Regular readers of this space know that I support a change to the tax treatment of carried interest. You also know that I strongly oppose many of the fees that buyout firms suck out of their portfolio companies, including deal closing fees and management agreement termination fees. In other words, my non-pandering bona fides are established and well-distributed.
I put this out there as a precursor to the following: I am extraordinarily disappointed by the short documentary film released today by Brave New Films, which is kicking off a campaign called “The War on Greed” (Watch film after jump). I have liked much of director Robert Greenwald’s past work, but find this film grossly unfair to the private equity industry as a whole, and to Henry Kravis in particular. This would be bad enough on its own, but is particularly galling because the intended audience is people who currently know little to nothing about private equity. It is, in short, agitprop.
The film tries to be a tongue-and-cheek look at income inequality, and juxtaposes Henry Kravis’ many mansions against the more modest surroundings of a school teacher, and other less wealthy individuals. I also takes Kravis’ 2006 income – a speculative $450 million figure published by Forbes – and breaks down how he makes in an hour or day what many people make in a year.
“I want people to first understand the size and scope of private equity, before getting into more substantive matters,” Greenwald told me last night. “So we decided we were going to focus on Kravis as one of the most egregious examples of economic disparity.”
And that would have been fine, if that was all Greenwald did. A bit juvenile, to be certain, but fine. My problem is that the film also tries to provide some “substantive” context, in a simplistic and damning definition of private equity. Here it is:
Kravis and KKR, like all of the private equity giants, take over public companies using primarily borrowed money. To pay off this debt, they then sell off the assets of the companies, fire thousands of workers and radically cut benefits of the remaining employees. It is the same product, in the same building with the same customers as before.
First, note the inherent contradiction. PE firms strip companies by selling off assets, but it’s the “same product in the same building with the same customers.” But leave that aside for a moment.
But the bigger issue is that Greenwald seems stuck in the 1980s and early 1990s. Sure some firms still follow a buy/strip/flip strategy in specific situations, but it is hardly the rule anymore. Greenwald says he’s only talking about the biggest buyouts shops, acknowledging that the second-tier often follows a buy-and-build strategy. But this still isn’t accurate. Remember yesterday, when I wrote about Travelport? Sure I objected to the dividend recap, but Blackstone has actually grown the company by adding Worldspan. And Travelport still holds a controlling interest in Orbitz, which it hardly “stripped.”
I asked Greenwald to name me some recent examples where KKR has followed the buy/strip/flip model, and he cited three: Dollar General, First Data and Nielson Company. Not to get too bogged down into details, but the first two deals only closed a few months ago. Way too early to make judgments, even with evidence of initial layoffs. VNU might be a better case – more than 4,000 layoffs and some asset sales to 3i – but again we’re talking about a company KKR has owned for less than two years.
Even if I grant Greenwald legitimacy to each example, his definition of PE fails to point out that some PE-backed firms add employees and increase value for the shareholders – which happen to be public pensioners, universities and charitable foundations. I’m not saying that PE is a benevolent force, but can we get some balance here. Ditto for Kravis, who has worked hard to fund and champion to New York City Investment Fund, which provides capital to both nonprofit and for-profit enterprises that often are based in struggling urban neighborhoods. Again, not saying he’s a saint. But Greenwald’s piece paints him as an uncaring sinner, without a mitigating word.
There are real issues to be dealt with as it relates to private equity, regulation, worker’s rights and equity. The “War on Greed” has not yet begun to seriously address any of them.