to a better solution.
Atrio of boys tramps alongthe length of a wooden fence, back and forth, shouting like carnival barkers. “The Land! It opens in half an hour.” Down a path and across a grassy square, 5-year-old Dylan can hear them through the window of his nana’s front room. He tries to figure out what half an hour is and whether he can wait that long. When the heavy gate finally swings open, Dylan, the boys, and about a dozen other children race directly to their favorite spots, although it’s hard to see how they navigate so expertly amid the chaos. “Is this a junkyard?” asks my 5-year-old son, Gideon, who has come with me to visit. “Not exactly,” I tell him, although it’s inspired by one. The Land is a playground that takes up nearly an acre at the far end of a quiet housing development in North Wales. It’s only two years old but has no marks of newness and could just as well have been here for decades. The ground is muddy in spots and, at one end, slopes down steeply to a creek where a big, faded plastic boat that most people would have thrown away is wedged into the bank. The center of the playground is dominated by a high pile of tires that is growing ever smaller as a redheaded girl and her friend roll them down the hill and into the creek. “Why are you rolling tires into the water?” my son asks. “Because we are,” the girl replies.
Formalwear elicits feelings of power, which change some mental processes.
Some psychology research in recent years is making an old aphorism look like an incomplete thought: Clothes make the man… Yes? Go on?
Clothes, it appears, make the man perceive the world differently.
A new study looks specifically at how formal attire changes people's thought processes. “Putting on formal clothes makes us feel powerful, and that changes the basic way we see the world,” says Abraham Rutchick, an author of the study and a professor of psychology at California State University, Northridge. Rutchick and his co-authors found that wearing clothing that’s more formal than usual makes people think more broadly and holistically, rather than narrowly and about fine-grained details. In psychological parlance, wearing a suit encourages people to use abstract processing more readily than concrete processing.
Advocates say that a guaranteed basic income can lead to more creative, fulfilling work. The question is how to fund it.
Scott Santens has been thinking a lot about fish lately. Specifically, he’s been reflecting on the aphorism, “If you give a man a fish, he eats for a day. If you teach a man to fish, he eats for life.” What Santens wants to know is this: “If you build a robot to fish, do all men starve, or do all men eat?”
Santens is 37 years old, and he’s a leader in the basic income movement—a worldwide network of thousands of advocates (26,000 on Reddit alone) who believe that governments should provide every citizen with a monthly stipend big enough to cover life’s basic necessities. The idea of a basic income has been around for decades, and it once drew support from leaders as different as Martin Luther King Jr. and Richard Nixon. But rather than waiting for governments to act, Santens has started crowdfunding his own basic income of $1,000 per month. He’s nearly halfway to his his goal.