James DeLong examines The Equities of Private Equity:
Whereas a generation ago most of the value of an enterprise was accounted for by its hard assets, such as factories or inventory, now about 75% of it lies in intangibles – patents, copyrights, staff creativity, trade secrets, know-how, reputation, brand names, customer relationships, and the ability to manage them all.It is a truism of the world that the scarcest resource commands an outsize share of the returns, because those who control it can force the holders of the more common resources to bid against each other.
If finance capital is scarce, the financiers rule. But in a world in which finance capital is plentiful and creative capital less so, the financiers get to bid for the privilege of going into business with the creatives, and sharing the returns from their intangible capital.
This shift in power is resisted because it does not accord with the 19th century model of the corporation, in which the financiers are the principals and all others are their subordinates and agents, and because the finance capitalists are not too keen on the shift. In fact, much of the work of the government that is undermining the efficiency of the public markets can be viewed as an effort to retard this change, to maintain the dominance of the finance capital over creative capital.
The private equity firms’ fat pay-offs and occasional ostentation on a Veblenian scale make them good targets, but their real sin is to be leaders and symbols of the shift. They earn their returns by identifying the opportunities for superior deployment of capital and by revamping the internal structure of the companies they take over so as to empower and reward the creativity of the managers and employees, collecting a handling fee along the way for their own intellectual contributions.