The recent attention given to the private equity industry, due in large part to the upcoming November presidential election, has fostered an often lively debate about the utility of the industry for society. Some would have you believe that private equity is not good for the economy, but this claim is an outmoded notion unsupported by the facts. The truth is that private equity delivers the capital necessary for companies to compete, succeed, and grow -- driving significant economic benefits that can be felt across the U.S. economy.
The essence of the private equity business model is about long-term investments in companies, people, and ideas. Private equity firms raise money from investors such as public and private pension funds, university endowments, and charitable foundations to invest in underperforming or undervalued companies, called portfolio companies. Private equity managers work to increase the value of the companies they buy through capital investment and managerial expertise. They improve business strategy, purchase more efficient machinery, commercialize new technology, and expand product distribution in an effort to strengthen companies and create value. Many years after the initial investment, private equity firms look to sell portfolio companies at a price higher than they initially paid. If they are successful, the investors realize superior returns.
Over the past 10 years, 2,400 U.S.-based private equity firms that in one form or another ascribe to this business model invested more than $1.6 trillion in 15,200 U.S.-based companies. By investing in promising companies and those needing a turnaround, private equity has helped grow key sectors of the economy including manufacturing, technology, health care, energy, and retail. In 2011 alone, the private equity industry invested more than $150 billion in U.S. companies, creating jobs and driving economic growth. Investments flow through local communities, saving and creating jobs.
Today, private equity firms operate 14,800 U.S.-based companies, which employ 8.1 million people. These are companies located in every state, employing people in local communities around the country. Private equity is not "Wall Street." Firms that invest in private equity find and grow promising companies in all sectors of the economy and across the entire nation. The summary statistics only tell part of the story, and it is the real life stories that further demonstrate what private equity can do for companies.
The purchase of AxleTech International, a company based in Troy, Mich., with facilities in Wisconsin, Michigan, Illinois, France, and Brazil is one example of private equity investing in local communities. The firm was acquired by The Carlyle Group, a global alternative asset manager, in 2005. Working with their new private equity partners, AxleTech's management team successfully expanded the company's focus on the military market and the commercial aftermarket, while significantly increasing capital investment and executing three add-on acquisitions. This resulted in a doubling of worldwide production capacity from 2,300 to 4,600 axles per month. AxleTech doubled the number of people working for the firm from 450 to 900 people when owned by private equity. By the time it was sold, AxleTech had become the top supplier of planetary axles to the U.S. military and a key supplier to a growing global market.
Universal SmartComp partnered in 2008 with private equity firm The Riverside Co. to expand. Based in Washington, Pa., the company is a nationwide physical medicine network solution in the worker's compensation industry. The Riverside Co. provided Universal SmartComp with the growth capital and management guidance needed to expand operations. Universal SmartComp grew dramatically as a result of their partnership with private equity. Revenue increased from $35.4 million in 2007 to $163.8 million in 2011, and nearly tripled the number of employees from 80 employees in 2007 to 222 employees in 2011. Today, Universal SmartComp provides service to patients in all 50 states and Puerto Rico, and is among the 5,000 fastest-growing companies in the nation.
Detroit Medical Center, one of Detroit's leading health care providers and a nationally and regionally recognized medical system, was bought by a private-equity-owned health care company. Because of difficult financial markets in 2008-2009, DMC was seeking a buyer who would not only uphold DMC's long-standing tradition of clinical excellence, but also provide the capital necessary to expand and upgrade its facilities. As part of the acquisition, private equity committed to invest $850 million over five years to fund routine capital improvements and new capital projects, making it one of the largest investments in Detroit's history.
But who benefits from private equity investment returns? In short, the largest beneficiary of private equity returns are the millions of Americans who rely on pensions, college endowments, and other charitable foundations. The U.S. private equity industry provides financial security to millions of Americans around the country. They are our teachers, municipal workers, police officers, firefighters, and union members. Without the superior returns private equity provides, pension plans would be more expensive for local communities, already suffering from strained budgets.
While it may be politically convenient to attack private equity and growth capital firms, they are vital to the U.S. economy. Their investment creates and saves jobs, grows companies, and provides financial security for millions of retired Americans.
To learn more about private equity and growth capital investments, visit www.PrivateEquityAtWork.com.
Guest contributor Steve Judge is the president and CEO of the Private Equity Growth Capital Council based in Washington, D.C.