Hassett & Davis: “Private Equity Is a Force for Good”
Private Equity Is a Force for Good
By Kevin Hassett and Steven J. Davis
When Mitt Romney challenged Ted Kennedy for his Senate seat in 1994, Kennedy made Romney’s private equity career a primary focus of the campaign. With Romney racking up impressive victories in Iowa and New Hampshire, Romney’s opponents are resorting to the “Hail Mary” play of rehashing Kennedy’s strategy of portraying Romney as a heartless Gordon Gekko who reveled in destroying jobs for profit.
As economists, we are unqualified to assess the political impact of these attacks. We can, however, state that the academic literature supports the view that the private equity industry serves an important and positive function in our economy.
DEFINING PRIVATE EQUITY
Private equity firms make investments in a wide range of businesses. Most of the investments are in privately held companies, but some involve the acquisition of publicly traded companies. The goal in each case is to create a thriving business so the private equity firm can sell its investment stake at a profit. This simple fact undercuts the claim that private equity firms systematically destroy jobs and loot companies. It’s hard to take a company public or sell it at a profit when it’s been looted. If private equity firms make money by selling their investment stakes at a profit, and Romney’s Bain Capital certainly did, then they are creating thriving enterprises. And, as common sense suggests, thriving enterprises do not hemorrhage jobs.
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