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Even the Wall Street Journal is giving on tips on how to really criticise private equity this morning — that has to tell you something about the lack of substance in this debate about the industry.Over the past couple of weeks we’ve watched people on every side, Republican and Democrat, fire shots at Mitt Romney through private equity. The shots sound like this: Mitt Romney is a corporate raider who specialised in “looting” companies and firing workers. He does not care about American jobs.
It sounds troubling for someone, but by the looks of things, Wall Street is breathing a sigh of relief (from the Journal):
A banking lobbyist ran into a private-equity lobbyist on a Washington street last week. “Thanks,” the first lobbyist said.
“For what?” the private-equity lobbyist asked.
“For getting in the way of all the bullets being shot at us,” the banking lobbyist replied.
It’s only a matter of time before these attacks spread out to the rest of the financial services industry though. An Obama PAC called Priorities USA has a memo out connecting Romney’s PE days to Wall Street excess. Romney never worked on Wall Street, but given the confusion about what PE actually is, it doesn’t really matter, as you can see from the polling below.
In Priorities USA Action poling completed Monday, 53% of South Carolina Republican primary voters (including one-third of his own supporters) expressed major doubts about Romney when given a description of his work that resulted in massive profits for him even if companies went bankrupt and fired their workers. Wall Street investment firms had a net negative rating with South Carolina Republicans, with 49% unfavorable and just 35% favourable.
The WSJ suggests that Wall Street go out and stump for private equity before things get any worse by sending out likeable CEOs like Jamie Dimon and Vikram Pandit to level with the American people about the value of the industry.
OK, maybe so… but on the other hand, this is about to get ugly and Wall Street already has enough ugly on its hands. It may serve the Street better if the real questionable aspects of the private equity industry surface so the American people can have a debate that won’t envelope it too.
That means talking about what happens when PE firms over-leverage buy-out companies to the point where they have so much debt that they’re basically set up for failure in future. It means taking a look at “leveraged recapitalizations” and “dividend recapitalizations” which allow PE firms to pay themselves with that debt. It means talking about the speed with which PE firms flip companies, and the amount of their own cash PE firm partners actually have at risk.
You see, it all comes down to risk. If Romney’s attackers can show that PE firms made tons of money while passing risk on to the companies they bought and the people that worked at those companies, they can really set up a nasty argument against PE that smacks of the inequality debate.
But if the PE industry can show that the vast majority of firms take on adequate risk and really try to reform companies, then perhaps populist anger will refocus on Wall Street alone.
The truth is, private equity is just a tool. How it’s used depends completely on the firm that’s wielding it. Romney’s performance at Bain had its successes and failures, but so does everyone’s tenure at any job. The question is, are private equity’s failures worth the risk, and who should be taking on that risk in America?