In his latest BIG newsletter, Matt Stoller (previously) relates the key moments in the history of private equity, from its roots in the notorious "leveraged buyouts" of the 1980s, and explains exactly how the PE con works: successful, productive business are acquired through debt financing, drained of their cash and assets, and then killed, leaving workers unemployed and with their pension funds looted, and with the business's creditors out in the cold. (...)
[ed. Link to Stoller's essay, Why Private Equity Should Not Exist: here]
The darlings of this movement -- Henry Manne, Milton Friedman, Michael Jenson -- promoted the idea of "shareholder capitalism" and the notion that managers have a single duty: to put as much money in the pockets of investors, even at the expense of the business's sustainability or the well-being of its workers. They joined forces with Robert Bork, who had set about discrediting antitrust law, arguing (successfully) that the only time laws against monopolies should be enforced was when monopolists raised prices immediately after attaining their monopolies -- everything else was fair game (Bork is a major reason that every industry in the economy is now super-concentrated, with only a handful of major firms).
Simon's policy prescriptions -- massive reductions in capital gains taxes, deregulation of trucking, finance and transport, and a move from guaranteed pensions to 401(k)s that only provide in old age if you make the right bets in the stock market -- were adopted by Carter and the Democrats, flooding the market with huge amounts of cash to be invested.
That's when the leveraged buyout industry was born. In 1982, Simon convinced Barclays and General Electric to loan him $80m to buy Gibson Greeting Cards from its parent company RCA. Once the company was theirs, they looted its bank account to pay themselves a $900k "special dividend," sold off its real-estate holdings for $4m, and took the company public for $270m, with Simon cashing out $70m from the transaction (Simon's total investment was $330k).
This was the starter pistol for future leveraged buyouts, through which companies like Bain Capital and the Carlyle Group buy multiple companies in the same sector and transmit "winning strategies" between them: new ways to dodge taxes, raise prices, and avoid regulation. PE owners suck any financial cushion out of companies -- funds that firms set aside for downturns or R&D -- and replace it with "brutal debt schedules." The PE owners benefit massively when this drives up share prices, but take no downsides when the companies fail.
Under PE, companies have emphasized firing workers and replacing them with overseas subcontractors, and amassing "brands, patents and tax loopholes" as their primary assets. PE firms specialize in self-dealing, cutting in the banks and brokers who set up the deals for a share of the upside. A company bought by a private equity firm is ten times more likely to go bankrupt than one with a traditional capital/management structure.
Elizabeth Warren has proposed some commonsense reforms to private equity: making PE investors liable for the debts they load their companies up with (including an obligation to fund workers' pensions); ending special fees and dividends; and reforming bankruptcy and tax laws to force PE companies to operate on the same terms as other businesses. Stoller calls this "reunifying ownership and responsibility": making the people who assume ownership of these productive companies take responsibility for their liabilities, not just their profits.
As Stoller points out, critics of Warren's plan say that this would end private equity investing as we know it ("Unfortunately, Warren’s fixes for these problems... would pretty much guarantee that nobody invests in or lends to private equity firms" -- Steven Pearlstein, Washington Post), but of course, that's the whole point.
[ed. Link to Stoller's essay, Why Private Equity Should Not Exist: here]
The darlings of this movement -- Henry Manne, Milton Friedman, Michael Jenson -- promoted the idea of "shareholder capitalism" and the notion that managers have a single duty: to put as much money in the pockets of investors, even at the expense of the business's sustainability or the well-being of its workers. They joined forces with Robert Bork, who had set about discrediting antitrust law, arguing (successfully) that the only time laws against monopolies should be enforced was when monopolists raised prices immediately after attaining their monopolies -- everything else was fair game (Bork is a major reason that every industry in the economy is now super-concentrated, with only a handful of major firms).
Simon's policy prescriptions -- massive reductions in capital gains taxes, deregulation of trucking, finance and transport, and a move from guaranteed pensions to 401(k)s that only provide in old age if you make the right bets in the stock market -- were adopted by Carter and the Democrats, flooding the market with huge amounts of cash to be invested.
That's when the leveraged buyout industry was born. In 1982, Simon convinced Barclays and General Electric to loan him $80m to buy Gibson Greeting Cards from its parent company RCA. Once the company was theirs, they looted its bank account to pay themselves a $900k "special dividend," sold off its real-estate holdings for $4m, and took the company public for $270m, with Simon cashing out $70m from the transaction (Simon's total investment was $330k).
This was the starter pistol for future leveraged buyouts, through which companies like Bain Capital and the Carlyle Group buy multiple companies in the same sector and transmit "winning strategies" between them: new ways to dodge taxes, raise prices, and avoid regulation. PE owners suck any financial cushion out of companies -- funds that firms set aside for downturns or R&D -- and replace it with "brutal debt schedules." The PE owners benefit massively when this drives up share prices, but take no downsides when the companies fail.
Under PE, companies have emphasized firing workers and replacing them with overseas subcontractors, and amassing "brands, patents and tax loopholes" as their primary assets. PE firms specialize in self-dealing, cutting in the banks and brokers who set up the deals for a share of the upside. A company bought by a private equity firm is ten times more likely to go bankrupt than one with a traditional capital/management structure.
