Wednesday, September 26, 2007

Private Equity; Public Losses

Two stories, one message. Over the weekend, the big story in Rochester (other than the pathetic football of the Buffalo Bills) was the finalization of the deal whereby Bausch & Lomb, one of Rochester’s ever shrinking “big three” industrial employers, was going to be taken private by Warburg Pincus, LLP, one of the most aggressive private equity firms around. More evidence of their busyness appeared in the Times on Sunday, with an expose of nursing homes in Florida (expose and nursing homes goes together like salt and pepper or bread and butter) that had been taken private by the same Warburg Pincus, resulting in catastrophically reduced service, with an interlocking ownership designed to be complex enough to fend off lawsuits.

Private equity are the financial phenomena of our time, secretive, open only to large investors, and largely unregulated. Since about 1850 or so, the story of American business has basically been that large companies would be publicly owned by investors, with a related amount of public disclosure. (The New York Stock Exchange has required annual reports of listed companies since about 1870.) The theory has been that companies sell shares, people buy shares, either directly or through mutual funds, and wealth trickles down, virtually and vicariously. Private equity firms subvert this conception of the stock market, where nowadays only the late Leona Helmsley’s “little people” invest.

Typically private equity firms purchase a company whose stock was selling at, say, $10 a share for a premium (say $13 a share), gain control, take it private, where the amount of public disclosure is greatly diminished, do a few things, typically selling or closing off parts of the company, as they are expected to do with B & L, or by directly firing workers as they did with the nursing homes, creating the phenomena of nursing homes without nurses.

Then after a few years out of the public eye, the private equity firm bring the company public again, with the IPO pegged at $25-$30 a share, which the lemmings purchase, but the real gains have been made not by investors in the market, but the private equity firm.

This has been terrible for the American economy and society on many levels. Private equity firms are not long term stewards, and their only interest is squeezing every last penny they can out of the firms they purchase, before foisting them off on new purchasers. Absolutely no one benefits from this process except for the well-heeled investors in the equity firms, and typically, lots of people in the purchased companies loose their jobs. And private companies they are much less regulated than regular public companies; the assumption that bigness carries with its obligations, either to employees, customers, or the public at large, in terms of either business practices or disclosure, is being systematically subverted.

Of course private equity firms have flourished under Bush, but they are essentially non-political, attaching themselves to the gullible or the avaricious of either party. I have never been a huge fan of capitalism, but since it seems to be the only game in town, there are, it seems to me, two bedrock desiderata for it operating with a modicum of fairness abd equity. One, strong labor unions (lets go UAW), and two, a strong and effective Securities and Exchange Commission, regulating capital markets with vigor. We desperately need private equity firms to be more carefully and stringently regulated. Big companies and big reservoirs of capital, whether publicly or privately owned, required the same degree of scrutiny.

And while it would be nice to see the convulsive expansion of private equity firms in the American economy become a campaign issue of some importance (any takers, Democrats?) don’t hold your breath. Increasingly, the United States is a free market economy without free and open capital markets, and you don’t have to be an old Marxist to think this contradiction will come back to haunt us.


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