Some of this even verges on truth. Mitt made a lot of dough. Like M&A, another practice with talking points, private equity has moments, particularly in frothy markets, that, in hindsight, look terrible, although the buyout universe features diverse strategies, skills and sizes, and blanket statements usually leave a rump or a nose exposed. But in crazy markets, crazy deals get done at crazy prices, with sky-high debt and fees resembling annuities. Not good. When markets crap out (they always do), folks get fired, companies go bust, and buyout magnates slink away, though they have their fees for comfort. Of course -- this isn't one of the talking points -- it works the other way too. Tough-minded markets reward smarts and jobs are created, factories hum like beehives, and the mother's milk of returns flows. Private equity feeds capital to mature, orphaned, distressed or starved-for-capital companies. That's bad? And, to complicate matters, who invests in private equity? Mostly public and private pension funds (including union retirement funds) and endowments. Why? Because they need returns to pay beneficiaries, like you and me. Well, you. I'm a 401(k)er.
Not among the talking points is how and why the practice emerged in the first place. Private equity was never "planned"; it sprang up in that decade of new beginnings: the '70s. The reality that interest on debt was deductible helped the math. But it also arose for a reason few recall today: Equities were insanely cheap, and the economy was ruled by large and self-funded public corporations. Venture capital was nascent. In a misfiring economy, loans were scarce and expensive (Michael Milken was just noodling his idea about high-yield default rates). Manufacturing, in particular, staggered under high costs (notably for energy), technological change and foreign competition. Capital was locked inside companies; entrepreneurs had few options to grow or cash out besides selling low to corporates or begging for loans from local bankers -- this was an era of many local banks and tight-as-a-corset bank regs. Private equity, at first quietly and modestly, moved in; deals were small because debt-enabled buyouts seemed strange and markets were penurious, at least until Milken's junk bond lollapalooza hit in the '80s.
The argument for private equity dovetailed with that of '80s M&A: Both involved turbocharged change-in-control mechanisms, which (a) threatened the corporate status quo and (b) in theory restored a dynamism to an economy grown sclerotic with success. Is (b) true? The Gordon Gekko laissez-faire critique is wildly overstated, but it's also difficult to argue that the '70s economy was some Edenic picnic ground. To ask whether the advent of private equity was good or bad is really another way of saying: Was the political economy of the '70s, with its broad middle class, big industrial sector, tightly regulated banks and cartelized Wall Street, the best of all possible worlds? Or was the top-heavy corporate structure breaking down? What's clear after 40 years is that private equity, with its aligned owners and managers, doesn't suffer the governance dysfunctions of public companies. And it certainly unleashed capital for new uses, some of which ended up back in Mitt et al.'s pockets. The most fundamental question, however, is this: Should (or can) we remain static -- or even try to return to an age that appears to glow like a golden apple -- in a world of remorseless change? Pondering those questions may not get Mitt votes, or solve inequality, but they do provide a better place to start thinking about our situation than a bunch of tired talking points.
Todd P. Kelly joined the Dallas Office of Jones Day as a partner in the healthcare and life sciences practice. For other updates launch today's Movers & shakers slideshow.
The Jordan Co. managing director talks about manufacturing M&A with private equity senior editor Jonathan Marino. More video