Friday Letter Badly needed job creation

As the US government forms partnerships with the private sector to boost employment and kick-start depressed regions, private equity fund managers have a chance to shine.  

Worries over slowing global growth sent markets sliding once again Thursday.

Analysts attributed the latest plunge in part to a fresh batch of depressing economic data in the US, where the S&P 500 fell 4.1 percent, the Nasdaq lost 4.6 percent and the Dow Jones Industrial average tumbled 3.8 percent.

Among the troubling figures was the US labour department’s disclosure that unemployment claims last week rose back above the 400,000 mark, a threshold economists say indicates a weak labour market.

Can private equity make it stronger? Blackstone’s president Tony James said last month the country’s unemployment rate could improve if Blackstone’s lead was followed: employment in the companies across its private equity portfolio increased by 7 percent in 2010, translating to about 23,000 new US jobs.

Barack Obama appears to be taking James’ message to heart, if not literally than at least in spirit. This week the president revealed an initiative aimed at creating more jobs in rural communities, including a series of conferences to match private equity and venture capital firms with start-ups.

Various federal agencies will also create capital marketing teams that pitch federal funding opportunities to private investors.

These initiatives follow on from the US Small Business Administration’s launch earlier this year of a $1 billion “Impact Investment Fund”, which collaborates with institutional investors to back private equity fund managers whose investments promote entrepreneurship in economically distressed US regions. Last month, a Michigan-focused mezzanine vehicle received funding to provide existing businesses with expansion capital.

Small steps they may be, but these are promising initiatives from an administration that in the past has been more inclined to regard private equity fund managers as asset-stripping profiteers benefitting from unfair tax breaks. They appear to recognise what GPs (and a number of studies) have long argued: that private equity firms can be important sources of capital and expertise which can help grow and strengthen companies and contribute to economic development.

The private equity industry certainly isn’t the end-all-and-be-all solution to America’s let alone the world’s economic woes. However, as Blackstone’s example illustrates, smart and operationally focused fund managers should be able to make a meaningful contribution – and perhaps even change a few negative perceptions about their trade in the process.