Private equity not evil

Private equity firms are not evil, a fact well known to the many in Decatur who are benefiting from them.
Democrats are walking a fine line in their attacks on GOP presidential candidate Mitt Romney.
Romney, as everyone knows, ran the private equity firm Bain Capital. He apparently did a good job, as he and his investors made lots of money.
Most Democrats have enough sense not to criticize someone for making money. The desire for money motivates all of us and it drives our capitalist economy. Romney gave his opponents an opening, though, by touting his record as a “job creator.” He did create jobs through Bain Capital. He also laid plenty of workers off. If his goal had been to create jobs, as opposed to generating profit for investors, he would have been booted from the firm and Democrats would be talking about his poor work record.
Unfortunately, the Democratic critique of Romney’s job-creation claims is quickly morphing into a rant against private equity.
Long before the recession hit, Decatur Mall was dying. In 2007, its owner was facing bankruptcy and the roof was leaking. Tenants were in a rush for the exits.
Today construction is ongoing on a major expansion of Belks. A builder last week obtained a permit for the $5.4 million construction of a high-tech movie theater. Tenants, once anxious for their leases to expire, are now enjoying increased traffic.
There is no evidence that pre-recession consumer demand was any weaker than it is now. If anything, continued high unemployment is suppressing demand.
So what happened to cause the mall’s resurgence?
Garrison Investment, a private equity firm, happened.
The simplistic view of capitalism is that where there is demand, supply will follow. The more complete view must incorporate the central role of accumulated capital. Depending on the product, the amount of capital needed to meet demand can be immense.
The last several owners of the mall were in the same geographic market as Garrison with roughly the same demographics and the same level of consumer demand. What they lacked was the capital needed to meet that demand and the expertise to use the capital effectively.
Garrison’s capital allows it to do things that the previous owners couldn’t do. It can patch the roof and paint the exterior. It can absorb a short-term loss to attract a valuable tenant that will increase consumer traffic. It also can hire managers with the skill both to gauge demand and to meet it.
Understand, Garrison is not investing in the mall to create jobs or to help Decatur. It is doing so for one reason: to make a profit. Everything else is incidental. A sole proprietor or family business can occasionally afford the luxury of allowing goals other than profit to dominate, but a corporate entity has a fiduciary duty to its shareholders and investors. They want a return on their investment. At the helm of Bain Capital, Romney had no obligation — and indeed, no right — to pursue goals that did not maximize the return on investment. Sometimes that meant cutting costs with layoffs. Sometimes it meant increasing production through hiring.
When Ralston Purina had to sell its Decatur pet-food plant in 2003, a private equity firm — The Cypress Group — bought it. Because the firm had plenty of capital and some brilliant managers, it figured out a way to turn a low-priced commodity into a high-priced product, Meow Mix, that any responsible cat owner was anxious to buy. Remember the lyrical “meow meow” ads?
Cypress did not invest its money with the goal of creating jobs, although that followed from increased production. It did not even have any long-term commitment to Decatur, as demonstrated by the fact that less than three years later it sold the plant — for a significant profit — to Del Monte.
Garrison may well be in it for the short term, too. Bain Capital often was. Their goal in that short term, though, is to add value.
It is fair for Democrats to complain about Romney’s self-promotion of his job-creation skills. It is a mistake, however, to label private-equity firms as evil or to bash the profit motive.
If there are abuses by private-equity firms — such as taking a profit while dumping pension obligations on taxpayers — then it is the job of the government to impose regulations. Within the constraints of the law, the private equity firm’s only goal is profit.
Unrestrained capitalism causes dramatic societal problems. Properly limited through smart regulations, though, capitalism is brilliant at allocating resources efficiently. Private equity firms are neither evil nor angelic. They are merely effective tools for employing large amounts of capital to the production of goods that consumers want.
Contact Eric Fleischauer at or


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Filed under Capitalism, Election 2012

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