Private equity is the industry in which investors provide funds to a management team which acquires a struggling company. The management team aims to improve the company’s profitability and efficiency, with the usual goal of taking the company public after the turnaround. Mitt Romney’s position at private equity giant Bain Capital drew attention during his failed 2012 presidential campaign, with many portraying private equity as a collection of heartless capitalists who downsize a company and lay off employees in favor of outsourced workers.
However, this caricature of private equity overlooks the economic good the industry does. Capitalism’s capability for “creative destruction” is well-noted; the quest for profit ensures that inefficient companies that fall behind their competitors are ruthlessly eliminated from the marketplace. Private equity undoubtedly plays a key role in this destruction; for example, Bain Capital often utilized outsourcing in its turnarounds of companies. American workers who lost their jobs as a result are understandably upset about this practice. But anger at Bain Capital in such cases is often anger of the “shoot the messenger” variety. If a company’s labor costs are too high for it to remain competitive in the marketplace, it will eventually go broke. In other words, if Bain did not inform companies that their labor costs were too high, the marketplace would soon do so. Moreover, looking at the immediate job losses that happen as a result of a turnaround is simplistic in that it ignores the other side of the ledger. Private equity allocates capital away from dying industries to companies that have the potential to become successful and to create jobs.