Private Equity Needs to Provide Jobs and Innovation

Private equity investors are the dream of every innovator and entrepreneur. Whether they want more business growth or to retire comfortably, they are willing to accept an offer. Established public businesses whose debt has become unsustainable also look for buyouts from private equity companies and their investors.

The lauded Berkshire Hathaway company is the model for these companies. However, he has made a wide range of individuals wealthy in the process. He uses the model of buying underperforming assets to make them profitable by inserting competent management. Often, the jobs lost are in upper management because the incumbents lack the required vision and skills to meet Warren Buffet’s requirements.

Partly through the magic of tax lobbying, many companies “taken private” have eventually been plunged into bankruptcy. In fact, they were purchased solely to sell the assets to gain the profit the investor plans before going out of business. I still mourn Sears. Its brands linger, but I don’t trust them like I did when they were developed and backed by the larger company.

The positive impulse behind private equity is that it can be a just use of capital. Creative thinkers who have acquired savings beyond their basic needs (however they picture them) can find other innovative individuals who can use the capital to make a profit. The thought to bear in mind is that a good investment needs only to provide a return on the current inflation level plus 2-3 percent. Without speculative bubbles, the real estate market proves that.

I don’t want to call any investor greedy. They may be, but you can also apply emotions rather than values to the situation. Extreme optimism, a competitive spirit, and marketing play a part. As long as the strategy behind the investment is conservative and ethical, these emotions cause less significant problems.

However, emotions can become an infectious evil in the hands of an investor who desperately needs to feel influential. Everyone wants to go along with such grand dreams. Expediency overtakes fact-finding and analysis.

Public sentiment could shift the investment community’s outlook considerably. When the public demands certain behaviors through law or expected norms, there is a social stigma applied. Unfortunately, we are currently in a battle over which social stigma we choose to avoid. One person’s taboo is another’s sign of connection to a group.

When unspoken behavioral expectations no longer hold society together, civil law must apply. We currently have regulatory authority authorized. The regulations need to be updated to do less harm to society at large. Again, this is a space where paid lobbyists may have had more influence than applying moral and ethical measurements.

Our tax code is the other area that needs reconsideration. Our country’s voters’ wealth inequity cannot be blamed on tax rates alone.

As tax law stands, businesses have insufficient incentive to pay robust wages to their employees. Performance should be the basis of executive salaries. Still, their performance is not measured in increased assets or decreased debt load. No one seems to be asking leaders whether there is high employee satisfaction. Is their compensation based on supply chain improvements or energy efficiency? Is bankruptcy, employee layoffs, or a major scandal a reason to withhold pay or fire? To Mainstreet, it appears that even misbehavior gains a golden parachute.

The nuts and bolts of a business are often hidden in complex accounting measures and legal maneuvers that avoid taxes and give an advantage to only the small group of executives running the company. That is not a moral use of the benefit of accrued capital! The use of invested money should be advantageous to everyone involved in the investment.

The American economy is second to none. There are enough dollars in the capital markets to grant living wages, fund advances in our infrastructure, provide quality lifelong education and limit government debt. It takes public demand, leadership integrity, and a tax code measured against public prosperity.

Wall Street has devised a significant marketing tool with its index averages. Many consider it the sole measure of economic success. However, it hides the truth that small investors have no governing influence. The motto of just capitalism should be: capital in 1,000 hands will grow faster and benefit more than capital in one hand.