If anything could trip up former Massachusetts Gov. Mitt Romney in his pursuit of the Republican presidential nomination, it might be the charge that he and the private-equity firm he co-founded, Bain Capital, got rich dismantling companies and destroying jobs. This line of attack hits Mr. Romney at his strong point — his private-sector experience.
And so Texas Gov. Rick Perry blames Bain for layoffs in South Carolina, while a super PAC supportive of former House Speaker Newt Gingrich is about to air a 27-minute film making similar claims. In his defense, Mr. Romney boasts that Bain helped create 100,000 jobs, adding that attacks on his Bain record amount to attacks on free enterprise.
Who’s right? Private-equity firms recruit investors — individuals, university endowments or pension funds — and use their money to start, restructure or expand businesses whose shares are not publicly traded. Once profits start flowing, the private-equity partners cash out, often by taking the company public. Of course, if the investment goes bust, the partners either lose money or make less than they hoped.
Risking your money on a business idea, and persuading others to join you, is Capitalism 101, a strange thing for conservatives like Mr. Perry and Mr. Gingrich to criticize — the latter with the “independent” help of a super PAC bankrolled by a casino magnate. Better that private parties take investment risks than government — as in the case of now-bankrupt Solyndra, or the hundreds of millions in state funds that Mr. Perry has steered to Texas high-tech firms.
As a means of corporate finance, private equity is hardly evil per se. Probably it is one feature of U.S. capitalism that makes our system more flexible and capable of “creative destruction” than Europe’s.
Yet there are costs to putting firms through restructuring, so government policy should not unduly favor private equity. Current tax policy does just that. Private equity managers’ winnings count as “carried interest,” taxed at a much lower rate than ordinary income. Now there’s an issue.
— The Washington Post