Private equity: Profit for investors, risk for workers
Private equity has gotten too big to ignore, said Christine Idzelis in the Institutional Investor. A new study found “private equity firms now manage $3.4 trillion of investor commitments globally, up from less than $500 billion in 2000.” That growth represents one of the “most profound shifts in the capital markets since the 19th century.” The boom in private equity is occurring as “the pool of publicly traded companies in the U.S. has shrunk by almost half in the past 20 years,” and the fastest-growing startups, such as Uber and Airbnb, are increasingly willing “to spend more of their life cycle on the private side.” Private equity’s basic technique is to buy a public company, often using borrowed money to fund the takeover, said Jason Kelly in Bloomberg.com. “The strengthened company is later resold”— sometimes for a huge profit. “Many private equity takeovers are success stories: Blackstone’s buyout of Hilton returned the iconic hotel brand to glory.” But other private equity targets have ended up in bankruptcy or liquidation—including Toys R Us, where the loss of 30,000 jobs “shined a light on the industry and helped to renew calls to rein it in.”
Americans have a problem with private equity, but it’s not what you think, said Hal Scott in the Financial Times. It’s that ordinary people aren’t allowed into private equity funds. The average private equity fund has significantly outperformed the S&P 500 in recent decades, yet “today, more than 98 percent of U.S. households are prohibited from investing” in them by U.S. law, and their 401(k) retirement plans cannot invest in them, either. Meanwhile, wealthy individuals with at least $5 million in assets, as well as university endowments, are reaping the benefits. “It is time to give middle-class Americans the same investment opportunities.”
Wonder why private equity gets such a bad rap? asked Dan Primack in Axios.com. Research by Josh Lerner of Harvard and Steve Davis of the University of Chicago found “average job losses of 4.4 percent in the two years after a company is bought by private equity,” up from less than 1 percent in 2011, when the researchers completed a similar study. That’s partly why Democratic presidential hopeful Elizabeth Warren has proposed killing the “vampire” leveraged buyouts, said the Financial Times in an editorial. She is right to call for change; with the industry’s increasing power “should come greater responsibility.” Some companies flourish under private equity ownership, but too frequently jobs and wages are sacrificed to productivity and profits. We need clearer evidence that private equities are actually transforming businesses through better management, “not financial engineering.”