What is private equity?

And there’s been a lot of talk in the press these days about private equity and all of the excesses that allegedly . . . In fact, I think a pretty good case could be made that private equity investments contribute importantly to the economy. Let me tell you why. When we buy a business, we don’t buy businesses that are overvalued by definition. We buy businesses that are undervalued. And why are they undervalued? Well technically they haven’t been doing as well as others in the industry have done. So in those cases, we’re very different than many public companies. A public company’s CEO today is under extraordinary short-term pressure. You’ve got the market analysts wanting quarter-by-quarter earnings guidance. And if the poor guy misses his earnings by a few pennies per share, then stock falls. And it creates a kind of a “short-termitis” disease where important decisions for the long term are often set aside in favor of the short term. Well in our business, we’re not terribly interested in the short term. We’re interested in what the businesses are going to be worth four, five, ten years ago when we’re out selling. And the only reason they’re gonna be worth a lot more today is if they’ve been fixed and they’re growing. So if you look at the typical private equity investment we make – and I suspect others are very much like that – to be sure they do some restructuring early on and reduce unnecessary costs. But the vast majority of the time we invest much more in ________ in the future, in development, in research; because what we’re interested in is doing those things that are going to make the companies five years from now go faster so they’ll be worth more than what we paid for them. So I don’t think it’s too fanciful to make the case that many private equity investors improve productivity in this country, improve countries, and provide jobs. Recorded On: 7/26/07

Private equity as a cure for "short-termitis."