PE Isn't Good, and It Isn't Evil.
Part 3 of a 3 part series
Institutions are only as good as the people who run them, and people are fundamentally flawed.
Private equity is an institution like any other.
Yes, PE firms ran companies like Sears and Toys R Us into the ground while making money off the parts, but neither company was thriving before, and neither is missed. Local newspapers were already dying before PE firms started snapping them up. Craig Newmark, whose Craigslist effectively destroyed the traditional news business, bootstrapped his company. He didn’t take PE or venture capital, and he never intended to destroy local newspapers. Possibly out of guilt, he has gone on to fund a graduate school of journalism. Alden Global Capital is just picking at the carcasses left by technological change.
If you look at the very long Wikipedia list of PE-owned companies, you’ll find a lot of companies that are perfectly fine, that you might not have realized were PE owned.
Some PE firms are better than others, of course, and many of them have too much money and are chasing too few deals. Some overpromised returns in order to bring in investors. They had to overpay business sellers to put the investments to work, and then they must start raising prices and slashing costs to generate a return on investment.
A lot of people had no opinion about private equity until their dentist and veterinarian sold their practices, possibly at very high prices, and now they are dealing with the rising prices and slashed costs.
But there’s no business ownership structure that always guarantees reasonable prices and excellent quality. The forces of capitalism in a competitive market usually lead to fair pricing and quality. Usually, but not always, because inefficiencies are inevitable. Mangers at public companies and sole proprietorships will raise prices and cut quality if they think they can get away with it.
I really miss a big morning newspaper, but those days are gone. The Chicago Tribune was declining for years before Alden Global Capital acquired it. Instead, I subscribe to the New York Times for national news, the BBC for world news, and several hyperlocal sites covering Chicago. If you don’t like your PE-owned newspaper, or dental practice, or shoe brand, you can go elsewhere. Capitalism works because people can walk away from businesses that don’t deliver.
What do you think? Please share in the comments:
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Traditional media is in a death spiral and we all know it and I am sad about it. My sister in law offered to get my kids a subscription to the Chicago Tribune (both kids have moved there, my hometown) but I knew they wouldn't read it. I still think the Sinclar-ization of local TV is bad, as they are pushing a political agenda, I can't say if the Tribune has changed, I will have to read it the next time I'm in town (my parents still subscribe).
There was an article in the obituary section of the Minneapolis Star Tribune about the death of Sam Sianis of Billy Goat fame, due to the popularity of the SNL skit I assume (syndicated from the NYT). The pull quote was about Mike Royko. Mike Royko! I grew up reading both the Sun Times and the Tribune and of course read Royko and Kup and Bob Greene. My kids didn't grow up WANTING to read the paper/magazines, as I did and as my husband did, even though we always subscribed to both and read in front of the kids (they did read kids magazines for a bit, and books).
I do think that we lose something when we lose local legacy media, that most people in Chicago knew who Walter Jacobson and Bill Kurtis and Irv Kupcinet were at the time, as opposed to a name on a website that may or not be real.
I realize that Calpers and the Toronto teachers pension fund need to have places where they can earn a little bit better return than you can from government bonds. And I’m sure they vet the PEs that they work with. I would love to hear your thoughts on what some good private equity funds are and why. In my mind, the private equity funds that hire prospective CEOs to look for quality companies to buy seem like a possibility.