Ken Mehlman of KKR talks about how private equity benefits society. This is a great short blurb on private equity for those of you who don’t know much about it. Transcript below:
Question: How does private equity benefit society?
Ken Mehlman: Private equity started off as a solution to those challenges that American companies had back in the mid-70’s. And the challenge that a lot of companies had was that the management of those companies thought of themselves separately from how the owners of companies might think. They got paid whether the company did well or didn't do well. They didn’t have skin in the game. Also a problem in a lot of companies was the fact that they thought short-term and not long-term, they thought quarter to quarter. And because they depended for their capital on public markets, what their stock traded at each quarter was critically important. What private equity does is it tries to deal with those and some other problems too. First, when we buy a company, the management of that company and the board of that company are paid like we are the owners of that company. We’re paid on whether it grows over the long-term, not the short-term. So if you’re the CEO, you’re not going to be getting around the country on a company plane, regardless of if the company is doing well, because that’s your money that you’re spending, and your not being efficient with respect too. And that’s really important. So one, you deal with what some might call the agency problem, you make company managers think like owners, not simply like agents.
Ken Mehlman: The second thing that we are able to do, we own companies for an average of seven years. If your horizon is “how do you build a company over seven years? Not simply what’s the stock trading each day? Then, you’re a lot more likely to focus on things like, “how do I grow into a new market, even if that’s going to cost us something over the initial period?” You think about how do you expand, for example, cap x. How do you make companies think more long term than short term?
The second area that’s important for private equity is, if you think about it, the people that invest in private equity. We look at our recent funds. There are 9 million retirees, a lot of them were once teachers, they were once firemen or police. They’re folks that have worked very hard all of their lives. And because their state pension fund chose to invest in private equity, their returns are better, and their retirement is more secure. And what that means, is that the communities in which the operate, which otherwise might have to divert resources away from public services or education to pay for the retirement, they don’t have to.
