All manner of public commentators and political rivals have been beating up on Mitt Romney for his work at Bain Capital. But most, if not all, show a serious lack of understanding as to how private equity works and the value that private equity professionals bring, says Tom Dougherty in an article for TheRightSphere. He attempts to set the record straight in a lengthy piece worth reviewing.
For example, many critics seem to think that a private equity firm only has to answer to its own management, but nothing could be further from the truth. Management has to provide an adequate return to the firm’s key investors. Failure to do so would quickly doom the firm to attracting more capital.
Critics also fail to understand the dire situation that companies seeking private equity investment find themselves in. Often, the company cannot obtain capital from any other source, is not profitable and could be on the verge of bankruptcy.
Thus, when a PE firm puts money into a sinking company, they do so with the full knowledge that they could lose every dollar invested. Critics don’t acknowledge this risk or the return needed to make it worthwhile.
“The bottom line is the winners have to return such profitability that they offset the certain losses in the much larger percentage of companies plus the overhead required to operate the PE firm on a daily basis,” says Dougherty.
Of course the biggest knock against PE firms is that they’re “job killers” when they take over. But often times it’s the target company’s executive management, the CEO, CFO and other top executives, who get the axe. PE firms then bring in new executives with highly sought-after skills to run the company more efficiently.
“Any business, regardless of size, is only as effective and profitable as the sum of the value of both management and the employees working together to produce goods or services that can be sold into the marketplace for more money than the costs to produce them. The best employee workforce would be at certain risk of loss of their jobs if upper management is ineffective,” says Dougherty.
The full article at TheRightSphere is worth reading and committing to memory as the private equity sector comes under increasing attack in the months leading up to the election. In the meantime, do you think Romney’s Bain Capital experience supports or hinders his ability to be a good president? Add your comments below.
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