The truth about job creation

Picture courtesy Flickr user GovernorDayton

COMMENTARY Depending on who you listen to, Bain Capital, the private equity firm that Mitt Romney ran for 15 years, is either a corporate raider that made gobs of money gutting companies or a virtuous venture capital-like firm that invests in companies to create jobs.

Not surprisingly, neither is true. In fact, there's so much political spin, self-serving rhetoric, and misinformation on the subjects of job creation, private equity and the economy that I thought I'd take a stab at explaining, in plain English, how it all works.

Job creation 101

Companies don't exist to create jobs, and private equity firms are no exception. Rather than get into an age-old debate, I'll just say that companies exist to win and keep customers, grow their business, make profits, and make money for shareholders.

Well-run companies that manage to do all that efficiently and grow over time tend to create more and more jobs. That, in a nutshell, is how it works. Of course, innovation creates markets and expands existing ones, and companies compete for share of those markets. But jobs fundamentally come from growing, profitable businesses. Period.

These days it's popular to challenge that basic construct with Utopian nonsense. Some people say that companies shouldn't exist to win business, grow sales, increase profits, and grow shareholder value. They should have more "virtuous" metrics.

Well, it's a good thing that American executives and business leaders don't listen to any of that nonsense because, if they did, there'd be no new jobs. Unemployment would rise with population growth and we'd lose more and more jobs to China and other nations over time. It's not a pretty picture.

Private equity for dummies

Just like any other company, private equity firms don't exist to create jobs. But they're not in the business of destroying jobs, either. They generally acquire significant equity positions in distressed companies with a goal of turning them around. They do that the same way any company should on its own, by making the company more efficient, more profitable, and ultimately, more competitive and capable of growing.

So you see, while restructuring a company typically does involve cutting some jobs, the truth is that private equity firms are highly incentivized to get companies healthy, profitable, and ultimately growing again. And as I explained above, that means more jobs. Generally speaking, the more successful the turnaround, the more money private equity firms and their investors make.

If that sounds as if the goals of all the key stakeholders in a private equity transaction are aligned, that's because in general, they are. According to Steve Judge, interim president and chief executive of the Private Equity Growth Capital Council, "Private equity is unique because the interests of the firm, the investors, and the portfolio company are all aligned. Because of that, the lion's share of a firm's compensation is directly tied to the returns they deliver for their investors."

Now, it's true that private equity firms and the way they structure deals have evolved over time. For example, the era of super-leveraged buyouts went out with the 80s and portfolio companies don't get saddled with as much debt as before. Which is why James Coulter, co-founder of TPG Holdings, the industry's largest company, says, "It's a new era. Fixing a company, improving operations and driving growth are more important than financial engineering."

It's not rocket science

Companies use profits to hire people and fuel revenue growth. The cycle continues as long as growth is profitable. Sure, you can also fund growth with debt, but too much leverage, as private equity firms and everyone else has come to realize, can be a bad thing.

If you're starting to see a parallel with our economy, then you're starting to get the picture. America has too much debt and our cost of doing business is too high, so our growth is limited. And yes, it really is that simple. That said, there's no silver bullet or quick fix for the economy. There's a lot of work to do to turn America around.

Through years of fiscal mismanagement and legislative stupidity, we've managed to create an unhealthy fiscal environment in America. As a nation, we're not competitive on a global scale. Just like a company, America needs to be restructured.

We need to dramatically cut our spending and national debt. We need to simplify the tax code, get rid of all the loopholes, and lower the tax rates for companies big and small. We need to incentivize companies to repatriate their profits and manufacture on-shore. And we need to repeal legislation that hinders our ability to grow the economy and therefore create jobs.

Interestingly, if we do all that it'll also reduce the dysfunctional lobbying, regulatory conflicts of interest and crony capitalism. How about that.

Look, job creation isn't rocket science, it isn't a miracle, and it's not something a politician can just conjure up like a magician. It's the result of competitive, profitable, growing companies and a healthy, growing economy that isn't laden with debt. That's all there is to it.

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