I WROTE MY LAST WEEK after the death of LEIGH PERKINS, for years head of Orvis. Today John Tamny writes about Leigh from a private equity perspective.
Leigh Perkins died last month. Most reading this likely weren’t aware of his passing, or who he was for that matter. But his story has broad relevance in consideration of the times in which we live.
About Perkins, his New York Times obituary noted that he “built Orvis from a modest mail-order fishing tackle shop in Manchester, Vt., into one of America’s largest and most distinctive sporting lifestyle brands.” Not a bad legacy.
What’s important about it for the purposes of this piece is that Perkins wasn’t the founder of Orvis. In reality, the company’s origins date back to the 19th century; 1856 to be exact. That was the year that Charles F. Orvis founded his eponymous business; one that was “sending out catalogs before the Civil War and predated Sears, Roebuck by more than 20 years.”
In reality, Perkins didn’t come into the Orvis picture until 1965. At the time, the company had 20 employees and $500,000 in annual sales. Perkins bought the owners out for $400,000, only to start building what wasn’t very well known. When he retired in 1992, he oversaw 700 employees and $90 million in annual sales. Again, not a bad legacy.
And it’s a legacy that says something much greater about the genius of private equity in particular. Class warriors like Oren Cass claim that private equity investors add little value to their own financial backers or the companies they invest in, which on its own is a ludicrous presumption.
Back to reason, if private equity funds weren’t generating returns, they quite simply wouldn’t have investors. Market forces have a tendency to put out to pasture that which doesn’t produce in the marketplace. Put another way, private equity giant Blackstone has become a financial behemoth not because it doesn’t generate desirable returns for the money behind its funds, but because it does.
As for the companies invested in, Cass is implicitly saying people don't matter. That management doesn't matter. That vision and execution don't matter. By Cass's logic, Alabama should never have hired Nick Saban. Cass’s reasoning implies that economic growth isn’t enhanced when wealth migrates to more skillful hands. If he's correct, stasis is the best economic outcome of all whereby what we call “money” sits still precisely because wealth isn’t moving. It’s actually a perfect scenario for Cass when we stop and remember his intense nostalgia for the past, and the jobs that individuals used to do in the past.
But for those of us yearning for what’s ahead, thank goodness for private equity investors, and for people like the late Perkins more broadly. Not of the view that the present is the frontier of progress, or that the past is something to aspire to, they set about relentlessly creating a much better future.
Perkins sensed that what had lineage, but that was also stodgy, had grand potential. And he proved it. The Orvis that was once unknown very much became a known brand and a staple of brick & mortar retail on his watch.
What Perkins achieved with Orvis is what private equity firms set out to do each day. Sometimes they see potential in businesses that are at death’s proverbial door, or sometimes they see possibilities in companies that, while operating in profitable fashion, are stagnating. Sometimes private equity firms sense that the various assets of a certain company would be better, more profitably managed if in the hands of numerous owners, and sometimes they see the chance to expand on the already massive achievements of existing owners.
Regardless of what these investors foresee, what they’re doing is no easy feat. If the future is opaque, the commercial future most certainly is. Not terribly long ago we hailed cabs in which we tapped away on Blackberry phones. How things change. How rapidly they change. When private equity investors put wealth to work, they’re making incredibly risky assumptions about what commerce will look like in the months, years and decades ahead. This is certainly no easy feat. Consider once again the semi-smartphones we used to communicate on, not to mention the cost of medallions in the taxis that used to very unreliably move us from point A to point B.
It’s all a reminder that when politicians and media pundits rant about the “preferential” tax treatment for “carried interest” earned by investors in the private equity space, that they know not of what they speak. Their disdain for lighter tax treatment on this “income” implies that it’s just that: income. Except that it isn’t.
Income is salary. It’s what we agree on with an employer ahead of time. In a limited sense, it’s guaranteed.
On the other hand, “carried interest” is the opposite of guaranteed. It’s a return on investment that private equity investors earn after their capital commitments have proven wise in aggregate, and after they’ve cleared a return “hurdle” agreed to with their investors ahead of time. In short, carried interest is a reward for successful investing, a reward for the movement of precious wealth to higher uses, when the movement of same is anything but a sure thing.
If we’re being at all reasonable, the only logical tax on carried interest is zero. Why on earth would we design the tax code to penalize successful investing, and for that matter why would the tax code penalize investing at all? Investing is what produces essential information without which there’s no progress.
Back to Perkins, his courageous investment in a little-known retailer over fifty years ago was in many ways the model for a happy explosion in private-equity investing that’s taken place since. Instead of sitting on their hands, these investors are energetically reshaping commerce for the much better with their bold capital commitments. Rather than demonize private equity, we should cheer the progress that it personifies with an eye on reworking the tax code in order to encourage more of what’s mindlessly penalized.
John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, and a senior economic adviser to Applied Finance Advisors (www.appliedfinance.com). His new book is titled When Politicians Panicked: The New Coronavirus, Expert Opinion, and a Tragic Lapse of Reason. Other books by Tamny include They're Both Wrong: A Policy Guide for America's Frustrated Independent Thinkers, The End of Work, about the exciting growth of jobs more and more of us love, Who Needs the Fed? and Popular Economics. He can be reached at jtamny@realclearmarkets.com.
I completely agree with Mr. Tamny’s sentiments regarding the value of private equity investment, but I do think his use of my father, Leigh Perkins, entrepreneurship was a stretch, and not the best example for the point he was trying to make. Orvis was, and is, a privately held company. My dad, his son and now grandson, when running the company were, and are, able to make decisions without accountability to equity investors. Sometimes this is a very good thing, sometimes not. Private companies, especially those owned by families, necessarily hold captive the investment of shareholders who are not in management roles. There is no right of exit and no opportunity for those investors to redirect their capital. That is the opposite of the virtues of private equity Mr. Tamny was making. What is true is that my father, born into a wealthy family, was in the fortunate position to have his own capital to invest in a venerable, though stodgy company, that he rightly believed had great potential. Most people are not in that position. Private equity allows investors the ability to direct growth capital to those entrepreneurs who have the talent and drive of my father but do not personally have the means to bank role their vision. That said, I do not believe my father would have relished the constraints of equity investors. To pretend that private ownership and equity investment are the same is disingenuous - even if both serve the same entrepreneurial initiative.
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