Private Equity is Done…Well, Not Quite (Last of a Series)

This week we wrap up our three-part response to the contention, as argued in an articulate WSJ op-ed by Andy Kessler that the glory days of private equity are over.

One interesting contention made by Mr. Kessler is that PE is “holding back the economy.” He uses examples of buying drugstores and car-rental companies, leveraging them to the hilt, and then being unable to invest in new products and services.

Having operated around private equity sponsors for decades, we’ve observed them to have missions other than just driving the economy. Their goal is to create value for their shareholders and limited partners. To do this, PE firms seek to buy companies for which they can make specific operational and strategic changes that enhance that value.

For example, if a company makes a terrific consumer product, but has limited distribution, the sponsor can leverage its management experience and help the company get on the shelves of major retailers to take revenues to the next level.

But if the company has bloated inventories, unprofitable SKUs, and money-losing stores, the sponsor will take the necessary steps to reduce losses, improve margins, and do whatever is needed to turn the business around. That may involve closing stores and plants, and reducing headcount in the short-run. But without intervention, those things would have happened eventually, perhaps in bankruptcy. With PE involvement, there’s a better chance the company will survive to reinvent itself to a better future.