And let me give you two real-world examples to illustrate this analogy. When I was in college, I was looking for a "parts car" to get parts to repair my pizza delivery car which I had wrecked (not while delivering pizzas, fortunately). I found one in the "Pennysaver" (the Craigslist of the day, in paper format) for $100. I went to look at it. It had been hit in the back and the rear fender was pushed into the rear tire, which was shredded. I gave the guy $100 and he signed over the title.
"Are you gonna get a tow truck to haul it away?" he asked. "No, " I replied, "I'll just drive it home." "But it ain't driveable!" he exclaimed. He then watched in wonderment when I pried open the trunk, took out the bumper jack (remember those?) and stuck it in the wheel well and started jacking until the wheel well started to spread apart, freeing the shredded tire. I put the spare tire on (back in the days of full-sized spares!) and then started it up. "Runs fine," I said.
"Sheeet!" he moaned, "If I'da known you coulda done that, I wouldna sold it!" And I just replied, "Well, I'll sell it back to you for $200 if you want it - for my labor and expertise and all." He was not happy. I drove the car for a couple of months and then took it apart to repair the remains of my other car, building a welded-together frankencar.
The point is, I saw opportunity where other people saw disaster. He thought the car was "totaled" and could only be moved with a tow truck. I saw a car that could be made to run with little effort and had some residual parts value. Not only did I use the parts (doors, etc) to rebuild my old car, I sold over $150 in parts off the car, which offset my purchase price.
Now multiply this times a million or a billion and you have private equity.
Or take one of my foreclosure purchases. We bought a duplex that the previous owner walked away from. He had mortgaged it for $140,000 to pay for remodeling, and then realized, when the market tanked, that he owed more money on the house than it was worth. At the same time, he came into an inheritance of another house (his Father's) so he made the strategic (in his mind) decision to walk away from the mortgage on the duplex and move into his Father's house.
He saw no value in this duplex, which he thought would never be worth what he had invested in it. I bought it for $95,000, completed the renovation he had started, and rented it out at a modest profit. A decade later, we sold it for nearly $300,000. Does this make me "evil" for seeing value where others saw only unrecoverable losses? Do I owe the guy who lost the house part of the profits from selling it? Bear in mind that when I bought it, I though that maybe a decade later I might make enough money to buy a car - the market going berserk never entered my mind. I used private capital (much of it borrowed) to invest in an undervalued asset and turned it around.
And if this is evil because it is private equity, is public equity just as evil? Bear in mind that Warren Buffet uses public equity in the form of his Berkshire Hathaway Corporation (of which I am a Class-B shareholder) to buy undervalued companies and then turn them around. Is he "evil" for seeing value where others see only losses? For seeing profit where others only fear?
Another supposed outrage which parallels the mortgage crises is how private equity firms are buying up public utilities such as water works and sewage treatment plants. Again, these firms didn't put a gun to the head of local municipalities and force them to sign over ownership rights. Rather, these municipalities recognized that they had mismanaged their public utilities for decades and could no longer operate them. Piping repairs were deferred or ignored in favor of paying public (union) employees more and more - as well as promising hefty pensions. Taxpayers "revolted" rather than pay more taxes or higher water bills. Eventually the piper had to be paid and the New York Times wants to make it out like private equity is somehow to blame for a New Jersey town neglecting its water pipes.
It is not clear from the New York Times series where they are going with this. Are they saying that private equity should be outlawed? (good luck with that!) Or merely heavily regulated (if so, how?). Or are they just trying to fan the flames of discontent to the drumbeat of "income inequality"? I think the latter. We are told that it is bad that some people have more money that us, simply because it is bad. Never mind that the poorest person in the USA lives like a king compared to world income standards - we should judge our self-worth and the "fairness" of our economic system by comparing the wealthiest to the poorest.
But what does it mean to have all this mega-wealth anyway? And that is the topic of my next posting.