In the coming weeks, Naked Capitalism will publish an investigative series on the private equity industry that will include articles written by current industry participants with considerable experience. It focuses on the activity formerly called “leveraged buyouts”: the purchase of established businesses, heavily funded by borrowing. The private equity industry has over $2 trillion globally in assets under management. With leverage, this translates into over $4 trillion of buying power.
These players claim to deliver value for investors by taking over companies and then improving how they are run. We intend to show, on the contrary, that:
The growth and performance of the private equity business depends on extensive support by the government, both in the form of tax breaks and substantial funding from “public,” meaning government employee, pension funds
Gross returns of private equity go overwhelmingly to the industry itself (through extraction of fees), and not to its investors.
Partly for this last reason, investors in private equity have overall obtained underwhelming returns. In fact, taking into account the illiquidity and implicit leverage inherent in private equity investments, investors would be
better served by avoiding this investemnt approach
The private equity industry has also played a demonstrably negative role in the economy overall and has increased the severity of job losses during this current downturn
Critics of private equity have often claim that the industry produces high returns for investors at the cost of widespread job losses. These critics are far too charitable – as indicated above, the industry does not produce high returns for investors. However, it is true that the process by which the industry redistributes money to itself involves significant externalities. Consequences are not limited to effects on employment; by rendering companies more vulnerable to cyclical downturns, the industry also exacerbates the effects of the business cycle.
The industry has numerous, well-paid allies and defenders. In later entries in our series, we will describe their arguments and refute them.
NC’s initiative has been aided by the considerable information provided by former and current industry participants. Despite their own success in business, these individuals are convinced that better understanding about the industry is essential in order to reduce its size and destructive role. NC will respect the confidentiality of other knowledgeable sources who consider this project worthwhile and are interested in helping. Please contact me at [email protected]