Daily Video

July 19, 2010

Movies, Music Affected by Private Equity Woes

Private equity, or money invested in companies that are not part of the stock exchange, is a popular way for big investment firms to make money. Private equity firms are designed to take investors’ money, invest it in a company, improve the company and make more money off of it. But, as NewsHour Economics Correspondent Paul Solman reports, many of the nation’s biggest companies owned by private equity firms are facing mounting debt and even possible bankruptcy.

Some of these companies include Clear Channel, which owns more than 1,000 radio stations and a million billboards around the world, and AMC Theaters, the biggest movie theater company in the U.S. EMI and Warner Music, both record companies owned by private equity firms, are in financial trouble as well.

For workers in companies that are taken over by private equity firms, times have been tough. Some have lost pensions and health care coverage, while others are in danger of losing their jobs altogether. Bruce Raynor, the president of the labor union Workers United, says private equity investments too often create unstable companies and unreliable working environments. But, Douglas Lowenstein of the Private Equity Council says not all private equity investments are doomed to fail.

“Private equity is imperfect,” he says. “It does a lot of things well. And, like anyone else, occasionally, it makes a bad investment. That’s it. It’s that simple.”

Quotes

“They look around to cut costs and they find a factory in Cleveland where they are paying workers the princely sum of $12 an hour. The workers have health care and a pension, a few paid holidays, and can live. And they decide, we can find workers who can make that for less.” – Bruce Raynor, president, Workers United

“I received the letter, and I was kind of shocked when I read what it said about closing up, because I don’t know what else to do. This is the only job I have ever had.” Carol Shaw, employee

“Debt, in my view, is not, in and of itself, a bad thing, if that — if the borrowed money is used to build the business. It’s when the debt is used to enrich a handful of private equity partners…that’s when it’s dastardly.” – Bruce Raynor, president, Workers United

Warm Up Questions

1. What is the difference between public and private?

2. What is the difference between a public company and a private company?

3. What is an investment? How do you know when something is a good investment?

Discussion Questions

1. Imagine you are an employee at a company that has been taken over by a private equity firm. How might the takeover be good for you? How might it be bad?

2. If you were an investor in a private equity firm, what kinds of things would you look for when deciding whether to invest in a company?

3. Think about what you saw in the video. Do you think private equity investment is a good thing? Why or why not?

4. Douglas Lowenstein in the video says that “Private equity is like buying a house that needs renovation. You improve it. You strengthen it. You make it a better asset. And then you try and turn around and sell it for more money. That is the essence of private equity. If you do the opposite, you lose money.” Based on what you know about the economic downturn and the housing market recently, why might it be difficult to make that model work during tough economic times? Is it always guaranteed that investors will make money off of their investments?

Additional Resources

Video Transcript

Paul Solman Video Reports

NewsHour Extra Economics Coverage

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