Private Equity: Slash and Burn

Whenever I ponder the enormity of the multitrillion-dollar industry known as private equity, I picture the lavish parties thrown by Stephen Schwarzman – and then I think of the root canals. Schwarzman is the billionaire impresario of Blackstone, the world’s most colossal private equity firm. In August, he hosted a 200-person housewarming party at his $27m (£21m) French neoclassical mansion in Newport, Rhode Island. It was a modest affair compared to the grand soiree he threw himself at his Palm Beach, Florida, estate for his 70th birthday, in 2017. That black-tie bash was itself a sequel to his multimillion-dollar 60th, in 2007, which became a symbol of the sort of Wall Street excess that led to the global financial crisis. The Palm Beach party, which some reports say cost more than $10m, featured Venetian gondolas, Arabian camels, Mongolian acrobats and a giant cake in the shape of a Chinese temple. “Brilliantly stimulating” was the billionaire industrialist David Koch’s review. Gwen Stefani serenaded Schwarzman as Jared Kushner, Ivanka Trump and several members of her father’s cabinet looked on. It was a world in miniature, ruled over by a modern Croesus – the perfect symbol for a form of money-making that has infiltrated almost every facet of modern life.

Preschools and funeral homes, car washes and copper mines, dermatologists and datacentres – private equity is anywhere and everywhere that money changes hands. If it can in any way be marketed or monetised, private equity firms have bought it – from municipal water supplies to European football clubs to the music catalogue of the rock group Queen. By some estimates, these firms now control more than $13tn invested in more than 50,000 companies worldwide. “We cannot overestimate the reach of private equity across the global economy,” Sachin Khajuria, a former partner at Apollo Global Management, which manages half a trillion dollars in assets, wrote in 2022.

It’s not just that hundreds of millions of us interact with at least one private equity-owned business every day. More and more people, especially the relatively poor, may live almost their entire lives in systems owned by one or another private equity firm: financiers are their landlords, their electricity providers, their ride to work, their employers, their doctors, their debt collectors. Private equity firms and related asset managers “increasingly own the physical as well as financial world around us,” the scholar Brett Christophers writes. “All of our lives are now part of their investment portfolios.” This is true not only in the US, where private equity has been on a spree since the late 1970s, but increasingly in the rest of the world, too. In recent years, private equity firms have spent hundreds of billions of dollars snaffling up businesses from Canada to Cambodia, Australia to the UK.

As private equity has spread, so have dire warnings about its effects. The vultures and vampires of the industry have been decried almost everywhere in the media that isn’t already owned by private equity. In the span of a single week last year, two major and almost identically titled books were published in the US – Plunder: Private Equity’s Plan to Pillage America and These Are the Plunderers: How Private Equity Runs – and Wrecks – America. Private equity is “greed wrapped in the American flag of efficiency, looting justified by solid investment returns”, the authors of Plunderers write. “The marauders answer to almost no one.”

This is where the baby root canals come in, as a grotesque epitome of the industry’s modus operandi. According to multiple media investigations and a US Senate inquiry, in order to drive up profits, private equity-controlled dental chains have induced children to undergo multiple unnecessary root canals. “I have watched them drilling perfectly healthy teeth multiple times a day every day,” a dental assistant in a private equity-owned practice told reporters. One child even died as a result. To its many critics, private equity is a shining example of “asshole capitalism”, but baby root canals make one feel even that label is a touch too kind.

Unsurprisingly, practitioners of private equity see their industry differently. Yes, they admit, there have been a few bad actors, and yes, a handful of bad deals, but by and large private equity firms are not full of profiteering sociopaths merrily making the world a crappier place. Rather, they’re the necessary fertilisers of growth and innovation, using their superior talents to rid companies of bad management, rejuvenate sluggish businesses and grow the economic pie so we can all continue to enjoy the relative prosperity of our developed societies. It’s just capitalism doing what capitalism does best. They call it “value creation”.

What’s more, they say they’re providing amazing returns to their investors, who might well include you, dear reader, if you happen to have a pension. “Hopefully we can get the news out there that, actually, private equity’s been a great thing for America,” Stephen Pagliuca, the billionaire co-chairman of Bain Capital, said at Davos in 2020. David Rubenstein, the billionaire founder of the Carlyle Group, another of the world’s largest private equity firms, goes further. “Private equity,” he likes to say, “is the highest calling of mankind.”

Whatever good or ill there is in private equity is not just about greedy sinners or enterprising saints. Whether acquiring a bakery that makes chocolate chip cookies or the nursing home where your grandmother is living out her days, private equity relies on the same basic business model: the leveraged buyout. These transactions – which account for roughly three out of every four dollars of all private equity deals – are frequently compared to house flipping: you buy a business using a ton of debt, or leverage, the way you buy a house with a mortgage; then you try to sell it for a tidy profit after you replace the carpets (or, better still, the market goes up). Unlike buying a house, however, the debt isn’t the responsibility of the buyer; it sits on the balance sheet of the acquired company. As strange as it sounds, it’s sort of like the company is forced to take out a loan to buy itself.

“Private equity creates value by growing great companies,” Pagliuca has said, offering a picture of the industry as a green-thumbed gardener turning mere seedlings into fruit-bearing trees. But over the past several months, as I combed through the recent trove of books on private equity, trawled through the memoirs of industry titans such as Schwarzman and Guy Hands, spoke with people who have worked inside Wall Street and City firms and interviewed scholars who study this species of finance, I came to see private equity in more virological terms, like a pandemic.

A coronavirus replicates by injecting its RNA into the cells of a target organism. Once inside, the RNA hijacks its host’s resources to build more copies of the virus, weakening and sometimes destroying the host in the process. Private equity’s business model is similar. A private equity firm pools cash from investors, then uses those funds, along with an extraordinary amount of money borrowed from other sources (the “leverage”), to take over a target company. Having acquired its target, a private equity firm may fire the management team, install new executives and decimate the workforce, or move it offshore. It can also liquidate the company’s own assets to pay back investors and line the pockets of the firm’s partners before selling the company to a new set of investors, a tactic sometimes known as a “buy, strip and flip”. (...)

“The predatory practices of private equity exacerbate inequality and eviscerate our economy by taking money from productive businesses” – retailers, hospital chains, manufacturing companies – “and giving it to largely unproductive ones,” Brendan Ballou, a US Department of Justice antitrust lawyer, writes in Plunder. Chief among these largely unproductive businesses are private equity firms themselves. Worse still, the private equity owners can make ludicrous amounts of money whether or not the companies themselves succeed – a decoupling of financial and commercial success that makes a mockery of the basic premise of capitalism.

by Alex Blasdel, The Guardian |  Read more:
Image: Stephen Schwarzman, the Blackstone Group. Richard Drew/AP