Modern Private Equity Investment Model Still Viable

LETTERSDECEMBER 5, 2008, 8:45 P.M. ET

Modern Private Equity Investment Model Still Viable

Your article "Making a Bundle on Mervyn's" (Marketplace, Nov. 24) presents a narrow view of private equity, seen through the prism of a single failed transaction. The Mervyn's story, as reported by the Journal, doesn't reflect the long-term investment approach of the overwhelming majority of modern private equity firms: a single-minded focus on operational improvements that enhance productivity and drive sustainable economic growth.

The modern private equity investment model aligns the interests of private equity owners and the companies they acquire by making companies stronger, more competitive and more valuable. Research supports this conclusion. Private equity-owned companies outperformed comparable publicly traded companies in terms of sales, capital investment and profitability, according to a study conducted for the European Union. A study released by the World Economic Forum found that private equity-owned companies are significantly more likely to pursue economically important innovations than companies that aren't owned by PE investors, often as a result of increased capital investment. The research also concluded that companies owned by private equity firms over a 20-year period defaulted at a rate substantially lower than that of all U.S. companies that issued bonds -- and much lower than companies that issued high-yield debt.

The S&P report you cited suggests that 53 of 86 S&P-rated companies that defaulted on debt obligations were somehow involved with private equity. The truth is that only 22 of those companies, or about 25%, actually were private-equity acquisitions. The rest involved minority private-equity investments, many in publicly raded companies, rescue financings where private-equity investors tried to save a troubled company and other strategic investments in which the private equity firms had no controlling interest.

The Mervyn's story is unfortunate, but the Journal is wrong to suggest that it defines an entire industry, an industry that has injected more than a quarter of a trillion dollars of investment capital into companies across the global economy.

Doug Lowenstein 

President 

Private Equity Council 

Washington