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 American republic was long safeguarded by settled norms, now shattered by the rise of Donald Trump.
A long time ago, more than 20 years in fact, the Wall Street Journal published a powerful, eloquent editorial, simply headlined: “No Guardrails.”
In our time, the United States suffers every day of the week because there are now so many marginalized people among us who don't understand the rules, who don't think that rules of personal or civil conduct apply to them, who have no notion of self-control.
Twenty years later, that same newspaper is edging toward open advocacy in favor of Donald Trump, the least self-controlled major-party candidate for high office in the history of the republic. And as he forged his path to the nomination, he snapped through seven different guardrails, revealing how brittle the norms that safeguard the American republic had grown.
Interbreeding with our fellow hominins appears to have helped humans survive harsh climates.
Early human history was a promiscuous affair. As modern humans began to spread out of Africa roughly 50,000 years ago, they encountered other species that looked remarkably like them—the Neanderthals and Denisovans, two groups of archaic humans that shared an ancestor with us roughly 600,000 years earlier. This motley mix of humans coexisted in Europe for at least 2,500 years, and we now know that they interbred, leaving a lasting legacy in our DNA. The DNA of non-Africans is made up of roughly 1 to 2 percent Neanderthal DNA, and some Asian and Oceanic island populations have as much as 6 percent Denisovan DNA.
Science says lasting relationships come down to—you guessed it—kindness and generosity.
Every day in June, the most popular wedding month of the year, about 13,000 American couples will say “I do,” committing to a lifelong relationship that will be full of friendship, joy, and love that will carry them forward to their final days on this earth.
Except, of course, it doesn’t work out that way for most people. The majority of marriages fail, either ending in divorce and separation or devolving into bitterness and dysfunction. Of all the people who get married, only three in ten remain in healthy, happy marriages, as psychologist Ty Tashiro points out in his book The Science of Happily Ever After, which was published earlier this year.
Social scientists first started studying marriages by observing them in action in the 1970s in response to a crisis: Married couples were divorcing at unprecedented rates. Worried about the impact these divorces would have on the children of the broken marriages, psychologists decided to cast their scientific net on couples, bringing them into the lab to observe them and determine what the ingredients of a healthy, lasting relationship were. Was each unhappy family unhappy in its own way, as Tolstoy claimed, or did the miserable marriages all share something toxic in common?
A new report estimates nearly 46 million people live in contemporary slavery, more than half of them in five countries.
This year, researchers surveyed residents of 15 states in India and asked them what it is like to live in conditions of contemporary slavery—the term used to describe human trafficking, forced labor, sexual exploitation, and other forms of illegal enslavement in the 21st century.
“I was physically and sexually assaulted when I was working in the field. I had also threat on my life and on my family,” said one unnamed person who was in bonded labor, a type of exploitation in which people are forced to work to repay debt, real or assumed. Another person, who was made a street beggar, said: “Though I am begging I am not paid a single amount. I have to deposit all to them. I am deprived of food and good sleep.”
Outrage over transgender bathroom use is just the beginning of a long conflict over what it means to be men and women.
In April, the state of Mississippi did something unusual. It made the definition of man and woman a matter of law: “Male (man) or female (woman) refer to an individual’s immutable biological sex as objectively determined by anatomy and genetics at time of birth.”
The Magnolia state is not alone in grappling with the meaning of gender and sex. This spring, after North Carolina’s legislature ordered public agencies and local school boards to allow people to use only public bathrooms that correspond to their biological sex at birth, the U.S. Department of Justice announced it is suing the state. A similar bathroom bill was passed and vetoed earlier this spring in South Dakota. And the people of Washington will vote on a bathrooms ballot initiative in November.
Oregon, one of the whitest states in the union, also has one of the most generous safety nets. Is that a coincidence or something more troubling?
