Was in some conversations with many people yesterday. One of the interesting tidbits of information that I received was this fact, 1% of the companies in the US create 40% of the jobs. That is a meaningful statistic. The conventional wisdom is that small business is a huge job creator in America. Small business does create a lot of jobs, but the heavy lifting is done by the 1%. What we need to do is fix current policy and create new policy that incentivizes businesses to become part of the 1%.
One incentive to creating jobs and expanding business is the trade off between risk/reward. In the past four years, over regulation and uncertainty are creating unfavorable risk/reward ratios when it comes to expanding businesses, or investing in new businesses.
If you have been paying attention to the political campaigns, one thing you have heard is that Bain Capital was a job killer. One side would have you believe Bain, and Private Equity companies like Bain, are bloodthirsty capitalist pigs that eliminate jobs and take businesses overseas. In some of my conversations yesterday I learned more about Bain’s business.
One of the first lessons you learn in business school is to find a market niche and exploit it. For example, in the food industry, we have market segmentation big time. McDonald’s, Applebee’s, and Morton’s are all restaurant chains. But they don’t have the same target market.
It’s the same with private equity(PE). Different PE firms target different markets. Some even specialize in one market segment, like only medical companies. In Bain’s case, they specialized in taking over companies that were going out of business. Because they had a cadre of consultants that specialized in turning around troubled businesses, they developed an investing strategy that found horribly run businesses. Then, they would get in and get their hands dirty, using their consultant cadre and prior experience to change the business so it would be successful.
Absent Bain, these companies would have gone out of business. Bain didn’t eliminate jobs-they saved or created new jobs. Sometimes, they had to take jobs to China. But if they didn’t, the entire company would have been dead. Is it better to have companies go out of business, or create value and survive?
Bain took a massive amount of risk because not only did they invest their time, but they also invested millions of their own capital in the businesses. They were on the hook and there was only two outcomes, success or failure. Because of the risk they took, success was magnified.
That’s the truth on Bain. It’s really the truth for a lot of private equity firms. What they do as far as job creation depends on the industry. If they take over a steel mill, odds are great jobs will be eliminated because of automation. If they take over a department store, the odds are thousands of jobs will be created because of all the workers necessary to run a successful department store. The strategy depends on the individual business and the market niche.
The goal of most private equity firms is to get their firm into the 1%. Because if you are creating jobs at that pace, odds are you are adding a lot of value into the economy, and back to the private equity firm that took risk and invested. Nothing wrong with that. It’s America, and it’s capitalism.