Friday, 17 August 2012
FT investigation: Romney’s take-off
The fascinating bit here is private equity is doing exactly the opposite that Mitt (as well as David Cameron) is prophesying in his campaign: borrowing heavily on the short term for a future gain.
No private equity deal would work through "austerity" or no business could achieve the stellar performance of private equity stars if it were to cut down their debts and their expenditure only. No private equity deal would invest, the time horizon of its model is too short. Borrow loads of money, incentivize management on cost-cutting and show potential buyers a face-lifted future cash flow (they may hope to repeat the trick, in a Ponzi, or find-a-bigger-idiot scheme). Please note that nothing fundamental changed in the business, it's only been "streamlined", or the "flab has been ruthlessly eliminated". Streamlining the business does not come through innovation, superior marketing or processed-driven increased productivity (if you had 100 employees and fire 40 but you only lose 20% of sales while increase your profits by 34% you obviously have some short term productivity gains by over-working the remaining employees). It comes through milking the inside while improving the packaging to sell a fake "product" at a massive profit. Winners: managers and private owners of equity. Losers: fired employees, remaining employees and consumers.
Now back to the US borrowing. Why is Mitt so anti-leverage? All he needs to do is to get those fabulous returns from otherwise really cheap borrowing, right? Borrow cheaply today, spin the money, pay back debt and make a profit. Come on Mitt, do it for us!