SALEM, Oregon—In much of the country, poor people are finding that there are fewer and fewer government benefits available to help them stay afloat. But here in this progressive corner of the Northwest, the poor can access an extensive system of state-sponsored supports and services.
In Oregon, a higher share of poor families is on welfare (now called TANF, or Temporary Aid to Needy Families) than in most states. The state has some of the highest food-stamp uptake in the country. It subsidizes childcare for working parents, asking the poorest of them to contribute as little as $27 a month. It helps people get off of welfare by linking them to employment and paying their wages for up to six months, and then allows them to continue to receive food stamps as they transition to higher wages. Families can be on welfare for up to 60 months, as opposed to 24 months in many other states, and once the parents are cut off due to time limits, their children can still continue to receive aid.
He lives near San Francisco, makes more than $50,000 per year, and is voting for the billionaire to fight against political correctness.
For several days, I’ve been corresponding with a 22-year-old Donald Trump supporter. He is white, has a bachelor’s degree, and earns $50,000 to $60,000 per year.
He lives near San Francisco.
“I recently became engaged to my Asian fiancée who is making roughly 3 times what I make, and I am completely supportive of her and proud she is doing so well,” he wrote. “We’ve both benefitted a lot from globalization. We are young, urban, and have a happy future planned. We seem molded to be perfect young Hillary supporters,” he observed, “but we're not. In 2016, we're both going for Trump.”
At first, we discussed Bill Clinton.
Last week, I wrote an article asking why Trump supporters aren’t bothered that their candidate called Clinton a shameful abuser of women who may well be a rapist. After all, Trump used to insist that Clinton was a victim of unfair treatment during his sex scandals. Either Trump spent years defending a man that he believed to be a sexual predator, even welcoming him as a guest at his wedding, or Trump is now cynically exploiting a rape allegation that he believes to be false.
Finally, an explanation for Bitchy Resting Face Nation
Here’s something that has always puzzled me, growing up in the U.S. as a child of Russian parents. Whenever I or my friends were having our photos taken, we were told to say “cheese” and smile. But if my parents also happened to be in the photo, they were stone-faced. So were my Russian relatives, in their vacation photos. My parents’ high-school graduation pictures show them frolicking about in bellbottoms with their young classmates, looking absolutely crestfallen.
It’s not just photos: Russian women do not have to worry about being instructed by random men to “smile.” It is Bitchy Resting Face Nation, seemingly forever responding “um, I guess?” to any question the universe might pose.
This does not mean we are all unhappy! Quite the opposite: The virile ruler, the vodka, the endless mounds of sour cream—they are pleasing to some. It’s just that grinning without cause is not a skill Russians possess or feel compelled to cultivate. There’s even a Russian proverb that translates, roughly, to “laughing for no reason is a sign of stupidity.”
For 50 years, Bassick High School in Bridgeport, Connecticut has been neglected and underfunded—despite being just a few miles from extreme wealth.
BRIDGEPORT, Conn.—The inequalities that afflict Connecticut’s largest city have been evident since 1961, when the veteran journalist Nancy Hendrick wrote a blistering column in the Bridgeport Sunday Herald.
“[F]or quite a few years now not enough people in Washington have cared what's happening here—and in a hundred other Bridgeports across the country,” she wrote. “What frustrates us is that in this crowded, unplanned, unlovely city, there is so much to be done that no one can tell where to start.”
Later that week, The Connecticut Post reported that when state educators came to Bridgeport to evaluate Bassick High School, they praised the teachers but balked at the city’s lack of financial support—noting that students were forced to pay for their own books, science equipment, globes, and maps.
A real-time chronicle of Donald Trump’s unpresidential statements.
People will look back on this era in our history, to see what was known about Donald Trump while Americans were deciding whether to choose him as president. Here’s a running chronicle from James Fallows on the ways in which Trump has been unpresidential in an unprecedented way, and of the evidence available to voters as they make their choice. (If you’d like to flag examples to include, please let us know.)