Is this how private equity firms really work?

Sunday's column was about the Bain/Romney/private equity problem writ large -- so large that it's a lot bigger than private equity. Buyout firms are only part of a process that has led to big productivity gains, the column said, whose benefits have accrued mostly to the wealthy: "Not surprisingly, corporate profits as a percentage of revenues are near all-time highs. The middle class is struggling. The top 1 percent of the income gradient has gotten very rich indeed. And many people want to occupy Wall Street."

The New Yorker's Jim Surowiecki focuses on the corporate train wrecks, which are certainly part of the private equity story. Many private equity firms, he implies, didn't even improve productivity. They just sucked money out of companies and wrecked them. Surowiecki:

"In 2004, for instance, Wasserstein & Company bought the thriving mail-order fruit retailer Harry and David. The following year, Wasserstein and other investors took out more than a hundred million in dividends, paid for with borrowed money—covering their original investment plus a twenty-three per cent profit—and charged Harry and David millions in “management fees.” Last year, Harry and David defaulted on its debt and dumped its pension obligations. In other words, Wasserstein failed to improve the company’s performance, failed to meet its obligations to creditors, screwed its workers, and still made a profit. That’s not exactly how capitalism is supposed to work."

He cites no research. Despite the horror stories, I suspect that the aggregate effect of LBOs is to increase productivity. (Surowiecki's shorthand for this is to "improve the value" of bought-out companies.) But there are certainly dozens of cases of private equity artists wrecking companies. Glad he mentioned the need to cap corporate debt along with changing the taxation of carried interest as ways to try to fix this.