Private Equity — The Rapacious Creditor of American Business
Check out the loan sharks of American business. And they don’t even loan their own money.
When I think of private equity, I think of former governor of Massachusetts, Mitt Romney, once legendary financier working for the private equity firm, Bain Capital, and now US Senator for Utah. Mitt Romney, like many other Utahns, is a Mormon.
Curiously, most of Romney’s fortunes were made from making usurious loans to businesses, and many of the businesses that Bain Capital once arranged loans for, have declared bankruptcy. But Romney would be the last person to tell you that usury is a sin. What is usury again? Oh, yeah. According to Wikipedia:
Usury is the practice of making unethical or immoral monetary loans that unfairly enrich the lender.
Mitt Romney is a deficit hawk as far as the government is concerned. Yet, his wealth is built from usury. He would never go into debt himself. Neither would Bain Capital. Still, they are happy to arrange for businesses they prey upon to go into debt using the business assets as collateral, collect the fees and watch the businesses they manage to go bankrupt. All while loaning other people’s money. That process is called an LBO, or Leveraged BuyOut, something Bain Capital has practiced into an art.
In their article, LBOs Make (More) Companies Go Bankrupt, Research Shows, Institutional Investor defines LBOs as follows:
…the process of acquiring a company using debt, rather than cash and stock, then designating the company’s assets as collateral for the loan.
Institutional Investor cites numerous studies in their article, but the one that caught my eye was the first one that said that healthy companies acquired by LBO are 10 times more likely to go bankrupt than otherwise. It’s a curious way to acquire a company. I mean, if it’s not even your own money, how in the world did you acquire it?
I’ve been a longtime reader of the blog, Beat The Press, by Dean Baker at the Center for Economic Policy and Research (CEPR). In that blog, Mr. Baker offers suggestions for corrections in articles about the economy and related public policy initiatives. He’s keen to add context where context is needed.
Lately, Mr. Baker has been busy with Patreon and building influence in policy circles in DC, so he’s not been blogging at CEPR much. On a whim, I decided to look around a bit more and I happened upon a few articles by Eileen Applebaum, co-director of CEPR and found that she also happens to be an expert on LBOs.
In an article Applebaum published on October 8th, she recounts a series of studies showing that employment prospects dwindle, OK, they’re decimated, at firms that were bought out by private equity. Wages go down. Jobs are lost. Here’s the nugget:
The finding in the current paper that employment falls 13 percent in buyouts of publicly-traded companies is a pretty damning statement about the job destroying effects of PE takeovers of successful companies that trade on a stock exchange.
“The current paper” she refers to is this one, “The Economic Effects Of Private Equity Buyouts”. Most of us in America are employees. We’re not represented on the board of directors at the companies we work for. We’re not “stakeholders”. We won’t get anything from an LBO deal because, for most of us, we’re not even “assets” that can be sold. No employee, with full knowledge of an LBO would ever vote for such a deal. None.
Notice how insulated everyone at the top is. The company management is already loaded. The private equity firm can write all manner of enticements into the deal so that the CEO, the board of directors and maybe some top managers get a golden parachute while watching their employees drown. And they do.
When the deal is done, the private equity firm gets to work, selling off assets to pay the loan. This deprives the company of money needed for training, new technology, and cash flow. Eventually, there is no more room for growth. But that doesn’t matter to the PE firm or the CEO or the Board of Directors. They have already made their money.
Now imagine repeating this process year over year for a few decades, with thousands of businesses in nearly every industry. LBO’s are a huge contributor to wage stagnation. LBO’s are a huge contributor to industry consolidation. Industry consolidation leads to monopoly. Monopoly leads to monopsony. What is monopsony? Investopedia says:
A monopsony is a market condition in which there is only one buyer.
If your company is big enough, you can practically dictate wages, because you’re the biggest labor buyer. When an industry consolidates enough, then the remaining players can dictate wages. They can even collude with no-poaching agreements and the like. The bottom line is that with consolidation comes lower wages through monopsony.
Tons of ink has been spilled over inequality. But very little discussion has been made over private equity. People don’t know private equity in quite the same way they know celebrities, or going into debt or missing their rent payment. People don’t understand that they’re stakeholders in the business they work in. Instead, they’re led to believe that business is for other people who are more qualified. If you work in a business, that is, if you have a job, you’re a stakeholder in that business.
Private equity has successfully worked its way around the stakeholders. They set up deals where they make their money, but they’re not actually stakeholders. They’re facilitators, or better, they’re “middlemen”. You might remember those guys, and how they’re always triangulating.
So take note of the private equity deals. Notice how they turn out. Note which companies are still at risk. And ask your representatives in Congress and in your statehouse, what they’re doing to reel in the power of private equity. One person can still make a difference. Imagine what happens when millions of people start posing the right questions to the people who are in power in front of cameras.