That Michigan suffered deep job losses during the previous decade is certainly well-documented.
But what’s generally unknown is that during the period from 2000 to 2010, companies backed by private equity countered the state’s economic decline and largely grew sales and jobs.
During the decade, private capital-backed companies in Michigan grew jobs 50.2 percent, compared to a 9.9 percent employment decline across all businesses in the state. Sales at companies backed by private equity capital increased 60.7 percent in the 2000-2010 period, versus a 14.4-percent decline for all businesses.
The data comes from a new report issued by the Association for Corporate Growth that details the impact of private capital on the U.S. economy and seeks to counter the poor public perception of the industry.
“The data is telling us exactly what I think everybody in the private equity world already knows,” said John Pollock, managing director of private equity firm LV2 Equity Partners in Grand Rapids and vice president of the ACG’s West Michigan chapter. “The capital that is deployed in the companies in a structured way through private equity investments, on the whole, drives not only sales growth but also drives job growth.”
“Everything that private equity does is positive for the economy and for businesses overall. I don’t think that gets conveyed enough. It creates jobs and it grows business. Does every individual investment work out? No, absolutely not. But on the whole, that is exactly what happens. And therein is the value of private capital.”
The national ACG report, supported by the Cassopolis, Mich.-based Edward Lowe Foundation, shows private capital-backed companies outperformed their counterparts in job and sales growth in most markets across West Michigan. That growth came even in the depths of the recession.
In the five-year period from 2006-2010, jobs grew 14 percent and sales increased 13.2 percent at private capital-backed businesses in Michigan, which compares to declines of 6.1 percent and 13 percent, respectively, for everybody.
In individual markets:
- The Grand Rapids area saw job growth of 6.3 percent from 2006-2010 at companies backed by private capital, versus a 5.3 percent decline at companies overall.
- In the Kalamazoo-Portage area, the job growth was 107.7 percent during the same period, which compares to a 4.8-percent decline overall.
- Job growth was 5.5 percent in the Holland-Grand Haven area for businesses backed with private capital, versus an 8.9-percent decline for all companies.
The performance differences likely stem from private equity investors’ tendency to put their money into companies that have the highest growth prospects and already have strong management teams, said Gary LaBranche, president and CEO of the Chicago-based ACG.
“Private equity seeks out the companies that have the most promise and the greatest potential to grow over time,” said LaBranche, noting that a firm typically will look at 1,000 opportunities for every one or two investments it actually makes.
“So they work very hard to put their money to work where that investment is going to pay off with the growth of the company. They are selective,” he said.
When private capital gets invested in a company, it tends to come with accountability from investors and a plan to strengthen and grow the business, he said. Private equity firms have experience in operating and strengthening companies, improving governance, creating efficiencies, and often they open doors to new supply channels and new markets, he said.
“Private equity doesn’t just bring dollars. It brings expertise and knowledge, and that’s the thing that, I think, is often missed in the discussion,” LaBranche said. “It’s not just the financial capital but the intellectual capital and the relationships and being able to connect those companies that they are investing in with supply chains and marketplaces and partners that they might not have been able to access otherwise.”
There are exceptions to the general trend, however.
In the Grand Rapids area, for instance, jobs at private capital-backed companies declined 49.1 percent from 2000 to 2010, compared to a decline of 9.9 percent for all area businesses.
The Muskegon area also contrasted the general statewide trend as private capital-backed companies experienced job and sales declines from 2006-2010 at a much deeper rate than all businesses in the market. Job losses in the Holland-Grand Haven area from 2000-2010 for companies backed with private capital also far outpaced those at all companies in the area.
The ACG data does not specify exactly why those markets posted those results, other than a general explanation such as the data for the Grand Rapids-Wyoming area is “due to establishments that decreased during this period.”
The contrasts to the statewide data could reflect business failures in individual markets and serves as a reminder of the inherently risky nature of private equity, LaBranche said. Because of the smaller sample size, negative results for one or two large companies can skew results for an individual market, he said.
“Private equity is a risky business,” LaBranche said. “These firms are taking risks when they buy a company, and sometimes those risks don’t pay off and they wind up closing those businesses and those businesses lose money.”
The ACG compiled the data and issued its report to begin altering what it sees as the long-held negative reputation of private equity investors among outsiders.
“A lot of the discussion in the media and political circles would have you believe that private capital strips and flips and destroys companies. In reality, the opposite is true,” LaBranche said. “We wanted to change the conversation.”
Most of the private equity investments in the U.S. go to middle-market companies that were family-owned and sold when the founder retired. The investments were not generally used to buy large, global corporations.
In a presentation at an event for institutional investors hosted by Crain’s Detroit Business and Pensions & Investments last November, Ken Mehlman, who now oversees global external affairs for the New York-based private equity firm KKR & Co. LP, said investors also need to be intimately familiar with companies before making an investment. They need to understand the labor-management relationship, the regulatory environment the company faces, the supply chain relationships and how the company treats the environment.
As MiBiz previously reported, KKR uses organizations like Transparency International and the United Nations Principles for Responsible Investment as guidelines when it vets potential companies. It also pays particular attention to labor and environmental practices at the companies and their suppliers, Mehlman said. The firm trains purchasing officers at investment companies on the protocols of business responsibility and how to look for potential corruption or labor issues in the supply chain.
“If you don’t know those things, you’re going to make a bad investment both financially and reputationally,” he said. “So today, we think it’s very important for good investors to not only create alignment around how a company is structured, how management works, and how operations work, but finally the stakeholders — not just the shareholders — impacted by the investment.”
Far too much of the public view of private equity is framed by political rhetoric and pop culture references, such as the signature line “greed is good” by the Gordon Gekko character played by actor Michael Douglas in the 1987 movie “Wall Street,” LaBranche said.
Many people, when they think of private equity, have images of “robber barons” of the late 19th and early 20th centuries, the leveraged buyouts of the 1980s or ultra-funds that buy companies “dirt cheap,” shut them down and liquidate the assets, he said.
Those images are counter to reality, Pollock said.
“Are there players out there that do that? Certainly, there are. But again, on the whole that’s not what private equity is,” Pollock said. “It’s about investing in businesses with good management teams (and) getting them solid business tools to grow their business over time, which drives employment, profit and a return on investment.”
Pollock and LaBranche say the industry needs to do more to explain itself to create a better public understanding of how private equity works. They point to how the venture capital industry over the last several years has been more talkative and public about transactions and about its role in the economy.
“Venture capital discovered the value in being more public and talking about their success. Private equity is just beginning to catch on that public views and cultural understanding of their industry do have an effect on their business,” LaBranche said. “We’ve got to get out from under the ‘private’ and be a little more open and transparent about what we do and why it’s important.
“If you don’t tell your stories, somebody else will tell the story for you.”