Wednesday, May 23, 2012

Think of Private Equity as Healthcare for Business

I've been thinking.  At least I hope I have.  I've been thinking about how to explain private equity to the American people.

After all, until Mitt Romney came along I should imagine that the average American voter had never thought about private equity before.  In campaign-speak, therefore, the Obamis are trying to define it for the American people before Mitt Romney does.  They want us to think of a vampire sucking the blood out of good union jobs at good wages.

The vampire metaphor probably does have application in some cases.  After all, there are bad apples everywhere--even in left-wing politics.

But I propose a new metaphor.  Think of private equity as healthcare for business.

Let's think about health care for a moment.  There are two key times of life when you really need health care.  You need it at birth, and you need it in your last months on earth.  Health care at birth is the reason that women now have a longer life expectancy than men: they no longer die in childbirth.  And healthcare is the reason that we don't have half of babies dying in their first year of life.

Why, that's just like private equity!  One of its key contributions is to help start-up companies, providing start-up capital and management advice.

In healthcare, obstetric and pediatric care is pretty straightforward.  Where things get messy is with the diseases of aging: geriatric care.  When you get sick, you look for the healthcare system to save you from early death and from serious disability, and that might mean surgery, cutting out a cancerous growth, or reaming out your coronary arteries or putting in a stent.  Guess what.  Very often, there's nothing the doctor can do for you.  He may order an expensive operation but you might still die anyway.

Here's a shocking fact.  When you get a doctor to operate on you, you pay him whether he fixes you up or not. He doesn't suggest an equity deal where he gets a cut on every extra month of life he's given you.  Talk about greed!

Just like aging humans, aging corporations are often a mess.  They may be paying their employees too much; they may be paying their executives too much.  They probably got into debt to tide them over a couple of rough patches.  Now they are really in trouble. and they can't get any more money from the bank.  Enter the leveraged-buyout guys.  They come in with new money, new management, new ideas, and try to save something from the wreck.  Like the doctor doing surgery, they want to get paid for their expertise.  Like anyone doing a high-risk business deal, they want a big payout if they succeed.

It's a pity that the Obama administration wants to teach the ordinary American voter that private equity stinks.  But you can understand why.  Almost everyone in the Democratic coalition is sitting on some sort of government benefit, whether the benefit of union intimidation or subsidy or straight out pay-for-play.  The politicians and the activists promised them lifetime security and told them they had a moral right to that security.  But now the money is running out, and the rest of the American people are getting a little restless about, e.g., paying government workers 45 percent more than private sector workers.  The only way they can keep the money going for a while is with demagoguery.

The Obamis can do this because the Democratic faithful still believe.  They believe what their leaders taught them, that they have a moral right to their handouts and their benefits.  And President Obama believes that too.  He believes in "spreading the wealth" through government programs.

In the end, of course, the whole Democratic political power will collapse into ruin, as every other empire has done.

But for ordinary people that aren't plugged into the national Democratic machine things are different.  What's wrong with the private-equity guys helping the start-up you work for?  What's wrong with a leveraged buyout when your employer is teetering on the edge of bankruptcy?

Not everyone gets a lifetime government job with tenure and lifetime benefits.

1 comment:

  1. Chris, why are you confusing private equity with venture capitalism? They have some similarities, but are not at all the same thing and do not exist for the same purpose.