The Obama campaign’s attack ad about Bain Capital presented a simplistic picture of a complicated reality. Private-equity firms can play a crucial role in keeping companies competitive. And although some firms have engaged in some bad practices, on the whole the industry has grown so large because it performs a useful function.I am not going to argue that private equity serves no purpose, to deny the possibility of a collateral benefit to the public or even to the businesses in which they're involved as they seek to extract their profits, because that would be untrue. But at the same time the fact that an industry exists and is large does not mean either that it supports a useful function for society. I don't want to read too much into Zakaria's shorthand - in stating that private equity "has grown so large because it performs a useful function" he is not saying that every industry that grows large and rich performs a useful function. In a perverse sort of way, there might be truth to the generalized statement - trade in illicit and diverted drugs provides a service wanted by drug addicts and is a bona fide multi-billion dollar industry - but I expect that Zakaria means "to society as a whole". And if his statement is so qualified, again with the illicit drug industry as an example, size and wealth is no guarantee of usefulness.
When discussing private equity, the important thing to remember is that a private equity company's principal "useful function" is to maximize return for its proprietors and investors, and that they tend to think and act in the short-term. There can thus be many contexts in which a private equity company's approach to an investment may be at significant odds with what is in the long-term interest of society, or even of the company they acquire. When private equity companies mess things up for the rest of us, they can still turn a huge profit - or get the benefit of a government bailout. It's all part of a game in which any benefit to society is incidental.