Private equity's impact on job creation has come to forefront over the last week of the Republican presidential candidate primaries, as critics took aim at Mitt Romney's Bain Capital career.
Never in my memory have we had a political issue that so distorts reality in favor of emotion in an effort to gain office on an issue that has nothing to do with economic policy in this country.
Private equity is a non-issue because capitalism is about generating returns for capital. If you work outside of government, that is your mission.
I have made a career analyzing investments in high yield companies. One reason high yield companies exist is that leverage and running companies more efficiently generated higher returns on capital.
The development of this market created jobs in the financial sector to manage this asset class. The higher returns on capital flowed to pension plans and insurance companies, which supported workers' pensions and kept insurance costs down.
Yes, companies were seemingly looted with extraordinary fees flowing to the management companies, but those decisions were not made in the name of destroying jobs. They were made because the bond covenants allowed the cash to flow and because people believed that the company could support the debt. There was no desire to specifically create or destroy jobs, only to generate a return on capital.
To decide whether such activity is good or bad policy is beyond the role of government and the voters. It is capitalism. If private equity had not bought any specific company, it might have gone bankrupt anyway because it was underperforming. Because private equity bought an underperforming company, they might have preserved jobs that would otherwise have disappeared. Underperforming companies need to reduce their workforce to find a level of activity that is profitable. Then they can seek to grow and add productive employment.
Thomas J. White is a former executive vice president and head of credit at Dwight Asset Management and has held senior portfolio and risk management positions at MetLife and J.P. Morgan & Co.