Private Equity (PE) is an instrument to divert capital to entrepreneurs who want to create new wealth by solving problems for the society or supplying the society with whatever it wants. In other words, it convinces the wealthy institutions (or individuals) to risk their money by backing an entrepreneur or management team, in return for more wealth if it succeeds. If new value is created and the entrepreneur succeeds, then everybody wins. The entrepreneur creates jobs, he or she gets wealthier, suppliers earn, the risk capital is returned with an interest, and the private equity guys who stitched the deal together and oversaw it, as well as shaped the entire process from start to finish also benefit immensely. All sounds idyllic.
Then comes along that proverbial thorn in the backside of capitalism: Equality. Wealth creators of all kinds, PE backed or not, ultimately centralise wealth in the hands of the few. Afterall, that’s why we have a tax system so that the government can fairly re-distribute some of that new value across society. Increasingly in the public discourse however, there is a malignancy creeping in between equality of opportunity and equality of outcome. One is good. The other is bad.
Society should strive to ensure that every citizen who has ideas coupled with talent and experience is given an equal opportunity to get the capital they deserve in order to create further wealth for society. Things like prejudice, nepotism and high taxes work against this aspiration. However, it would be disastrous for any society if it tried to get the same outcomes for everyone regardless of their talent, experience and entrepreneurship. The incentive to create wealth, to strive, to risk and succeed would be instantly wiped out.
And yet, if one reads the rhetoric of socialists, or the unionists, they will often refer to an equality of outcome, rather than opportunity. In effect they are selling a false dream to workers that everyone can earn, and everyone must earn similar amounts. They hide their ignorance under the blanket of fluffy words such as ‘fairness’, and ‘deserving’. Society only needs to look back at the 20th century to discover what happened when we dabbled with socialism, but alas, it seems human beings suffer from amnesia all too quickly.
A society requires balance. And each society is at a different stage of evolution. The UK is a mature capitalist society, and one that has some moated institutions such as the NHS, Welfare, State pensions, among others. These are all good things, and the wealthier ought to, and on the whole do contribute more to them in absolute terms. Where there is not a level playing field, it should be made so. But to dream an utopian society of equality where everyone is considered the same, of equal talent and skill, is simply not feasible and wreaks of intellectual dishonesty.
PE is, and ought always to be, about wealth creation within the compounds of the norms of the society in which it operates. PE empowers the entrepreneurial, and encourages the rich to risk, while developing the skills in people to succeed more often than not, in wealth creation. It is a tool that not only should be better understood but actively encouraged.