The Case for Change

Following the 2007-2008 recession, in staving off a total crash, the economy and some stop gap solutions were handed off from one administration to the next.  We still lost Lehman Brothers, doesn’t seem like such a big deal now, does it?  The bounce back to normal has been very slow, and the argument now is what should be done going forward and should a new administration take over the reins.  Recently David Brooks, the rather conservative commentator for the New York Times recently made a good case for a Romney administration based on the underlying tenets of Private Equity.  But can a private sector approach be made to solve the current problems with the US economy?

Brooks argues that a Private Equity approach with a focus on change should be a case for Romney.  Romney seems to be focusing on the Venture Capital side of Bain for his model on how to achieve job growth. Confusingly for the Romney story, Bain Capital was involved in both sectors.

First let us distinguish between Private Equity firms (“PEFs”) and Venture Capital firms (“VCFs”).  PEFs address the market for investment in underperforming companies, usually mature, with returns pegged to economies of scale, cost cutting, and leverage to achieve an appropriate risk/return.  It has been shown recently that this activity has a net neutral effect on overall employment.

VCFs address the market for newer growth companies in need of funds to access customers, build staff and other resources, and fund working capital needs.   The risk here is higher, as many of these investments will fail, and the resulting expected return is higher.  Here “hiring” growth can be explosive, by some measures netting some 2% of total US GDP.

If Romney were to tout his PEF experience, this is not an area to site job growth, rather change management.  This might be the smarter play.  If he continues to tout his VCF experience, citing some 100,000 in job growth, then is he planning a targeted investment strategy in young companies?  Isn’t this what the Communists do?  I think the message is confused, but maybe Brooks has the right approach.

Or maybe a more appropriate comparison should be made to the Romney tenure running Massachusetts.  But that’s for another post.

Rob Cannon is a frequent guest contributor at SMBmatters and is a principal at Cannonomics.  He is a virtual CFO for hire.