What if PEs stop trying to turnaround failing companies?

The fanned hysteria against private equity firms is ripe with hypocrisy and unintended consequences.

The hypocrisy is almost comedic.

Gingrich was on the board of Forstman-Little.

Obama just promoted Jack Lew – formerly head of Citi’s PE group – to be his chief of staff.  And, don’t forget that Team Obama picked Dan Akerson to run Government Motors. What’s his background?

Prior to joining GM, Akerson was a managing director and head of global buyout for The Carlyle Group in Washington, D.C. In this position, Akerson managed more than $50 billion in assets and more than 200 portfolio companies with several hundred thousand employees around the world. He was instrumental in helping Carlyle achieve 30 percent gross internal rates of returns in the firm’s corporate private equity business.

Gee, sounds a bit like Romney doesn’t it?  I’d even be willing to bet that Akerson closed a few plants and laid off a few people in his time.

That’s not bad.  That’s how failing businesses are turned around.

Which leads me to my bigger point.

Connecting some dots, I see a disturbing trend.

  • A doctor friend of mine opined that if MDs start getting paid based on “success rates” then docs will simply start taking fewer difficult cases … why risk your pay check on on high risk patients? … treat the ones that are certainly curable … bingo, high success rate
  • Similar story with a dedicated teacher friend … asked about pay based on students success (e.g. test score improvement) … he parried: fine, then who’s going to teach the mainstreamed special needs students … or the incorrigible discipline students …  not the teachers striving for high success rates.

Easy to project those stories into the PE debate,

PEs go into turnaround situations knowing that tough actions will need to be taken, that companies will need to be restructured, and that some managers won’t make the cut.  That’s the way businesses are turned around

And, they know that – despite their best efforts – some turnarounds will fail.  That’s part of the game.

If the world lasers in on the unsuccessful attempts, who is going to step-in and start taking on the toughest turnarounds?

If the answer is nobody – or worse yet, the Feds – then those failing companies are certain for demise.

Is that what Gingrich and Obama want?

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One Response to “What if PEs stop trying to turnaround failing companies?”

  1. TK Says:

    Nobody expects 100% investment success (except Obama bashers lasering on Solyndra). The question is whether these firms should take huge fees upfront if they will also participate in such a big way in the back end.

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