Private Equity’s ‘Vulture’ Reputation: Does It Deserve Reconsideration?

Private equity’s vulture image is generally traced to KKR’s acquisition of RJR Nabisco for more than US$30 billion in 1988. (The 1990 film Pretty Woman also gave audiences another taste of the financial maneuvering involved in acquisitions, breakups, and asset sales.) Private equity came to be portrayed as the barbarians at the gate. Strictly speaking, however, KKR’s deal was not a hostile takeover: KKR and the incumbent management team submitted competing bids to RJR Nabisco’s board, which decided which team to sell to. Private equity firms, however, have come to be seen as embodying capitalism’s most fundamental traits: an obsession with making companies more valuable, whether they are growing or declining; finishing one deal only to start another; continually making acquisitions and then looking for the next target. They are portrayed as shareholders motivated solely by money, without human warmth, who ruthlessly extract profits and then discard the company without hesitation. Private equity firms are therefore often criticized for laying off workers, selling assets, and dismantling a company’s existing systems. Yet an acquisition by a competitor usually leads to more job losses than a private equity leveraged buyout. Still, an acquisition means that ownership has changed in one form or another, and the company will inevitably change hands again in the following years—or more than a decade later. This process naturally creates fear and unease among employees of the acquired company. The claim that private equity systematically damages companies is probably incorrect. If that were true, the acquisition business could not continue. If private equity firms habitually sold bad companies, the industry would find it hard to keep selling them. Public pension funds are private equity’s largest investors. If they believed private equity caused mass unemployment, they should immediately stop providing capital, depriving the industry of its biggest source of funding. Academic research shows that private-equity-owned companies significantly outperform other newly listed companies after returning to the public market, contradicting the argument that acquisitions damage corporate development. (This has been borne out in the limited number of Taiwanese capital-market examples, including Fusheng, Nien Made, and Primax. I was fortunate to participate in Fusheng’s return to the public market.) In employment, private-equity-owned companies are, on average, much like other companies. Some employees lose their jobs at acquisition, but more jobs are created over the longer term. Although one theory holds that leveraged-buyout debt makes companies more fragile, research indicates that acquired companies have the same bankruptcy rate as other companies. The vulture image persists, but private equity firms make money by acquiring companies that are declining, distressed, or in need of transformation, helping them recover and grow stronger, and then selling them. Contrary to claims that acquisitions are simply a route to quick windfall profits, many CEOs who work with private equity say that private ownership actually lets them pursue long-term development strategies more effectively. As publicly listed companies, they previously had to maintain short-term profits blindly. ---- Robin: ‘Capital markets are also looking for new forms of more responsible growth. This includes broader attention to labor rights, environmental protection, social issues, and diverse values. Capitalists, too, can bring greater human understanding to caring for society and making Earth, our shared home, more sustainable.’