Elizabeth Warren has proposed some commonsense reforms to private equity: making PE investors liable for the debts they load their companies up with (including an obligation to fund workers' pensions); ending special fees and dividends; and reforming bankruptcy and tax laws to force PE companies to operate on the same terms as other businesses. Stoller calls this "reunifying ownership and responsibility": making the people who assume ownership of these productive companies take responsibility for their liabilities, not just their profits.
As Stoller points out, critics of Warren's plan say that this would end private equity investing as we know it ("Unfortunately, Warren’s fixes for these problems... would pretty much guarantee that nobody invests in or lends to private equity firms" -- Steven Pearlstein, Washington Post), but of course, that's the whole point.
by Cory Doctorow, Boing Boing | Read more:
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[ed. Exerpt below:]
"So what is private equity? In one sense, it’s a simple question to answer. A private equity fund is a large unregulated pool of money run by financiers who use that money to invest in and/or buy companies and restructure them. They seek to recoup gains through dividend pay-outs or later sales of the companies to strategic acquirers or back to the public markets through initial public offerings. But that doesn’t capture the scale of the model. There are also private equity-like businesses who scour the landscape for companies, buy them, and then use extractive techniques such as price gouging or legalized forms of complex fraud to generate cash by moving debt and assets like real estate among shell companies. PE funds also lend money and act as brokers, and are morphing into investment bank-like institutions. Some of them are public companies.
While the movement is couched in the language of business, using terms like strategy, business models returns of equity, innovation, and so forth, and proponents refer to it as an industry, private equity is not business. On a deeper level, private equity is the ultimate example of the collapse of the enlightenment concept of what ownership means. Ownership used to mean dominion over a resource, and responsibility for caretaking that resource. PE is a political movement whose goal is extend deep managerial controls from a small group of financiers over the producers in the economy. Private equity transforms corporations from institutions that house people and capital for the purpose of production into extractive institutions designed solely to shift cash to owners and leave the rest behind as trash. Like much of our political economy, the ideas behind it were developed in the 1970s and the actual implementation was operationalized during the Reagan era. (...)
The takeover of Toys “R” Us is a good example of what private equity really does. Bain Capital, KKR, and Vornado Realty Trust bought the public company in 2005, loading it up with debt. By 2007, though Toys “R” Us was still an immensely popular toy store, the company was spending 97% of its operating profit on debt service. Bain, KKR, and Vornado were technically the ‘owners’ of Toys “R” Us, but they were not liable for any of the debts of the company, or the pensions. Periodically, Toys “R” Us would pay fees to Bain and company, roughly $500 million in total. The toy store stopped innovating, stopped taking care of its stores, and cut costs as aggressively as possible so it could continue the payout. In 2017, the company finally went under, liquidating its stores and firing all of its workers without severance. A lot of people assume Amazon or Walmart killed Toys “R” Us, but it was selling massive numbers of toys until the very end (and toy suppliers are going to suffer as the market concentrates). What destroyed the company were financiers, and public policies that allowed the divorcing of ownership from responsibility."
While the movement is couched in the language of business, using terms like strategy, business models returns of equity, innovation, and so forth, and proponents refer to it as an industry, private equity is not business. On a deeper level, private equity is the ultimate example of the collapse of the enlightenment concept of what ownership means. Ownership used to mean dominion over a resource, and responsibility for caretaking that resource. PE is a political movement whose goal is extend deep managerial controls from a small group of financiers over the producers in the economy. Private equity transforms corporations from institutions that house people and capital for the purpose of production into extractive institutions designed solely to shift cash to owners and leave the rest behind as trash. Like much of our political economy, the ideas behind it were developed in the 1970s and the actual implementation was operationalized during the Reagan era. (...)
The takeover of Toys “R” Us is a good example of what private equity really does. Bain Capital, KKR, and Vornado Realty Trust bought the public company in 2005, loading it up with debt. By 2007, though Toys “R” Us was still an immensely popular toy store, the company was spending 97% of its operating profit on debt service. Bain, KKR, and Vornado were technically the ‘owners’ of Toys “R” Us, but they were not liable for any of the debts of the company, or the pensions. Periodically, Toys “R” Us would pay fees to Bain and company, roughly $500 million in total. The toy store stopped innovating, stopped taking care of its stores, and cut costs as aggressively as possible so it could continue the payout. In 2017, the company finally went under, liquidating its stores and firing all of its workers without severance. A lot of people assume Amazon or Walmart killed Toys “R” Us, but it was selling massive numbers of toys until the very end (and toy suppliers are going to suffer as the market concentrates). What destroyed the company were financiers, and public policies that allowed the divorcing of ownership from responsibility."
by Matt Stoller, BIG | Read more:
[ed. Must read. Private equity is neoliberalism's Godzilla, profiting from the destruction of a wide range of American businesses (and insinuating itself into more industries every day). See also: What are private equity firms? (Wikipedia).]
