The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything (Bloomberg)

by Jason Kelly

  Coulter keeps a sheet of paper in his office where he jots down important elements about the firm’s culture and he and Bonderman give speeches, sometimes via video, to new hires that join the firm. “You instill the culture on long airplane flights,” Coulter said. “You tell stories and legends and model the behavior.” He noted that a small firm with a lot of money at its disposal places great trust in the people it hires. “If somebody some place makes a bad decision, it could bring the whole place down.”

  When talking about the firm, TPG partners are quick to mention Coulter’s “No assholes” rule. Another way Coulter and Bonderman said they stressed togetherness and transparency is open meetings: any person at any level of the firm can register to listen in and participate in any investment committee meeting across TPG’s funds. “We want to let the young people talk and have a voice,” Bonderman said.

  TPG faces a variation on a couple of themes when it comes to succession. Unlike the firms where the founders are all in their sixties or above, Coulter’s age means there’s less discussion about who will replace the men who started it all. Bonderman, like Schwarzman at Blackstone, has embraced some of the statesman-like trappings of the job. “He’s an artist and this is his palette,” Coslet said. “He’s at a point where he’s getting an invitation from Vladimir Putin to advise on how Russia should think about investing.”

  Beyond the founders, Coslet is a key voice in the direction of the firm by virtue of chairing the investment committee and the private-equity management committee, as well as a tenure that matches the founders’. Then there’s Davis, the fellow Bass alumnus who reunited with Coulter and Bonderman after founding Colony. He’s charged now with building up the firm’s real estate efforts and has the trust of the founders dating back more than two decades to the Bass experience. Another more recent senior addition to the firm is Alan Waxman, a former Goldman executive who joined TPG in 2009 and helps run the special situations group. Waxman set out to raise TPG’s first dedicated distressed debt fund in 2011, and his profile is notable given that he’s not a leveraged buyout guy in the classic sense.

  That serves to underscore how TPG, though less broadly diversified than some of its larger peers, responded to the same forces of the market, and its investors, by reaching beyond takeovers. “We’ll all have a cafeteria,” Clive Bode said. “You can take the soup, but not the entrée. Private equity, energy, real estate, pure credit. It’s all going to be there. PE’s not going to die, but in the overall structure, it will be smaller.”

  Bonderman’s contribution was set early on, from the Continental deal and the ethos he cultivated at Bass. His combination of intellectual horsepower, appetite for risk, and appreciation for the eclectic are impossible to replicate in a single person. Coulter won’t find Bonderman’s like, even in his disciples, and it will be up to him to figure out what combination of people adds up to something resembling a Bonderman. To that end, TPG’s place in private equity’s future landscape rests squarely on Coulter and his ability to bottle the firm’s secret sauce, a blend of traditional investments with a heavy dose of deals no one else will touch.

  Notes

  1. Devin Banerjee and Cristina Alesci, “Rubenstein Says Carlyle IPO Benefit Is Freeing Up Money to Give to Charity,” Bloomberg News, February 1, 2012.

  2. Jason Kelly and Will McSheehy, “TPG Sees Itself on ‘Tail End’ of Buyout IPO Parade,” Bloomberg News, December 11, 2007.

  3. Jason Kelly, “Bonderman Says TPG Isn’t Planning to Go Public Like Rivals,” Bloomberg News, February 1, 2012.

  4. Adam Bryant, “Deal Maker Takes Aim at Skies,” New York Times, November 11, 1992. www.nytimes.com/1992/11/11/business/deal-maker-takes-aim-at-skies.html?pagewanted=all&src=pm

  Chapter 8

  Hundreds and Billions

  Workers and Owners

  The numbers speak for themselves. U.S.-based private-equity firms employ 8.1 million people by one estimate,1 out of a total workforce of roughly 154 million. That’s one in 20 workers, meaning at a cocktail party, kegger, or family reunion, there’s a good chance at least one person ultimately works for private equity.

  KKR and Blackstone together, through the companies they own, count more than 1.5 million workers between them, based on data they post on their websites. That makes the firms huge employers on a global scale. Walmart had about 2.2 million employees at the end of 2012, according to Bloomberg data.

  To be clear, all of the people who work at Blackstone companies don’t wear Blackstone name tags or even get a paycheck signed by Steve Schwarzman. The firms, and especially their lobbyists in Washington, have gone to great lengths to point out that a ride operator at Legoland has no direct connection to a housekeeper at Hilton. That’s especially important in the eyes of regulators and the government, who are rightly wary of situations where one company’s failure can have a domino effect. Were Legoland to struggle financially, it would have no impact on Hilton, despite their common ownership. Each company is technically owned by a distinct partnership created by Blackstone, a partnership that shares nothing other than a common owner.

  Still, any concentration of companies that have a lot of debt is worrisome to people who watched an overleveraged global financial system come to the brink of collapse in 2008 and 2009. When the subject of regulation was being debated in mid-2011, I talked with a senior investment advisor at the AFL-CIO named Heather Slavkin. “If we learned nothing from the financial crisis, highly leveraged opaque pools are breeding grounds for systemic risk,” she said.2

  And as demonstrated in the discussion around operations, controlling all those companies does make for an influential owner. Look at it another way. KKR companies together had annual revenues in 2010 of $210 billion. That’s more than $50 billion more than General Electric had that same year.

