The Twinkie Defense of Private Equity

Commentary about business and finance.
July 16 2013 8:51 AM

The Twinkie Defense

Private equity may be a vampire, but that vampire saved your snack cakes.

Hostess Twinkie hovering over pile of US Currency.
Private equity saved your Twinkies. How do you feel about that?

Photo Illustration Lisa Larson-Walker/Slate; photos by Getty Images (2)

For the past few months, we have been living in a world without Twinkies. After a union-management stalemate at Hostess, home of those golden tubes of aerated sponge, the company went bankrupt last year and began selling off its brands to various bidders. Last spring, the private equity firms C. Dean Metropoulos & Co. and Apollo Global Management purchased Twinkies—along with their cousins Ho Hos, Ding Dongs, Fruit Pies, and more—for $410 million, with plans to restore the brands to store shelves by summertime.

This week, Twinkies return to the American pantry, replete with an extended shelf life, thanks to private equity. Simply put, future generations will have access to their snack cakes of choice because carried-interest-earning private equity funds, staffed by current or aspiring members of the 1 percent, provided the financial lifeline that no one else could. A Wall Street bogeyman saved a Main Street brand icon.

Private equity went on trial as never before last year, due to the vast wealth that Republican presidential candidate Mitt Romney amassed from his work as a founder of Bain Capital. The debate tended to portray private equity as both rarefied and rapacious—but that distorts its everyday role in the American economy. In the U.S. alone, 2,600 private equity firms have invested in over 15,000 portfolio companies; last year, approximately 8 million people in the U.S. were working for private-equity backed companies. Despite private equity’s sometimes well-earned reputation as the scourge of the working man, public pension funds are some of the biggest investors in private equity deals. Simply put, the retirement benefits of many teachers, police, and firefighters are dependent on private equity producing stellar returns.

Enormously wealthy businessmen like Mitt Romney are easy to pillage. But the private equity pile-on during the 2012 presidential campaign created a Bizarro World in which conservative Republicans were bashing the profit motive and liberal Democrats were straining to defend “vulture capitalists”—a term used by Texas governor and presidential hopeful Rick Perry, even though Texas pension plans are large investors in private equity. (As governor, Perry also approved the leveraged buyout of TXU, the Texas utilities company—the largest private equity deal ever completed, although the results were somewhat less than spectacular.) In May 2012, the same month that the Obama campaign released an ad comparing Bain Capital to vampires, Cory Booker, Democratic mayor of Newark, N.J., voiced his support for private equity. “I know I live in a state where pension funds, unions and other people are investing in companies like Bain Capital,” Booker said. “If you look at the totality of Bain Capital’s record, they’ve done a lot to support business, to grow businesses.” (After an outcry, Booker later “clarified” his position via YouTube.) Occasional Obama campaign surrogate Bill Clinton also aired favorable views about private equity: “This is good work,” he told CNN’s Piers Morgan.

Part of private equity’s image problem—which Clinton and Booker might recognize—is the misconception that it targets healthy, well-run companies with focused management teams and happy shareholders. But there are no problems in such companies to fix, and therefore no opportunities for profit. Another misimpression is the idea that private equity exists to cut jobs. But that’s like saying Twinkies exist to provide a balanced diet. Fundamentally, the purpose of private equity is not to create jobs but to save faltering companies—which sometimes involves cutting jobs.

When a company such as Hostess needs to be rescued, someone must step up to rescue it. The tools of rescue can include refinancing the company, replacing management, changing suppliers and distributors, cutting unprofitable brands and services, refashioning international strategy, and developing new pricing models. The owners of the new Hostess Brands, LLC have made clear that they will radically reshape how the company does business. Union rules governing what could and could not be carried in trucks and where deliveries would and would not be made have been swept away, in favor of a 21st century model that recognizes radical advancements in logistics and supply-chain management that have transformed retailing in recent decades. Admittedly and unfortunately, many drivers lost their jobs as part of this restructuring. (According to CNN, a total of 18,500 workers lost their jobs when Hostess shut down, and only 20 to 25 percent of those jobs will come back.) However, had Hostess been left to flounder in bankruptcy and close its doors forever, all jobs would have eventually been lost. In this regard, private equity can be seen as a job preservation endeavor.

Just witness what Bain Capital and its partners, the Carlyle Group and Thomas H. Lee Partners, did with another bastion of sugary carbo-loading, Dunkin’ Donuts. The trio energized the company by opening more locations, speeding up service, and focusing on beverages and healthy menu options. (Admittedly, the deal was also a highly leveraged transaction that saddled Dunkin’ with big debts on its balance sheet ahead of its IPO in 2011, but the shares have performed well since then.) Other private equity success stories that will be familiar to American consumers include Hertz and Snapple.

There are certainly legitimate questions that can, and should, be asked about how private equity firms conduct their business. What is the appropriate tax treatment for carried interest? What kinds of fees should funds charge their investors? And what about the use of debt in the financial engineering of portfolio companies?

The unavoidable fact, though, is that companies go bankrupt and downsize their operations with distressing regularity. This occurs, and will continue to occur, with or without the help or involvement of private equity firms. The difficult and politically awkward question is what to do about these failures. But there’s another important question to be asked: Who saved Twinkies? If 2012 was the year private equity went on trial, maybe 2013 can be the year that we can take a more dispassionate look at what private equity actually does for the economy.

Timothy Spangler writes the “Law of the Market” column for Forbes.com and is the author of the forthcoming book One Step Ahead: Private Equity and Hedge Funds After the Global Financial Crisis.