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Part 1: The Seismic Shift Amongst Private Equity Giants

Part 1: The Seismic Shift Amongst Private Equity Giants

Private equity remains one of the most influential industries and career paths in our capitalist society. At a high level, private equity firms look to invest in and manage a company, typically using leveraged buyouts, with the hopes of substantially growing the acquired business within three to five years. The end of an investment arrives when the firm either sells the acquired company to another private equity firm or takes it public, resulting in a considerable return on investment. These firms manage and oversee a staggering proportion of businesses worldwide, with the top 5 firms alone claiming nearly $600 billion in assets under management (Rosenberg, 2019). These investments do not concentrate insignificant parts of the economy, with names like Staples, Dominos, Dunkin Donuts and Toys R Us having all been, at one point, under the management of a private equity firm.

Despite the unparalleled influence on everyday life, the world of private equity is often reviled for its “secrecy”, with firms making up the sector known as “shadow finance”. This characteristic could be seen as deliberate. The brass at PE firms look for growth and returns for the business in many ways, but unfortunately some of the common ways that margins are increased are not in the best interest of the company’s employees. The most evident “undisclosed outcome” of private equity operations is the layoffs and plant closings that often accompany firms’ attempts to make operations more efficient and economical. Obviously, this makes the private acquisition process incredibly damaging to employees at the lower end of the corporate ladder, and though the reacquisition of operating costs and other overhead through this unfortunate process creates value in the entire company, this is very much value that the acquirer is merely looking to extract for themselves (Manis, 2008).

Layoffs do not even comprise the primary tools for value capture. The most damning financial focus of private equity firms comes in the form of leverage. Private investors will often load up acquisition companies with debt in the hopes of raising their return upon selling in the time horizon, and if the new business model is not as successful as projected, the company is at a much greater risk of declaring bankruptcy (Froud, 2007). These companies do not cease to exist after being sold by private equity firms and are sometimes left with no option but bankruptcy. Research conducted at California State Polytechnic University found that 20% of larger companies that were privately acquired through a leveraged buyout went bankrupt within 10 years, as compared to a “control group” that only saw the same fate at a rate of 2% (Ayash, 2019). Additionally, the toll that leverage has had on the retail sector is staggering. In the case of high-profile bankruptcies like that of Toys R Us, the retailer is loaded up with debt, which made adjusting to e-commerce trends and upgrading operations much more difficult (Unglesbee, 2018), and other companies without this burden found a competitive advantage much quicker. In many ways, the PE firms look to create value in spite of the current state of their acquisition and are intent on bringing the company to market whether they like it or not.

The loss of jobs and the above-average rates of financial distress is a strong indication of the root problem when it comes to private equity firms: the misleading nature of their message. Private equity firms and their defenders often laud the economic efficiency that their investment brings, and how their interest and attention have the ability to bring operations back to life (Segal, 2019). This sentiment, in a vacuum, is quite touching, and seems to indicate a moral commitment to bringing profound and sustained economic prosperity to a great number of individuals. What is missing from this idyllic image is the unsympathetic and self-interested attitude that firms undertake, and the unequal benefit bestowed upon all supposed beneficiaries indicates that the kind and caring, parental undertones of these firms are far from the truth. Firms treat the members of their portfolio company as a means to an end and not true business partners (Clark 2010), encompassing the true dark side of business partnerships. Layoffs and financial restructuring are inherent parts of the business cycle, and these consequences alone should not lead to the intuition that private equity firms are the sole cause of these unfortunate instances. In many cases, it is not the outside voices but the established executives at a firm that are making the decision to pursue these paths for their business. However, it is evident that the financial engineering and maneuvering often brought about by private equity acquisition is not carried out with proper care and respect for the portfolio company. Small corner stores and multinational companies are all driven by the self-interest of its owners to seek success in any way possible. But, these owners’ jobs are to create value for the foreseeable future, and to assure that their tenure is fruitful for a generation of employees and consumers. Private equity firms are not held to task in the same way, and as relatively short-term owners within the business, are not held to the same standard of craftsmanship and consideration for the status of the company in the long run.