  Setting aside the pay of the founders and top executives of the firm, private equity is on average, a very lucrative business. The data are hard to come by; except for the small clutch of publicly traded firms, these are closely held partnerships. One researcher pegged the average cash earnings for a private-equity executive at $248,000 in 2011, a 6 percent increase from a year earlier.3 That’s roughly five times the median household income at the end of 2010 in the United States of $50,046, according to Bloomberg data.

  The dollars involved are at the root of private equity’s biggest issue: the perception, real or imagined, that they are making huge amounts of money on the backs of people who are paid a tremendous amount less. A similar gulf certainly exists between the top managers of publicly traded corporations and the vast majority of employees at those companies.

  In defending their record to me, and characterizing the public misperceptions of them as unfair, private-equity executives several times sought to draw a comparison between what they do and the chief executives of big companies like General Electric in terms of rationalizing what lines of business they should be in, how many employees they should have, and where geographically a company should expand or contract.

  What does separate private equity from a public company—and this is a key part of the pitch buyout managers give for their existence and the superiority of their business model—is the speed, and some would say the ferocity, with which they go about making those decisions. Because the clock is ticking on their investment from the moment they make it, they are highly motivated to do something, and do it fast.

  So in our journey following the money through the private-equity cycle, we arrive at another crucial, simple question that of course doesn’t have an easy answer: Should you be thrilled or terrified when private equity arrives on your company’s doorstep? More to the point, are you likely to lose your job?

  As a nerdy financial journalist, my first instinct is to retreat to the data, which bring a lack of clarity and ultimately disappointment. The most comprehensive study to date, updated in 2011, was conducted by Steven J. Davis, John Haltiwanger, Ron S. Jarmin, Josh Lerner, and Javier Miranda. Titled “Private Equity and Emp
loyment,” it comes to a maddening conclusion for those looking for an easy answer: It depends. Overall, the study says, private equity is neither a massive job creator nor a massive job destroyer.4

  The research drills deep into the companies it studies, taking into account not only employment for each company, but at each individual facility (plants, field offices, and so on). Several interesting nuggets emerge. The researchers were able to divide firms into three sectors—manufacturing, retail, and service—and the results are varied among those, with manufacturing coming out at essentially a wash. Service companies see some initial job growth in the first couple of years, then a slowdown. Retail companies experience the most dramatic overall job loss. The result “serves as a caution against painting with an overly broad brush when characterizing employment outcomes in the wake of private-equity buyouts,” the authors wrote.

  The findings about which sectors face the most job destruction in the wake of an LBO is particularly interesting. It may help explain the reputation that private equity has earned in the wider world. Public-to-private deals are ones involving a company that is listed on the New York Stock Exchange or other such stock market, and those comprise the vast majority of the biggest deals in history, from Caesars to Hilton to RJR. Firms in those types of transactions experienced job loss of 10 percent versus comparable companies. Those companies also experienced less job creation at what the researchers call “establishment births,” or the opening of new offices, factories, or branches. The authors summed it up: “Along with the high visibility of public-to-private deals, these results help to understand concerns about job loss related to private-equity buyouts.”5

  Here’s the interesting twist that underscores that finding: The data show the opposite result for private-to-private deals, or transactions where a buyout firm buys an already closely held company. There, employment grows by 10 percent during the first two years, a factor the authors chalk up to the buyers’ tendency to expand rapidly through acquisition.

  Perhaps not surprisingly, the study also found that disruption is almost guaranteed at companies that go through an LBO, and job losses occur disproportionately in the months immediately following the takeover. In other words, if you work for a company headed for a buyout, buckle up.

  Jobs have become a centerpiece question in the private equity industry in large part because one of their own is running for president: Bain Capital founder Mitt Romney. The former Massachusetts governor made the economy and job creation a centerpiece of his campaign, touting his skills honed in the private sector to win over voters.

  The Romney candidacy inserted private equity into the broader national conversation in an unprecedented way, as voters and the press began examining his personal and business record anew. A stream of stories told tales of Romney and Bain deals gone bad and focused mostly on a handful of companies, including American Pad & Paper, KB Toys, and Dade International, a medical company. Romney took a huge amount of criticism for each of these deals, largely because they portrayed him and Bain as overseeing a system whereby they essentially guaranteed they and their investors got paid regardless of what happened to the company.

