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Anyone who works in, writes about, or just follows politics avocationally should stop what they’re doing and read Brendan Greeley’s current Bloomberg Businessweek cover story on private equity. Because of Mitt Romney’s tenure as chief executive of Bain Capital, and because Democrats plan to demonize him for it, the role private equity plays in the economy is going to be central to the 2012 presidential campaign. Billions of pixels and print pages will be expended debating its merits, and it’s not inconceivable that the election itself could turn on how Americans ultimately come to view private equity.
But few political reporters will do what Brendan did for his piece, which was to go and spend a week at a private equity “boot camp,” actually doing the job before writing about it, and coming away with a much more nuanced and persuasive account of what private equity firms—or at least what Monomoy Capital Partners, the firm he embedded with—actually do. Brendan spent a week at Heat Transfer Products Group in Scottsboro, Ala., a midsize company acquired by Monomoy in 2010 that makes parts for industrial refrigeration units.
Like Bain Capital, Monomoy’s goal is ultimately to make a profit by improving efficiencies and then selling HTPG for a profit. But in contrast to the image of “vulture capitalists” propagated by Rick Perry and Newt Gingrich during the Republican primaries, Monomoy doesn’t simply move in, load up the company with debt, and start firing people indiscriminately—and the article does a nice job of explaining why. “The partners at Monomoy are not saints, and people are expensive,” Greeley writes. “But if you cut costs through head count alone—and not by improving operations—you have to just pray the economy goes your way. To survive, you cut people. To grow, you cut waste.” The picture he presents is far more favorable to the private equity industry than what the general public has probably absorbed during the GOP nominating contest. Indeed, even the local union steward declines to criticize Monomoy when offered the chance.
But neither, Brendan makes clear, is the industry concerned with “growing jobs” for its own sake, or in any way trying to rescue the American economy as a whole, as Romney often seems to claim. What comes across best in the piece, and what is explained rather candidly by Monomoy’s director of operations, is precisely what private equity companies seek to do: improve businesses enough to turn a healthy profit, and then move on to others:
“We’re trying to get from a B-minus, C to a B-plus. We don’t have to hold this long enough to get to Toyota quality to get significant value.” I ask him whether this should worry a potential buyer. HTPG CEO May—and Farrister, a team leader on the line—both seem dedicated to the system. Yet on the plant floor, I can already notice it beginning to slip in places. Investors “aren’t going to look at it like that,” says Stewart. “They’re looking at financials. They’re looking at 12 months of value.” … Practiced this way, private equity is not slash-and-burn liquidation, extracting money from capital. It’s not overleveraging, making profits off dividends paid out of unsustainable loans. Private equity, the way Monomoy does it, is a castle in the sand, a brief victory for order in the constant slide toward entropy.