JUDY WOODRUFF: Finally tonight, we return to an issue raised by the focus on Mitt Romney’s taxes, how he made his money as the head of a so-called private equity firm.
Those firms invest in other companies, often troubled ones, and try to turn them around. But there is great debate over whether private equity activity is more focused on short-term profits or the long-term health of the company.
We have our own debate about that with Stewart Kohl. He’s co-CEO of The Riverside Company, a private equity firm that manages more than $3 billion in assets. And Josh Kosman, the author of the book “The Buyout of America: How Private Equity is Destroying Jobs and Killing the American Economy.”
We thank you both for being with us.
Josh Kosman, just so that we understand what we’re talking about here, how big a role does private equity play in the U.S. economy?
JOSH KOSMAN, author, “The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis”: Private equity firms own companies employing about one out of every 10 Americans. So they are hugely important. They’re America’s biggest employers.
And up until recently, they’ve been largely ignored. And, Judy, there’s just one thing that I needed to jump in and say. I think it’s a fallacy — and it’s what the Mitt Romney defenders are trying to throw up in the air — that private equity firms buy troubled companies. They’re almost always buying profitable businesses, not troubled businesses.
JUDY WOODRUFF: Well, that will be part of the question that I ask Stewart Kohl now, because let’s — let’s get — have a basic understanding of what private equity is about.
It’s a group of outside investors who put their money together, borrow a lot of money, buy a company, then try to make that company profitable, sell it, so that they then can make a profit.
Is that fair, Stewart Kohl?
STEWART KOHL, The Riverside Company: It is, Judy.
We collect money from pension funds and endowments for colleges and foundations and the like. And firms like The Riverside Company invest that into, as Josh says, mostly healthy companies, with the objective of making those companies a bigger and better over an extended period of time, so that companies become more valuable, so that they can be sold then eventually for a higher price, which allows us to generate attractive returns for those colleges, universities, foundations, and the like.
JUDY WOODRUFF: But you agree it’s mostly healthy companies that are invested in?
STEWART KOHL: Yes.
There’s a subset, a segment of private equity they focuses on troubled companies, companies that are struggling. I have a lot of respect for those firms. That’s hard work, and it is not something that The Riverside Company does. But it is a small, but important part of private equity.
JUDY WOODRUFF: So, Josh Kosman, you have a problem. You’re critical of the way most, if not all private equity operates. Why?
JOSH KOSMAN: Well, most.
And I have a lot of respect for Stewart’s firm, which mostly buys companies not with a tremendous amount of leverage. And, really, the only way Stewart’s firm makes money is by growing the businesses, because they traditionally have brought relatively small businesses.
But the way mainstream private equity works, which includes Bain Capital, is they buy companies by putting them in deep debt. And then the record shows — I did two years of full-time investigative work on my book — that they don’t improve the businesses — 52 percent of the companies acquired in the 25 biggest buyouts of the ’90s ended up going bankrupt.
I looked at the 10 biggest buyouts of the 1990s. So I wasn’t cherry-picking. In six of the 10 cases, it’s clear that the company would have been better off if they had never been acquired. In three cases, it was mixed. In one case, the P.E. firm did improve the business.
In this decade, Moody’s came out with a report just last month that showed that, in the 40 biggest leveraged buyouts that all occurred in kind of ’05, ’06, ’07, ’08, that those companies were — had grown revenue since being acquired by 4 percent, while their strategic peers, their peers, had grown revenue 14 percent.
So, to me, there’s. . .
JUDY WOODRUFF: Well, let me. . .
JOSH KOSMAN: Go ahead.
JUDY WOODRUFF: I was just going to say, let me break in now, if I may, and ask Stewart Kohl, if — given that picture that we just heard painted, it sounds like these private equity firms are destroying more than they’re building up.
STEWART KOHL: I disagree. And here’s why.
Private equity relies on its ability to attract capital, again, from these pension funds and others. And to attract that capital, it needs to generate good returns. To generate good returns, it needs to invest in companies that grow and prosper.
