Today, May 31st, I was watching “The Squawk on the Street” which is a CNBC television show. One segment featured Jimmy Hoffa, President of the Teamsters Union, ranting about Bain Capital, private equity investment firms and Mitt Romney. The reporter mentioned that there was a bit of hypocrisy in his ranting because the president of the western portion of his Teamsters’ Union confirmed that the Teamsters had investments in private equity firms.
Private equity firm invest money to make money. The money invested comes from a variety of sources from individuals to unions. To many private citizens and unions, the investments represent their retirement funds so they can enjoy a prosperous retirement. The one thing investors don’t want to happen is their investments going to corporations that are not doing well because of poor management, inferior products, outdated processes, etc. Solyndra is a perfect example.
Since the whole purpose of investments is to make money, private equity firms may withdraw money from corporations that are sinking. They have a responsibility to their investors. Why pour money into a failing enterprise? Yes, people may lose their jobs but the business was probably going to fail anyway.
The money that is saved from poor investments goes to other enterprises that will make money. Profits then become a source of future jobs in those businesses that succeed. Even Warren Buffett only invests his money in companies that have sound fundamentals.
Private equity firms would quickly lose investors if they made poor investments. Can you imagine the Teamsters Union leaving their money with a private equity firm that lost them money especially since the money belongs to the union members? The word “equity” denotes part ownership so wouldn’t you want to be part-owner of a business that is making you money?