The private equity industry as a whole took a big hit earlier this week with a story that went viral about bankrupt mattress maker Simmons Bedding.
The Sunday edition of the New York Times detailed the alleged damage done to the company from its numerous private equity owners, including Thomas H Lee Partners, that all together, the newspaper estimated, have made about $750 million in profits from Simmons.
The article, which also had an accompanying video, informed readers that this particular case study is indicative of a trend in corporate America: “Every step along the way, the buyers put Simmons deeper into debt. The financiers borrowed more and more money to pay ever higher prices for the company, enabling each previous owner to cash out profitably.”
Social networking site Twitter, for example, starting buzzing with tweets linking to the article with accompanying commentary like this tweet: “If any of ya'll in the business world don't understand private equity, this recent NYT video series is a must watch.”
The problem, of course, is saying the Simmons saga is representative of private equity unfairly vilifies an entire industry, which numerous studies show, on the whole, enhances value for portfolio companies and invigorates financial markets.
No matter which way you look at it, the Simmons outcome certainly isn't pretty. After being owned by Wesray Capital, Merrill Lynch Capital Partners, Investcorp, Fenway Capital Partners and finally THL, the company, which filed for bankruptcy in late September, has a $1.3 billion debt load, up from its debt obligations of $164 million in 1991.
THL co-president Scott Schoen defended the firm's stewardship of Simmons. “We think the work we had done had positioned the company for us to reap the financial rewards that this economic cycle has taken away,” he told the NYT. He added, however, “We are clearly disappointed in the outcome of this investment. Make no bones about it.”
Deal gone wrong or not, the Simmons example shouldn’t stand to represent the entire private equity industry, and it’s incumbent on firms to get the word out about the good work they are doing.
Two years ago, when private equity was under increased scrutiny from labour unions and US politicians, it did make more of an effort to highlight how it betters conditions for most companies.
For example, Jon Luther, chief executive of private equity-owned Dunkin’ Brands, appeared before the US House Financial Services Committee to explain that the financing expertise of the company’s private equity owners – THL, Bain Capital and the Carlyle Group – had led to better deals for its franchisees. The resulting increased franchise growth would likely create more than 250,000 new jobs in the next 10 to 15 years at new Baskin Robins and Dunkin’ Donuts stores, he said.
Private equity professionals and portfolio companies must continue to make such sentiments and facts public – and not just when they are called to testify on Capitol Hill.
The need for the global buyout industry to better tell its own story and be less opaque is a theme PEO has been banging on about for some time. US GPs in particular – by virtue of the fact they have never established a US private equity association – are missing a grand opportunity to demonstrate the industry is nuanced and segmented, to shout its successes, explain failures and frame related issues.
As a similar editorial argued back in April 2008, they are underestimating the power of having one voice, be it on Capitol Hill or in America's living rooms.