And that is overwhelmingly what private equity has achieved over the several decades that it’s been around. We went through a very difficult period after 2007, the global financial crisis, the resulting recession, the worst since the Great Depression. And, surely, some private equity-done transactions struggled.
Surely, some public companies and privately held companies struggled as well. But, overall, private equity wouldn’t be continuing to attract the capital that it attracts if it wasn’t able to generate consistently good returns, which it does really in one way, which is by making the companies that its invests in bigger and better.
JUDY WOODRUFF: So, Josh Kosman, if that’s the case — and that doesn’t sound like it squares with what you were saying — how do you square that, and what all does this mean for jobs?
JOSH KOSMAN: I think that, you know, for Bain, 22 percent of the money they invested in funds raised from ’87 to ’95, during the time Mitt was there, were in companies which they made, Bain and their investors made $578 million, the bulk of their profits, and all those companies ended up going bankrupt.
Unfortunately, when you buy a sizable company and load it up with debt, and then take money out, have the company, after you raise earnings in the short term through cuts, borrow money and pay yourself dividends in the short term and set up those companies for failure, they can fail and you can still make a lot of money.
JUDY WOODRUFF: Stewart Kohl. . .
Yeah, let me bring in Stewart Kohl on that point, about the short-term turnaround, the pressure on these companies to make a profit, and the investors get out.
STEWART KOHL: The investment that private equity firms make in is, of course, equity.
It is the last claim on the cash flow and earnings and value of the company. In order for that equity to be valuable, the company needs to succeed, it needs to be able to service and, over time, retire its debt.
The amount of debt a company borrows is a function of the profitability of the company and the — where we are in the cycle and the willingness of banks to lend. Surely, there are periods when banks will lend higher amounts and lower amounts. And there’s sometimes situations, such as we saw in 2008-2009, when companies that had performed splendidly in 2005, 2006 and 2007 struggled and the amounts that they borrowed in this periods then looked high.
Those companies worked hard to become successful again. The private equity businesses that invested in them worked equally hard to make those companies successful, because, if they weren’t able to do that, they would not be able to raise their next fund.
JUDY WOODRUFF: But it sounds like — I was just going to say, it sounds like you’re painting a picture of a healthy set of transactions, whereas, Josh Kosman, you’re painting something very different.
What are we — what am I missing here, Josh Kosman?
JOSH KOSMAN: I don’t think – you know, in my view, the facts don’t justify what Stewart is saying, with all due respect to Stewart.
What private equity defenders now are doing is throwing out a lot of nice terms, “We build businesses,” but not a lot of facts behind it. Private equity firm returns, according to several good academic studies, are no better than the S&P 500.
And if we look at Bain, which has gotten the most scrutiny lately, four of Bain’s 10 biggest investments under Mitt Romney ended up going bankrupt, and yet Bain made a lot of money. So, I think there’s very little evidence that, for the big, large private equity firms, that they build any value in their businesses.
JUDY WOODRUFF: You get the last word, Stewart Kohl, to bring us around to your argument on how you see this.
STEWART KOHL: Yeah, I’m reticent to talk about Bain. I’m not an investor in Bain. I’m not familiar enough with their results, although I will say that Bain has been able to continue to attract capital, which would lead me to believe that most of their transactions have worked well enough.
At Riverside, that has certainly been the case. And I’m very proud of the hard work that my colleagues have done to help us build companies that have added jobs. In the last two years alone, we’ve added almost 1,500 jobs. That’s about a 15 percent increase in the employment of the companies we have invested in, in North America.
And if we looked at the companies that we have invested in, whether it’s a Crisis Prevention Institute in Milwaukee, or a SmartComp in Washington, Pennsylvania, these are growing, profitable companies that are — have benefited, I think, greatly from private equity.
And I think if you asked their — their founders, their managers, people like David and Shannon, they would — they would agree.
JUDY WOODRUFF: We are going to have to leave it there. It’s a big subject, and we are going to continue to look at it, no doubt, in the days and weeks to come.
Stewart Kohl, Josh Kosman, we thank you both.