Private Equity: The Good, The Bad, and The Ugly
Private equity ownership comes with its fair share of risks. Statistics show that companies owned by private equity firms are about 10 times more likely to go bankrupt compared to non-PE-owned companies. While this statistic might seem daunting, it’s essential to understand the underlying factors contributing to these risks.
Recently, we had the opportunity to engage in a fireside chat with Brendan Ballou, the acclaimed author of Plunder: Private Equity’s Plan to Pillage America. With his background as a former federal prosecutor and special counsel for private equity at the US Department of Justice, Ballou provided valuable insights into the inner workings of private equity firms and their impact on the economy.
During the conversation, Ballou shed light on the practice of leveraged buyouts (LBOs) by PE firms, where they invest minimal equity, significant investor funds, and borrowed money to acquire companies. While this approach aims to generate profits over a few years, it often leads to adverse outcomes such as increased bankruptcy rates, job losses, and negative industry impacts.
Ballou emphasized the importance of regulatory changes to align private equity activities with the long-term health of businesses and communities. He highlighted specific strategies used by PE firms, such as sale-leasebacks and dividend recapitalizations, that prioritize short-term gains over sustainable growth.
Key Takeaways From the Conversation:
- Private equity firms often prioritize short-term gains over long-term sustainability.
- Strategies like sale-leasebacks and dividend recapitalizations can harm companies in the long run.
- Regulatory changes are essential to ensure accountability and fairness within the private equity industry.
Advocating for Fair Practices
As professionals, it’s vital to advocate for fair practices within organizations influenced by private equity. By promoting transparency, accountability, and long-term thinking, we can contribute to a more sustainable economy. Organizations like Americans for Financial Reform and the CFA Institute Research and Policy Center are valuable resources for staying informed on these issues.
While the growth of private equity firms is inevitable, it’s crucial to monitor their activities and hold them accountable for their actions. Regulatory efforts at the state and local levels can help ensure that decision-makers take responsibility for the consequences of their actions.
Conclusion
Private equity has the potential to drive economic growth and innovation when guided by principles of transparency and accountability. By advocating for fair practices and regulatory changes, we can help create a more equitable and sustainable economy for all stakeholders.