With fast-growing private equity firms controlling as much as 20% of the U.S. economy with minimal disclosure requirements, business leaders must understand the implications of increasing concentration of ownership by both private equity firms and index funds and advocate for enhanced reporting standards, a Harvard Law School professor argues. At stake: market competitiveness, innovation, and economic fairness.
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Private equity has its origins in leveraged buyouts in the 1970s and 1980s. The idea was to take companies, usually publicly listed on the stock exchange, borrow a lot of money—that’s the leverage—and buy them out. Then, they could use their control to improve the value of the company and resell it, typically 3 to 5 years later. That’s the original idea of what private equity mostly does.
What’s changed since then is that the scale of operations of private equity has grown and grown and grown—to the point that now private equity controls between 15% and 20% of the entire U.S. economy. They’re no longer buying isolated companies and flipping them back to the public markets. Instead, they buy them and sell them to mostly other private equity firms. They’ve become their own separate capital universe.
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The private equity industry is very good at convincing Congress or regulatory officials to shape laws in a way that allows them to remain essentially dark. They don’t put out public reports. They don’t put out any information that the public can use to evaluate what they’re doing, or even their investment performance.
It is increasingly a challenge for the legitimacy of capitalism. Capitalism depends upon some degree of transparency about how it’s functioning, how workers are being treated, and how consumers are being treated.
Private equity used to buy distressed firms then build value to sell. The new norm is buy anything and suck it dry then let it fold in on itself and take the money elsewhere.
For example, the firm that bought Red Lobster leveraged everything their brand had to sell (cheddar bay biscuits in the grocery store). The individual stores which sat on company-owned land had their budgets re-configured to “pay rent” to the overlord which now owns everything including the land.
The costs of advertising and company image maintenance were passed down to the stores as fixed costs that local managers had to account for in their budgets without impacting the owners of the name.
No surprise that very few locations can turn a profit in that environment but the leeches at the top aren’t hurt by store closings.
Private equity acquisition today is simply buying something of value to slurp it’s blood then discard the husk.
Private equity used to buy distressed firms then build value to sell. The new norm is buy anything and suck it dry then let it fold in on itself and take the money elsewhere.
Bingo!
I thought this was common knowledge, but it probably isn’t, and is worth outright stating.
Its basically the last stage of late stage capitalism:
The need for increased profit is so high that capital itself is consumed. Not utilized, not restructured… just consumed, like food.
This keeps the profits flowing for a smaller and smaller number of people, but it actively destroys the chunks of the economy it touches, raises prices, lowers wages, cuts jobs.
Its Mergers and Acquisitions on steroids, even worse because it normalizes even further obsucuration of the whole economy.
Basically the last stop before outright Corporate NeoFuedalism.
Say hello to the new trusts, same as the old trusts. 100 years later, it’s literally the gilded age all over again.
Gilded Age but we don’t even get the Art Deco and the flappers. Just Ketamine and whatever the fuck Vivek Ramaswamy is talking about.
Definitely sustainable and not completely stupid.
Remember that bit in Pretty Woman where they are in the big business meeting and you find out that the goal is to buy the company and sell it off piece by piece because the company is worth more on parts than as a whole? The good guy in the movie is the one that decides to use the ship yard to make ships instead. Make instead of destroy.
Most people never pay attention to that part of the movie. But I did. That’s a private equity, aka hedge fund, aka corporate raiders company he owns. He makes money by buying a company and destroying it to squeeze as much money out of it as possible. Everyone loses and he gets richer.
Private equity, where the profits don’t trickle down, and you can’t buy shares so the wealth concentrates even more while also making a profit from running a company into the ground and having it collapse in bankruptcy.
People don’t realize the systemic risk this puts the world economy at when a sizable chunk of the world economy is held by people individuals who are only finding new ways to make the most money and have zero obligations society.
I’m actually kinda surprised the number isn’t higher by this point. I suppose late stage capitalism feels even later stage in my mind. Fucking hell.
I suspect that because of minimal reporting requirement, the real number is higher. What the real number is, I can’t say with certainty. 27T is the size of the US economy in 2023, so 20% is ~5.5T
Always remember that 100% of an business (an therefore the economy) can be completely controlled by just 40% of it
