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 condition has long been considered untreatable. Experts can spot it in a child as young as 3 or 4. But a new clinical approach offers hope.
This is a good day, Samantha tells me: 10 on a scale of 10. We’re sitting in a conference room at the San Marcos Treatment Center, just south of Austin, Texas, a space that has witnessed countless difficult conversations between troubled children, their worried parents, and clinical therapists. But today promises unalloyed joy. Samantha’s mother is visiting from Idaho, as she does every six weeks, which means lunch off campus and an excursion to Target. The girl needs supplies: new jeans, yoga pants, nail polish.
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At 11, Samantha is just over 5 feet tall and has wavy black hair and a steady gaze. She flashes a smile when I ask about her favorite subject (history), and grimaces when I ask about her least favorite (math). She seems poised and cheerful, a normal preteen. But when we steer into uncomfortable territory—the events that led her to this juvenile-treatment facility nearly 2,000 miles from her family—Samantha hesitates and looks down at her hands. “I wanted the whole world to myself,” she says. “So I made a whole entire book about how to hurt people.”
She lived with us for 56 years. She raised me and my siblings without pay. I was 11, a typical American kid, before I realized who she was.
The ashes filled a black plastic box about the size of a toaster. It weighed three and a half pounds. I put it in a canvas tote bag and packed it in my suitcase this past July for the transpacific flight to Manila. From there I would travel by car to a rural village. When I arrived, I would hand over all that was left of the woman who had spent 56 years as a slave in my family’s household.
The office was, until a few decades ago, the last stronghold of fashion formality. Silicon Valley changed that.
Americans began the 20th century in bustles and bowler hats and ended it in velour sweatsuits and flannel shirts—the most radical shift in dress standards in human history. At the center of this sartorial revolution was business casual, a genre of dress that broke the last bastion of formality—office attire—to redefine the American wardrobe.
Born in Silicon Valley in the early 1980s, business casual consists of khaki pants, sensible shoes, and button-down collared shirts. By the time it was mainstream, in the 1990s, it flummoxed HR managers and employees alike. “Welcome to the confusing world of business casual,” declared a fashion writer for the Chicago Tribune in 1995. With time and some coaching, people caught on. Today, though, the term “business casual” is nearly obsolete for describing the clothing of a workforce that includes many who work from home in yoga pants, put on a clean T-shirt for a Skype meeting, and don’t always go into the office.
A recent push for diversity has been blamed for weak print sales, but the company’s decades-old business practices are the true culprit.
Marvel Comics has been having a rough time lately. Readers and critics met last year’s Civil War 2—a blockbuster crossover event (and aspiritual tie-in to the year’s big Marvel movie)—with disinterest and scorn. Two years of plummeting print comics sales culminated in a February during which only one series managed to sell over 50,000 copies. Three crossover events designed to pump up excitement came and went with little fanfare, while the lead-up to 2017’s blockbuster crossover Secret Empire—where a fascist Captain America subverts and conquers the United States—sparked such a negative response that the company later put out a statement imploring readers to buy the whole thing before judging it. On March 30, a battered Marvel decided to try and get to the bottom of the problem with a retailer summit—and promptly stuck its foot in its mouth.
The president’s business tells lawmakers it is too difficult to track all its foreign revenue in accordance with constitutional requirements, and it hasn’t asked Congress for a permission slip.
Days before taking office, Donald Trump said his company would donate all profits from foreign governments to the U.S. Treasury, part of an effort to avoid even the appearance of a conflict with the Constitution’s emoluments clause.
Now, however, the Trump Organization is telling Congress that determining exactly how much of its profits come from foreign governments is simply more trouble than it’s worth.
In response to a document request from the House Oversight Committee, Trump’s company sent a copy of an eight-page pamphlet detailing how it plans to track payments it receives from foreign governments at the firm’s many hotels, golf courses, and restaurants across the globe. But while the Trump Organization said it would set aside all money it collects from customers that identify themselves as representing a foreign government, it would not undertake a more intensive effort to determine if a payment would violate the Constitution’s prohibition on public office holders accepting an “emolument” from a foreign state.
For a number of reasons, natural and human, people have abandoned many places around the world.
For a number of reasons, natural and human, people have evacuated or otherwise abandoned many places around the world—large and small, old and new. Gathering images of deserted areas into a single photo essay, one can get a sense of what the world might look like if humans were to suddenly vanish from the planet. Collected here are recent scenes from abandoned construction projects, industrial disaster zones, blighted urban neighborhoods, towns where residents left to escape violence or natural disasters, derelict Olympic venues, ghost towns, and more.
Why is the president putting ISIS in the same category in which he places Rosie O’Donnell?
Donald Trump has coined a term to describe terrorists like those who murdered 22 people on Monday in Manchester: “Losers.” White House officials claim he came up with it on his own.
That’s not surprising. As USA Today has noted, “losers” is Trump’s go-to epithet. He’s applied the term to the Standard & Poor’s credit-ratings agency, Rosie O’Donnell, George Will, Cher, Salon, Huffington Post, Karl Rove, Graydon Carter, Marc Cuban, Marco Rubio, Ted Cruz, the Club for Growth, Ana Navarro, The New York Daily News, a Scottish farmer who tried to keep him from building a golf course, and the Republican Party, among others. Maybe the term will prove effective in undermining the aura of rebellious cool that attracts some young Muslims to ISIS, as my Atlantic colleague Uri Friedman suggests, although I have my doubts about Trump’s ability to arbitrate what young Muslims find hip.
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.
People with preexisting conditions could face sharply higher costs in some states if the legislation was enacted, the Congressional Budget Office reported Wednesday.
The House-passed Republican health-care bill would leave 23 million more people uninsured over a decade and could spike costs for people with pre-existing conditions in many states, the Congressional Budget Office projected in a highly-anticipated analysis released Wednesday afternoon.
The new report is likely to exacerbate the political backlash against Republicans who voted for the party’s replacement for the Affordable Care Act without an updated estimate of its impact. It will also factor heavily into the deliberations on health care in the Senate, where Republicans decided to start from scratch rather than try to fix an unpopular House bill that many of them consider deeply flawed. The top-line numbers in the report from the nonpartisan congressional scorekeeper changed little from an earlier version of the American Health Care Act, which the CBO said would have resulted in 24 million fewer people having insurance after a decade and an initial increase in the cost of coverage premiums.
What started as a cold meeting between the pontiff and the U.S. president turned friendly after a brief closed-door discussion.
Meeting Pope Francis can really mess with a guy. The day after then-House Speaker John Boehner met with the pope during his visit to the U.S. in 2015, the Republican politician tearfully resigned. The former Fox News host Bill O’Reilly spent the morning of his last day with the network in Rome, where he met Francis in the Vatican receiving line.
Depressed liberals who hate President Trump and (incorrectly) see Pope Francis as a global avatar for their progressive agenda might have hoped something similar would go down during the meeting between the two leaders at the Vatican on Wednesday. It’s unlikely that their wishful thinking will come to pass, but the two men seem to have warmed to one another during their visit. The Italian newspaper La Stampa noted the tension in the room when the meeting began: Posing for press photos, “Trump smiled, Bergoglio a little less,” they said, referring to Francis by his given name. After a half-hour-long closed-door meeting, though, “the slightly tense climate that marked the beginning of the visit melted,” the newspaper reported. By the end of the visit, members of the two delegations were joking and laughing. “I will not forget what you said,” Trump said.