Andrew Ross Sorkin’s DealBook column profiles Paul Levy, a PE manager who makes a good defense of private equity:
“We want to build businesses,” Mr. Levy said earnestly. “Nobody wants to fire people. We want to retain all of the value-added, high-quality people that work at these companies. But it’s like any other endeavor. If there are more people there to make the shoes than needed, you can’t keep the people. It’s not about wanting to get rid of people. It’s about wanting to make the company operate on a size and scale that’s commensurate with its opportunities and its revenues such that it can make profits and then build the business. It’s as simple as that.”
It’s probably about the best defense the industry can muster. Yet Sorkin rightly asks why none of the big PE firms have added their voices to the debate.
The immediate reason, of course, is that none of them want the attention. Defending private equity is the sort of thing that brings protestors and headlines, which makes investors jittery. The big firms have also figured out that the only opinions that matter are those of the Congressmen who sit on the committees that write the finance and tax rules. They’ve won them over before and seem confident they can keep doing so.
But there’s a more fundamental problem for private equity than job-creation when it comes to this discussion. It’s not that PE hasn’t played by the rules; with a few exceptions it has. The issue is whether the rules are right. That is, do we as a society get an adequate return for the benefits granted to PE firms, like preferential tax treatment on their managers’ income and the deductibility of interest costs.
Capitalism is a brutal business; no one disputes that. But it’s fair to suggest that the success PE firms enjoy isn’t the result of capitalism, but rather favoritism. Until the industry addresses that issue, its image problems will continue.