Is private equity good for the economy?

Anyone following business news lately knows that private equity is pretty controversial right now. The industry has formed its own Private Equity Council to defend itself from media attacks and government regulation, and lawmakers are looking for ways to take a bigger tax-bite out of the firms' profits. Leading economic thinker John Kay chimed in with his own editorial with the headline "Arguments for private equity are not always convincing."

In his piece, Kay is skeptical about whether many of the private equity deals being done actually create value: "If management and business operations remain much the same, as does the underlying ownership structure once you drill down through the layers of fee-collecting intermediaries, it is hard to see where value is being added."

Kay makes a valid point. Historically it seems, the point of leveraged buyouts was to improve operations or the capital structure in such a way as to increase the value of the business. The book Barbarians at the Gate (About the RJR Nabisco buyout) provides an excellent description of the leveraged buyout mania of the 1980's, which may be a precursor to the current popularity of private equity. Much of the money being "earned" is coming in the form of fees to investment bankers. When looking at these deals, investors and regulators might do well to ask: Just what exactly is the point of all these deals? Is anything being built? Are operations being made more efficient?