  Political opponents seized on that narrative. Former U.S. House Speaker Newt Gingrich’s campaign experienced a surge in late 2011 as he took aim at Romney on a variety of fronts, including his Bain tenure. After Romney suggested that Gingrich return the $1.6 million he was paid as a consultant to mortgage provider Freddie Mac, Gingrich parried: “I would just say that if Governor Romney would like to give back all the money he’s earned from bankrupting companies and laying off employees over his years at Bain that I would be glad to then listen to him.”6

  During that same period, Romney’s campaign got a taste of what they’d face during the general election, when President Obama’s surrogates took aim at his private-equity career, as well. David Axelrod, the president’s chief campaign strategist, took aim at Romney within days of Gingrich’s comment. Keying off an ill-advised debate quip where Romney offered to bet Texas Governor Rick Perry $10,000, Axelrod said: “What was startling to me was that generally his practice has been to bet other people’s money, not his own.” He continued: “That’s the way he ran his leveraged buyout business. They closed down hundreds of factories. They outsourced thousands of jobs. They took a lot of companies to bankruptcy and made a fortune off of those bankruptcies.”7

  One unhappy former worker at a company bought by Bain was credited in part with Romney’s failing to unseat the late U.S. Senator Edward Kennedy in 1994. The most potent symbol then was a man named Randy Johnson, who worked at a factory that had been acquired by Bain-owned American Pad & Paper. Johnson was among those who lost his job when the factory was shuttered.

  The American Pad & Paper saga became part of an advertising campaign against Romney in the Senate campaign and is credited in part for leading to Romney’s defeat by the incumbent. Johnson himself traveled to Massachusetts to campaign against Romney. Johnson, who subsequently relocated to Pittsburgh and now is a member of the United Steelworkers, re-emerged in late 2011 to again campaign against Romney. In an interview with ABC News, he framed the question in stark terms: “I was stunned by the amount of wealth he created in a short amount of time,” Johnson said. “He definitely got the money, but was it the right thing to do? Was it the moral thing to do with workers and people?”8

  In late 2011, as the nomination contest was narrowing, the New York Times analyzed how Romney had continued to earn money from Bain deals, even after his departure in 1999. The article cited layoffs at companies including KB Toys, a retailer that eventually went bankrupt, as well as job cuts at Clear Channel Communications, the broadcast company Bain and Thomas H. Lee Partners bought in 2007. Romney’s campaign repeatedly asserted that during his time at Bain, the firm created more than 100,000 jobs through the companies it invested in, including Domino’s and Staples. After months of staying mostly quiet, Bain sent a letter to its investors in March 2012 that in part addressed the jobs issue. “While experts agree that calculating net job growth across a portfolio of companies is difficult to do with precision, the revenue growth in our companies has created hundreds of thousands of jobs over our 28-year history,” the partners wrote.9 The firm said the companies it had invested in had increased revenue by more than $105 billion.

  The jobs question had broader consequences and was the subject of consternation in the halls of private-equity firms beyond Bain. Top executives within Blackstone, Carlyle, and KKR spoke repeatedly about how a Romney nomination would manifest itself for the industry in the context of a nasty, well-financed presidential campaign. The Private Equity Growth Capital Council and the individual firms scrambled to gather employment data to try and stem the inevitable flow of stories that portrayed private equity as job destroyers.

  There was a certain fatalism in many of the discussions and a number of them conveyed that to me when the topic came up, which it inevitably did during any meaningful discussion of what was happening in the industry. Most of the firms were assembling information from their own portfolios to try and distinguish themselves, either from Romney, or Bain, or their peers, all while understanding that they would help the broader business put on a brave face.

  The reality, they said, was that they needed to prepare themselves and, more importantly, their investors, for a storm that was coming. It’s hard to imagine any limited partner would be surprised to learn that Romney once worked in private equity. It’s also hard to imagine that having Mitt Romney as a presidential nominee will have an actual impact on deals getting done. Capitalism tends to trump politics, especially once the stump speeches cease and the hot lights of the campaign dim. One private-equity executive said to me, with a sigh, when I brought up the topic of Romney, “This too shall pass.”

  But the Romney candidacy and the inevitable flood of questions from voters and reporters, along with the dozens and dozens of political ads, do lead to another larger private-equity question: Should the industry, or
individual firms, ultimately be judged on how many jobs they create or destroy?

  In the context of Romney drawing a line between his private-equity experience and skill growing employment, one sentiment I heard repeatedly from managers in the buyout business was: We never said we were out to create jobs. Steve Murray, the CEO of CCMP Capital, told me jobs could be a by-product of good investing. “The payoff on growing the business is better than the payoff from cutting it,” he said. “Adding jobs is usually in our interest, but I don’t think private equity alone can solve the overall unemployment issue.”

  It’s an idea that some who’ve studied the industry agree with. Oliver Gottschalg, a professor at HEC in Paris, told me: “It shouldn’t be based exclusively on jobs. For me the question is whether the company is better positioned versus its competitors. That’s what will drive employment in the longer-term as well.” He’s far from an industry cheerleader and is among those pushing for more data to actually prove, or disprove, a lot of the things that people assume about private equity. In his estimation, private equity has an easy analogy.

  “I see it as a fitness camp. You do a few things that may not be fun while you’re doing it, but beneficial in the long term,” he says. Some cases, he contends, are beyond saving. “For some it’s beneficial. For some the fitness camp was inappropriate or hopeless.”

  Gottschalg circles back to the lack of data. It points largely to the immaturity, and potentially the arrogance, of the industry and the individual firms. For years they took incoming fire around their activities without responding and developed a reputation as “strip and flip” artists. Yet they never produced any evidence to the contrary, which looked to those on the outside like at best, pleading the Fifth Amendment—invoking the right not to incriminate one’s self.