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Is This a Private Game?

April 30, 2021
Private equity has done a lot of good – and secrecy is part of the fee for its services. Privacy is an expensive commodity, and if we cannot afford it then the best that we can expect is that those who can pay for it have invested wisely.

There is a growing sense of optimism about a U.S. economic recovery, with various data points available to argue that the year-long whammy effected by a global pandemic is over – or will be soon. In recent weeks analysts have offered the monthly Purchasing Managers’ Index, durable goods shipments, and various metrics of consumer spending to argue that the pre-pandemic levels of low inflation and high employment, plus renewed strong industrial demand are just about to resume.

To believe evidence like this requires a lot of tumblers to fall into place, a lot of prior economic assumptions to be fulfilled. I have become less confident that problems of such consequence will work out so neatly. My confidence in economic recovery is based on a simpler observation: metalcasting operations are drawing investors’ capital.

Since the start of 2021 we have reported a half dozen acquisitions of U.S. metalcasting plants, along with a steady log of expansions and new equipment programs. I don’t have to see my fiscal principles fulfilled for my confidence to be boosted; I merely have to note that these investors cannot all be wrong. I am drawing assurance from their confidence.

It’s hard to come up with better arguments to explain these investors’ confidence because every one of them lacks the details that justify the investors’ risk-taking. We don’t know how much they’ve paid or other basic terms of their investments. We cannot compare their transactions to other comparable moves. They are private deals, not quite secret but carried out by corporate entities. The personal motives and stakes are not clear.

To the extent that the investors explain their actions they cite goals to improve performance or product quality, or customer service. We cannot predict their rewards or measure their successes. We must assume that there is a commercial strategy for recouping the capital invested but revealing that would give away too much of the plan, apparently.

Surely the metalcasting sector needs the capital infusion. It’s an expensive business that makes its profits in margins, not multiples. Metalcasters need to update their machinery and technologies and meet evolving standards. They need to adapt their ways of doing business to match the current accelerated pace of designing and manufacturing, and delivering, finished parts. All this requires capital, now.

Private equity is not a new phenomenon. Investment funds have long been part of the free market economy, only more so in recent decades as other sources of capital investment have become restricted by disclosure requirements, and as investors seek higher and faster returns than listed holdings can ensure. They’ll take risks, but they want some cover.

Then, too, many manufacturing businesses have often been cast as high-risk investments, meaning a high-risk investor may be the only type offering capital when it’s needed. Private equity has done a lot of good for metalcasters and other U.S. businesses, and those who rely on those businesses for their own livelihoods. The secrecy they keep about their plans and goals is part of the fee for their services.

It was not always true that privacy came at a cost. The quaint image of a family-owned business supporting dozens of employees and the community where they all thrive is an idealized notion of commercial life that barely exists any longer – some metalcasting exceptions notwithstanding. And such images do not exist out of context: they fit within a broader idealism involving responsible government, a trustworthy legal system, reliable commercial institutions, effective academic bodies, and so forth. It’s a mythic nostalgia we maintain based on the shortcomings of reality.

It’s an impression that is highly personal too, set in an alternate universe where our own feelings and motives are not questioned, and we feel no suspicions about those we encounter there. Our own assumptions about what is good and bad are the standard that everyone shares. The outcomes we want are all agreed to be the best ones.

In reality, we live in a world that is almost entirely impersonal. It is wholly commercial: relationships are transactional and values are negotiable. Surrendering your thoughts and records is the price of admission. We are governed by pragmatism, not principle. Personal expression is sanctioned so long as it conforms to shifting social “truths.” Integrity, meaning a unity of principles and responsibility that ensures an individual’s autonomy, affords one very little.  

Privacy is an expensive commodity in this world, and if we cannot afford it then the best that we can expect is that those who can pay for it have invested wisely.