Wharton responds to private equity criticism

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Wharton MBA Graduates Employed in Private Equity and Venture Capital

This interactive explores the trend of MBA employment in private equity and venture capital since 2001.

The field of private equity — under intense political attack in recent weeks — has a haven at the Wharton School.

Despite negative media attention on the topic and its connection to Republican candidate Mitt Romney, there is continued enthusiasm for it among Wharton students in the field.

Private-equity firms make high-risk, high-return investments — often by acquiring companies — making internal changes and reselling them for profit.

These firms can serve an important function, Wharton Dean Thomas Robertson said.

“A lot of private equity has the potential to make business more efficient,” he said. “That may actually save the business [and] can lead to an increase in economic welfare.”

What is important, Robertson added, is the mentality of private-equity firms and “whether they’re willing to invest rather than just downsize it, pull out the cash and sell it off.”

But that is precisely what former Massachusetts Gov. Romney is accused of doing as CEO of Bain Capital, a private-equity firm he helped found.

Attacks on Romney

Texas Gov. Rick Perry charged Romney with practicing “vulture capitalism,” and former Speaker of the House Newt Gingrich’s attacks on the number of employees Bain Capital fired played an important role in Romney’s loss in South Carolina.

But at Wharton, there exists a different view of private equity than the one being portrayed in campaign advertisements and in the national news media.

“What Mitt Romney and many private equity firms do … is not different from what Warren Buffett does,” said Daniel Pang, a first-year Wharton MBA student, referring to the chairman of Berkshire Hathaway, one of the world’s wealthiest people. “It’s pretty much just investing in companies.”

He defended Romney, saying the candidate “might be really wealthy, but he’s made exponentially more money for other people.”

Private equity at Wharton

Private equity is an increasingly popular career option for Wharton students, particularly MBA students. In 2001, 2.3 percent of MBA students accepted full-time job offers with companies in the industries of private equity or venture capital, a subcategory of private equity, according to that year’s MBA Career Report. By 2011, that figure had jumped to 7.65 percent.

“The industry grew a lot in the early 2000s,” Pang said. “It’s an attractive career path.”

In contrast to the general public, students, “especially in business schools like Wharton, get a more balanced opinion,” he added.

Undergraduates have a somewhat more difficult time breaking into the field. From 2006 to 2011, the percentage of undergraduates accepting full-time positions in which their job functions involved either private equity or venture capital declined slightly from 7.7 percent to 5 percent, according to Career Services.

“Certainly there is a lot of student interest in private equity, but it remains a tough area to get hired in immediately after an undergraduate program,” Senior Associate Director of Career Services Barbara Hewitt wrote in an email. “It is more typical for individuals to enter PE after working for a couple of years.”

Wharton plays a central role in the study of private equity. Aside from supplying the field with many of its graduates, the school has held the Wharton Private Equity & Venture Capital Conference for the past 17 years. This year’s conference, titled “Finding the Edge: Succeeding in a Turbulent and Increasingly Competitive Global Landscape,” will be held Feb. 3 at the Hyatt at the Bellevue.

‘High-risk transactions’

Pang is a co-manager of a panel at the conference on leveraged buyouts, which are a type of corporate takeover financed by borrowing.

Much of the criticism directed at Romney on the campaign trail comes for his use of leveraged buyouts as CEO.

At a debate in New Hampshire earlier this month, Gingrich criticized Romney’s career at Bain Capital, saying, “I’m not nearly as enamored of a Wall Street model where you can flip companies, you can go in and have leveraged buyouts, you can basically take out all the money, leaving behind the workers.”

Pang defended the effects of leveraged buyouts, saying that “these are high-risk transactions.”

“Sometimes, for a company to operate most efficiently … it’s not the worst thing if some people ended up losing their jobs,” he said. “A lot of times, that’s very beneficial for companies.”

Sanjay Banker, a principal at Bain Capital and 1996 Wharton graduate, will participate on the leveraged buyout panel at the conference,, Pang said. Banker and other speakers will discuss “opportunities and challenges in today’s turbulent marketplace,” according to the conference’s website.

For Banker and others at the conference, the recent negative press surrounding Romney and private equity are sure to be “pretty top of mind,” Pang said.

He added, “I’m sure Bain Capital feels [the pressure] more than other firms.”

Wharton MBA Graduates Employed in Private Equity and Venture Capital

Comments (5)

Mr. Pang’s “What Mitt Romney and many private equity firms do … is not different from what Warren Buffett does” may enhance future job prospects at PE firms, but as a factual matter it borders on embarassing.

It would be instructive if Mr. Pang can cite one example where Buffett’s Berkshire purchased any company in the last 25 years, and leveraged it up as Private Equity does, AND EXTRACTED “FEES” TO PAY BERKSHIRE UP FRONT!

Buffett has famously said he never buys companies with an “exit strategy” in mind. His is an “entrance strategy” meaning they have to be good enough to enter the Berkshire fold, and once in they are keepers.

Has Buffett made mistakes, yes but very rarely. In fact most Berkshire companies are considered best in breed!

Since the major criticism of Mr. Romney and his business procedures on the national stage has been that people lose jobs, should a PE firm include a retraining component and/or job placement service for those affected by this capitalistic ploy of “capital readjustments” as a benefit or public relations practice, those MBA students whom hold a more social consciousness attitude would be attracted.

It is unfortunate that more MBA students are encouraged to prepare to create new businesses after graduation. They could then contribute to adding jobs and growing our economy. It sounds as if competitive MBA programs are behind the curve, failing to adapt to the way things have changed (and the favorable low interest rate environment to which it has led). The world of business desperately needs forward thinking individuals particularly ones with high level finance backgrounds. Building wealth by aggregating or dismantling existing firms takes talent, but it cannot be compared to the the creative benefits society gleans when people who know what they are doing build new companies.

I doubt that Warren Buffett ever had any of his portfolio companies borrow a huge amount of cash which was then dividended to Berkshire Hathaway, leaving the company burdened in debt while cutting back on R&D, new product development, etc., to enhance reported earnings for an IPO. Naive!

Private equity is an asset management industry that manages a fund to invest with the purpose of creating a return on those investments. Investors in PE funds are public and private institutions, including STATE and CORPORATE pension funds that help provide retirement income for the so called “99%.” A PE fund’s number one responsibility is to its investors. Part of PE investing is taking risks by finding poorly operated and poorly managed businesses that are not efficiently utilizing their resources and infusing them with capital, cutting costs (many times jobs), in an attempt to resurrect that business. The strategy has a big bet risk reward associated with it, but it is one that has worked over a long history of capitalism. There are no guarantees it works, just like starting a company, and when it goes south, the PE fund has a RESPONSIBILITY TO ITS INVESTORS to MINIMIZE the amount of money lost in the transaction/business deal. Taking dividends to get their equity back and returns maximized is part of the process – you may not like it, but it isn’t some sort of unfair move in a large scale plane to destroy a company. The goal of those investments is to improve a company and benefit from that process financially. No PE shop goes into an investment with the goal of putting capital to work, and having it go south and needing to take dividends to ensure they get their capital back – it happens tho. Remember at the end of the day, the PE fund is responsible to it’s investors, which many forget or are ignorant of the fact that YOU are likely a beneficiary of a PE fund.

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