KPCC's business analyst Mark Lacter talks about how private equity impacts the Southland's economy and whether it's been a help or a hindrance.
Steve Julian: On Tuesdays we talk about the latest business stories with Mark Lacter. Mark, Mitt Romney, who tops the field of Republican presidential hopefuls, keeps taking criticism over running Bain Capital... how does private equity impact a local economy like ours?
Mark Lacter: Where do I start? It's what makes the local business world go round Steve - both for private equity firms in search of businesses and businesses in search of being sold. Actually, L.A. is the headquarters to some of the bigger names in private equity funding - one example is Colony Capital - it's run by the billionaire Tom Barrack, and focuses a lot on hotels and casinos (he's also recently become interested in bidding for the Dodgers). Another big local firm is Oaktree Capital - it's run by a billionaire named Howard Marks, and that firm has stakes in everything from radio stations to a British ice cream maker. Platinum Equity is operated by still another billionaire, a guy named Tom Gores. Platinum just sold off the San Diego Union-Tribune for more than $100 million; it had bought the newspaper just two years ago for
less than $50 million.
Julian: Not a bad return -
Lacter: …but that's the thing with private equity firms: Buy in at an undervalued price (often using borrowed money to make the purchase), make changes in the place - sometimes layoffs, sometimes restructuring, sometimes selling off assets – and at some point look to make a sale on the company. Some firms specialize in particular areas - Leonard Green & Partners, also based in L.A., focuses on the consumer sector (it has stakes in J. Crew, Del Taco, Petco, and a bunch of other large retailers). Some firms concentrate on manufacturers and wholesalers - companies that most of us wouldn't be familiar with because they don't directly deal with consumers. But let there be no doubt, this can be a very lucrative occupation.
Julian: So if I looked at a list of billionaires in the L.A. region, how often would the private equity world be represented?
Lacter: Quite often Steve, which is one reason this group has been vilified in some circles. It’s not just that these folks make enormous amounts of money - it's that they are taxed at a lower rate than they would be for ordinary income. President Obama has proposed eliminating that provision, which would mean billions of additional tax dollars, but obviously the private equity people aren’t happy. They say that being taxed at a higher tax rate doesn't reflect the kind of business they're in. And as we've seen, the debate has spread into the presidential campaign.
Julian: We sometimes think of private equity as bottom feeders.
Lacter: That’s right - investors moving in on a struggling business, they dismantle the pieces, and then sell them off at the highest price. Just like Gordon Gekko did. But it often doesn’t work that way. I’m reminded of the purchase last year of 99 Cents Only Stores, the big discount chain based in Commerce. It was bought by a big L.A. private equity firm called Ares Management, along with a Canadian pension fund. They paid $1.6 billion, and it's very unlikely that they did this deal with the idea of shutting down lots of stores and firing people.
Julian: On the contrary, the dollar stores have been doing very well haven't they?
Lacter: Yes they have, and so the game plan is likely to involve opening many more stores beyond California - and with it many more people being hired. At some point, they'll want to sell off the company at a nice profit - and that's where much of the criticism about these firms comes into play. But the criticism is really misplaced. That’s not a political judgment - what private equity firms do is take companies that are either poorly managed or undervalued and try to make them more attractive. Understand they're not doing it because they're nice guys - they're doing it to make money. It’s an essential part of business life - and like anything in business, sometimes it works and sometimes it doesn't.
Julian: Mark Lacter is a contributing writer for Los Angeles Magazine and writes the business blog at LA Observed.com.