Private equity has become a hot topic in the presidential election, with both President Obama and Mitt Romney hurling barbs over the issue. But what’s the truth beneath the political rhetoric? We discuss the advantages and pitfalls to a business that makes some people very wealthy.

Sebastian Mallaby, senior fellow at the Council on Foreign Relations
Colin C. Blaydon, director of the Center for Private Equity and Entrepreneurship at the Tuck School of Business at Dartmouth
Eileen Appelbaum, senior economist at the Center for Economic Policy and Research

  • Gort

    Please be on guard for statements about private equity that equate its promoting the increase of wealth with its increasing the general wealth. We should also be quick to question whether the good they do could also be done otherwise, for example by a civilian equivalent to D.A.R.P.A., free of the ills associated with P.E..

  • Jonathan Ryshpan

    There has recently been a graph on the web which shows that in the thirty years from 1950 to 1980 retained corporate profits were about 4% of GDP, so that the total they had available to them for investment over this period was about 120% of GDP, that is of the whole country’s income.  No wonder business prospered.  In the 30 years since 1980 retained corporate profits were negative, that is investors took more out of companies than they earned.  No wonder the country’s industrial base has been hollowed out.

    You can see the graph and long comments at any of these 3 web site:

    • Jonathan Ryshpan

       Most of the discussion on the air assumes that private equity provides capital to be invested.  The graph shows that this is almost surely not so.  Private equity extracts capital from the companies they “invest” in; on the average it disinvests in them.

  • Guest

    Many publicly traded companied over time become poorly managed and overstaffed.  We have seen it with old companies like Chrysler as well as newer tech companies like HP and Cisco.  Private equities do the tough job of cleaning up those companies.  I wonder if it is better to force these companies through bankruptcy rather than allow private equity to intervene?

  • James R

    Are all private equity firms the same?  Do some have a greedy reputation while others are white knights?  If so, has does Mitt’s company rate on the greed scale?

  • Palo Altan

    The problem isn’t with private equity per se, the problem is that Capitalism seeks reward for investors in a firm and not the workers. In fact, the workers are merely the means to an end, and are underpaid for their labor in all businesses, and the reality of our economic system legitimates that. The rage comes from the fact that workers see wealthy people in private equity making economic decisions about their future which they are utterly powerless to oppose. Obama may be an opportunist for his advertisements, but the populist rage at the owners of the means of production is perfectly legitimate.

  • Drift Wood

    The private equity issue is being cast by GOP as “attack on capitalism”.  But the President’s point was not about private equity’s role in our capitalist economy, or whether citizens have a right to earn money by investing private capital.  It was about whether Mr Romney’s record of making copious sums of money for private investors, often at the expense of workers who lost their jobs due to private equity-engineered corporate bankruptcies, is really a valid qualification for the role of President.

  • Ben Lorica

    OTOH, the problem with Venture Capital is that the returns (to investors) have been paltry: see links below for details


    2. Felix Salmon’s interview with Diane Mulcahy, Director of Private Equity for the Kauffman Foundation

  • The reason people complain that the Obama administration is beating up on private equity is the campaign video that highlighted the jobs lost by a single company that Bain was involved with. The video showed comments by former employees. It had nothing to do with Romney’s qualification for the job of president (which is indeed something worthy of discussion).

  • Iphitis

    It is very simple, you should not be able to borrow against the company you are purchasing.  Could you imagine walking into a car dealership and saying, I need a $15,000 dollar loan and and I will place the car I am buying as collateral.    HAHAHAHAHA!  

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