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Don’t Pillage Private Equity

By   /   June 19, 2012  /   No Comments

Private equity, for so long the saviour of dying businesses and the only way back to productivity for leviathan publicly-traded firms, is under a thinly-veiled attack by the Obama campaign’s latest advertising drive.

Obama attacks Mitt Romney’s involvement with Bain Capital, a private equity firm that Romney founded along with T. Coleman Andrews III and Eric Kriss. In 1993, Bain Capital bought Kansas City, Missouri’s Armco Worldwide Grinding System steel company, and quickly merged it with a Georgetown steel plant, re-branding the whole structure GST Steel.

The firm was profitable for a time, but closed in 2001, with claims that the firm siphoned off funds for the employees pensions into its private coffers. Importantly, the facts of the case are irrelevant. That Obama is attempting to defame his opponent is to be expected, the problem is the collateral damage done to private equity as a sector of the economy, a crucial one at that.

At base, private equity, and specifically venture capital, is only a profitable sector because venture capitalists invest heavily, increase productivity, slash unnecessary fringe areas of the businesses and expand, creating a profitable firm, and, in turn, a profit for themselves. In one broad business transaction, a firm receives a specialised injection of capital and enterprise, increases its competitiveness and, ideally, surges onwards. Of course, the model is hardly full-proof, but private equity deals most often fail because the firm is beyond repair anyway.

Employees often get laid-off, but in the spirit of capitalism, this ought to be viewed as a necessary step in the broader picture – that of providing the lowest possible prices for consumers. Indeed, private equity often creates jobs where there is evidence that such a move will enhance the firm’s profitability. If America is to return to the heyday of its global economic predominance, it must recognise that it has never truly embraced the social side of capitalism, and nor should it.

The longer unprofitable companies are artificially subsidised by the state, the heavier the debt burden will be to the American government, and by extension, the heavier the tax burden will be to the American people. Firms that are artificially kept afloat not only burden the economy, but even have the potential to force profitable firms out of the market. These are not the principles on which the country was built, nor those on which it grew to become the economic master of the world, where private firms competed fiercely to provide the lowest price for consumers.

When the crisis hit back in 2008, there was a case for bailing out banks and large-scale manufacturers. These interventions prevented full-scale depression, to everyone’s benefit. Sooner or later though, policy-makers must realise that the only possible long-term solution is for the government to shift such responsibilities to the private sector. If the private sector fails to bear the burden, then it must be assumed that the enterprise was not deemed to be competitive in the long run, and should be allowed to close. The capital can be reallocated to areas which will utilise it more efficiently, and yes, the workers must be allowed to join the unemployed.

These are hard decisions to make, but the long-term consequences of government aid in this field are ultimately a heavier burden on the tax payers. That grain farmers in the mid-west should bear the cost of an unproductive plant in the north-east is not only nonsensical and inefficient, but immoral too. Obama’s economic policies have generally been sound, but in attacking private equity, he is attacking the sector that epitomises everything that America will come to rely on in its recovery.

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