With Mitt Romney at the top of a heated Republican primary race, there is a renewed focus on his tenure as the head of Bain Capital, and, as the democratic opposition is want to point out, his leadership over the loss of hundreds or thousands of jobs through company liquidations. These ad hominem attacks on his record at Bain have only served to further cloud the image of the private equity industry and fueling the perception that they don’t create value. Meanwhile, venture capitalists are seen as the knights on white horses in comparison. As Steven Davidoff writes at DealBook, “Venture capital is viewed as a creative industry, while the world considers private equity as finance, money men who do not create.”
His article suggests that an entrenched clash of cultures exist between the two industries, but that the knock against
private equity firms may be undeserved. Without taking anything away from the accomplishments of venture capital, he points out that private equity firms have made substantial contributions to business expansion, albeit with an emphasis on financing strategies versus the more direct operational strategies of VCs.
Steve Klinsky, chairman of the Growth Capital Committee arm of the Private Equity Growth Capital Council, jumps to the his industry’s defense with a shining report by Ernst & Young finding that, based on 158 buyouts completed in 2008 and 2009, “private equity investors created lasting value that outperformed public company benchmarks across comparable sectors and geographies.” He points to additional evidence that during the early years of private equity ownership, companies added jobs at rate higher than the industry average.
Some industry observers point to a convergence of activities between the two investment sectors that make them less distinguishable. While private equity firms still rely on financial engineering to move their companies forward, they are focusing more and more on identifying less established companies in which they can add some management value along the lines of a venture capital approach to investing. And more private equity firms are partnering with venture capital investors in early funding of disruptive technologies. Additionally, with lending on the decline, the PEs are focusing more on creating operational efficiencies for improving immediate cash flow and less on leverage.
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