When starting the theoretical portion of this class, I was introduced to a term called private equity.
After understanding what private equity was, I began researching some firms in Keene. As I read about Pneumo Precision and Precitech, I found Don Brehm sold his Precitech to a private equity firm in 1997. Don Brehm’s first company Pneumo, had financed some capital investments with the help of a group of venture capitalists. He was excited, their business advice and insight proved extremely useful. Unfortunately, this arrangement went awry because the company’s profits couldn’t provide substantial returns for the VC’s within the expected five years. The strain of debt weighing on Don and his company became too great to manage. He sold his first venture, Pneumo to the conglomerate corporation, Wheelabrator-Frye, which then sold Pneumo to Allied Signal in 1985.
To give a brief summary as to what a private equity firm does, we’ll start with the two main components, a general partner and a limited partner. The general partner ordinarily works for the firm, they invest and handle the limited partner’s funds. A limited Partner is typically a large endowment fund or pension fund, as well as other interested parties like a hedge fund. When PE acquires a portfolio company, a general partner will look for a target firm, the firm is usually moderately successful but has huge potential for growth. Once acquired the general partner will take whatever measures they can to increase either the asset value of their newly acquired portfolio. Sometimes the plan for huge and fast growth fails to materialize, then significant austerity measures within the portfolio company are taken to ensure a speedy return on their investment. Typically when this happens the quality of the portfolio company’s product is compromised. This can entail mass layoffs and a reduction in benefits and salaries. Altogether putting a large amount of pressure on the company to maximize capital gains any way possible.
Naturally, this process can be detrimental to a company’s long-term profitably, A PE firm can saturate a portfolio company with debt and then abdicate any ownership of that debt, leaving the company virtually underwater. The responsibility of a company can be transformed from providing a quality product or service to increasing and maintaining share price.
Being acquired by a private equity firm does not necessarily indicate the demise of a company, although most often it does fracture the human relationships involved. Don’s second company, Precitech was later sold in 1997, to Permira Funds. After changing a few hands Precitech was bought by Ametek and is now a publicly held company on the stock market. The production side of Precitech is still creating the same machine tools that were produced under Brehm. The question of the product quality is a mystery but nevertheless, Brehm’s ideas are still manufactured. The issue with management under these powerful firms is its impersonal and cutthroat style, most of the time management is outsourced. The partners who run these large firms are much more interested in profitability and costs rather than production value and employee satisfaction.
In the case of Pneumo and Precitech, both high precision and cutting-edge companies. The acquisitions were based off impatient finance, which is a pervasive force across U.S. industry. Speculative investors received wind of Keene’s industrial base, by 1997 when Permira Funds (also known as Schroeder Ventures) purchased the Rank Corporation, including the Rank Pneumo plant in Keene. Then proceeded to pressure Keene’s Precitech into a sale, and merged their two competitors. Permira was able to sell Precitech for three or four times the purchase price. It’s possible this is due to an asset bubble that emerged in the fiber optics industry. Although Precitech did not produce for the fiber optics industry, their association with optics may have increased their value during the bubble. Brehm sold Precitech in 1997 for 6 million, Permira Funds sold it years later for 28 million. One could speculate that Permira Funds was able to do this by failing to correct the mistaken association with the highly profitable fiber optics industry.
From my interviews with Don Brehm, he seemed each time when founding a company to be working under a tremendous amount of financial pressure. He is an engineer, occupied with innovation and furthering technology. Small business owners alike have been hamstrung by a powerful financial sector. Impatient fiance and a loosely regulated financial system may be one of the leading factors for the loss of manufacturing jobs across America. The pressures of financing innovation on an inventor in our modern economy can seriously impede growth on a national scale.
Source: NBER-CES NAICS Database for 333314 Optical Instrument and Lens Manufacturing.