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A Few Thoughts on Capital Allocation

Last Sunday morning, I was making brunch while listening to political pundits on the major broadcast stations. Rather than the usual national and global update, it was mainly commentary about how Mitt Romney should address the attacks on his time at Bain Capital.

As a disclaimer: I do not currently know for whom I will vote in November and I am not necessarily advocating for Romney. Generally, politics disgust me. I try to stay out of the fray. Sometimes, however, I feel it is important to comment. This is one of those times.

I think there is a fundamental misunderstanding when you begin advocating that efficient capital allocation is a bad thing. Private equity and venture capital investors take enormous risks compared to other capital providers, such as banks. That is why private equity and venture capital investors typically expect higher rates of return — their ‘failure’ rate, or risk level, is comparatively higher.

Thankfully, the United States has a relatively stable government and business climate. We are fortunate that investors continue to believe the United States is a good place to allocate capital, especially growth capital. This allows companies to expand and provide livelihoods for employees and partners.

According to the most recent stats from the Bureau of Labor Statistics, the current US unemployment rate is 8.5%. That does not include another 2.5 million people who are considered marginally attached to the labor force. The US workforce is estimated at a total of 155 million. So, to put it another way, about 15.7 million people, or nearly 10.1% of our workforce, are looking for a job.

Corporations, banks and private equity and venture capital investors play an enormous role in creating jobs when they decide to invest capital to grow enterprises. Obviously, we need all of that we can get. If you do not believe me (or the stats above), maybe you haven’t spoken lately with your unemployed neighbor who used to frame houses, or the other one who used to install fiber optic cable, or the other one who used to be a foreman for a heavy highway construction firm or the other one who used to own a brick company.

Most reasonable people probably do not have a problem with private equity investors. Especially the fund managers who are proper stewards of the resources entrusted to their care. Rather, I suspect people have a problem with being unemployed. They have a problem with seeing their savings, which would have sent their kids to university, depleted. They may also have a problem with investors who hoard capital, either personally or as a firm, rather than redeploying it into new opportunities, which create jobs.

Allocating capital in a socially and environmentally equitable manner is a wonderful responsibility. Private sector growth is the only sustainable means, of which I am aware, to create jobs, provide opportunity and preserve and protect the environment. While there are certainly many private equity firms that do not operate with integrity, that is not an accurate description of Bain Capital and numerous other reputable investment firms (if you don’t agree with me, see this editorial on Bain: http://bit.ly/z1d1Mp).

Maybe I will next add some thoughts on stewardship, because it seems to be at the core of this debate.

JTV
Raleigh, NC