In flouting their own promises, PE firms have not just squandered their own reputations, but have also wasted their potential value for consistently improving economic well-being across many industries and regions. There is a lot to be said for finding undiscovered value in “stuck” organizations; each company has its own set of strengths and weaknesses, and any true business leader understands that a fresh pair of eyes can help in improving overall business strategy. But the entrenched secrecy and ideal time horizon have made it in investors’ best interest to forgo their sharp business acumen in favor of self-interest and complex financial engineering that benefits themselves more so than their acquired organization. Given the private nature of operations, the considerably lower legal oversight and diminished accountability in risk-taking, private equity firms are manipulating the rules and philosophy of the free market in a way that tilts the scale in their favor. They continue to increase the concentration of decision-making outside of the hands of visible managers and public spokespeople, transforming our economy into one continually outside of the scope of public scrutiny. Private equity brass avoid the burdensome presence of the public shareholder, just like other large companies that are looking to do what is best for their own business within their purview. However, their historical lack of consideration on a wide scale demonstrates that their deliberate privacy goes beyond a focus on enhancing their day-to-day operations. It stems from a deliberate attempt to shield their destructive practices.

Works Cited

Appelbaum, Eileen, and Rosemary Batt. Private Equity at Work: When Wall Street Manages Main Street. Russell Sage Foundation, 2014, www.jstor.org/stable/10.7758/9781610448185. Accessed 4 August 2019.

Ayash, Brian and Rastad, Mahdi, Leveraged Buyouts and Financial Distress (July 20, 2019). Available at SSRN: https://ssrn.com/abstract=3423290 or http://dx.doi.org/10.2139/ssrn.3423290

Beers, Brian. “Why do Stock Prices Change Based on News Reports?”, Investopedia, https://www.investopedia.com/ask/answers/155.asp. Accessed 3 August 2019.

Clark, Ian and Morrell, Kevin. “Private Equity and the Public Good.” Journal of Business Ethics, vol 96, 2010, https://link-springer-com.proxy.bc.edu/content/pdf/10.1007%2Fs10551-010-0463-8.pdf. Accessed 1 August 2019.

Fonda, Daren. “Carlyle Group will Become a Little Less Secretive with Its Switch to a Corporation.” Barron’s, https://www.barrons.com/articles/carlyle-group-private-equity-conversion-corporation-51564585925?mod=article_signInButton. Accessed 2 August 2019.

Froud, Julie and Williams, Karel. “Private Equity and the Culture of Value Extraction.” Manchester Business School and Centre for Research in Socio-Cultural Change. 2007. Accessed 3 August 2019.

Geewax, Marilyn. “So, Um, What is a Private Equity Firm?” NPR, https://www.npr.org/2012/01/19/145416791/so-um-what-is-a-private-equity-firm. Accessed 1 August 2019.

Gottfried, Miriam. “Blackstone to Become Corporation, Swapping from Partnership Status.” The Wall Street Journal, https://www.wsj.com/articles/blackstone-to-become-corporation-swapping-from-partnership-structure-11555588261. Accessed 1 August 2019.

Manis, Jerome. America’s Downward Spiral: A Call to Action. Xlibris, 2008.

Maremont, Mark. “Romney at Bain: Big Gains, Some Busts”. The Wall Street Journal, https://www.wsj.com/articles/SB10001424052970204331304577140850713493694. Accessed 3 August 2019.

Mohler, Jeremy. “The Secretive Industry Turning Trump’s Immigration Crackdown into a Global Cash Cow.” Medium, https://medium.com/in-the-public-interest/the-secretive-industry-turning-trumps-immigration-crackdown-into-a-global-cash-cow-bd0f6fa427c. Accessed 2 August 2019.

Morgenson, Gretchen. “Entering the Secret Garden of Private Equity.” The New York Times, https://www.nytimes.com/2014/12/28/business/entering-the-secret-garden-of-private-equity.html. Accessed 3 August 2019.

Rosenberg, Eric. “The 8 Best Private Equity Firms of 2019.” The Balance, https://www.thebalance.com/best-private-equity-firms-4583955. Accessed 31 July 2019.

Rotonti, John and Lomax, Alice. “Does ESG Investing Produce Better Stock Returns.” The Motley Fool, https://www.fool.com/investing/2019/05/22/does-esg-investing-produce-better-stock-returns.aspx. Accessed 4 August 2019.

Segal, Troy. “Understanding Private Equity.” Investopedia, https://www.investopedia.com/articles/financial-careers/09/private-equity.asp. Accessed 19 August 2019.

Teather, David and Trainor, Jill. “Private Equity: The Human Cost.” The Guardian, https://www.theguardian.com/business/2007/feb/23/privateequity1. Accessed 2 August 2019.

Unglesbee, Ben. “Is the road to bankruptcy paved by private equity?” RetailDive, https://www.retaildive.com/news/the-road-to-bankruptcy/540617/. Accessed 19 August 2019.

Part 2: The Seismic Shift Amongst Private Equity Giants

Part 2: The Seismic Shift Amongst Private Equity Giants

The Economic Drag of College Debt and a Novel Solution

The Economic Drag of College Debt and a Novel Solution