The New Dark Age

The Private Equity (PE) BS shtick is that private equity investors and managers will be driven to find greater efficiencies, and deliver better services and develop better products due to the pressure of the massive amount of debt taken on to purchase a target company. This ignores the fact that the debt is taken on by the purchased corporation not by the private equity investors.

So the investors have relatively little skin in the game (the small amount of money they invested themselves, massively leveraged with debt). The PE partners have even less skin in the game and can more than recoup any personal investments through such things as “management fees” charged to the bought out corporation. Any corporate wholly-owned land and buildings can also be bought from it, after which high rents are charged to further extract value and remove these solid assets from the corporation’s ownership. The proceeds from these sales can very quickly be funnelled back to the investors and PE partners through a special dividend, greatly offsetting the property purchase costs. Fundamentally, the interest of the purchased corporation and the interest of the private equity investors and partners significantly diverge; producing what amounts to looting rather than investment.

The investors’ money can be multiplied by the looting of the company through massive cuts to corporate spending, which will goose profits in the short term, while they take lots more money out through special dividends etc. Once the target has been exploited as much as it can be, the private equity firm can walk away with outsized profits while leaving the debt they used to buy the company on the company’s books; with the company now a gutted shell of its previous existence. An overview of the reality of PE, with a twist of humour. The big players are Blackstone, Apollo, Carlyle Group, and KKR.

Walgreens has been bought by PE investors for US$10 billion, with the stable cash flows of a grocery chain it is a perfect target for leveraging up and gutting to produce outsized PE profits. PE has recently been getting its teeth deeper and deeper into the US healthcare sector, as its just too massive an area which has large cash flows to ignore. They are now gutting healthcare to drive outsized PE profits. Below is an investigation into some examples of PE plundering, including the gutting of employee pension funds.

In the fire truck industry, private equity worked to consolidate the industry into very few players to facilitate collusion to drive up profits. This includes investing very little in productive capacity, and even cutting capacity, even though the industry has huge order backlogs. The comparison between the monopolized US fire truck industry and the highly competitive Chinese fire truck industry is stark. US$400,000 and 6 weeks for a fire truck in China, US$2 million and 4 years for a fire truck in the US.

PE expanded rapidly with the very low interest rates of the 2010s and early 2020s, but is now struggling to raise funds in a very different liquidity environment. It also benefitted from the frothy asset prices of that period which facilitated the sales of company assets at good prices, and a growing economy that supports corporate revenues. The constant pressure from the possibilities of PE buyouts pushed all corporations to act more like PE firms, optimizing short term profits and investor returns over the longer term success of the company. The appliance maker Whirlpool is a great example of the metastasizing of the PE mindset across the corporate world. Its appliances have been crapified to drive short term results, at the cost of the destruction of brand value and customer loyalty. All the while the company hiked up dividend payments and repeatedly carried out large share buybacks (that boost the value of the executive stock options); extracting all of the value out of the company. Opening up the market for foreign competitors with a different mindset such as LG and Bosch.

US PE funds actually shrank in 2023 to US$4.7 trillion, and the raising of new money fell by 23% in 2024 to US$401 billion; that is after the global PE industry quadrupled during the 2010s though. As this article in the Financial Times points out, PE’s use of highly complex layers of extensive leveraging has lead to banks holding large amounts of PE debt. The ability to pay off that debt relies heavily on an active market in the buying and selling of corporate assets. A major downturn in the economy and market could quickly freeze that market and lead to widespread bad debts and defaults.

Different types of lending are led by different teams within a bank, and often different banks altogether. The lack of oversight has regulators worried about whether lenders can really know just how exposed they are.

The Bank of England official responsible for financial stability strategy and risk, Nathanaël Benjamin, cautioned in April that there were “natural questions about the risks of these financing arrangements, and the growth in kinds and quantity of leverage, or ‘leverage on leverage’, throughout the ecosystem”.

In its Financial Stability Review in May, the European Central Bank said that although private markets had a relatively low risk profile overall, they had an “opaqueness and uncertain resilience” that was a source of concern.

The debt that ties private equity in with the banks, insurance companies and other groups dubbed “non-bank financial institutions” means that any stress in the industry could ripple across the wider financial system.

“The opacity, complexity, and interconnectedness of the sector have made assessing its developments difficult, but it also means that it is all the more important,” Benjamin added. “These developments could pose risks to financial stability.”

A perfect setup for the next financial crisis, where the bag will be held by the corporate creditors, suppliers and employees. Investors may also take a hit (pension funds, endowments and oligarch family investment offices etc.), after not getting a better return than just investing in a stock index tracking fund. The PE partners have been extracting most of the outsized profits through extravagant investment management fees and a 20% share of any profits. In effect, the PE partnerships have been asset stripping the purchased corporations that have been loaded up with debt while at the same time gouging the PE investors. Many individual PE partners have already become billionaires and oligarchs in their own right, by gutting the productive capacity of the US and other Western nations and charging ridiculously high investor fees – to the tune of US$100 billions over the past decade.

How has such a destructive group managed to keep operating like this? Easy, they give oodles of money to politicians and political campaigns, hire the best law firms, and operate a revolving door with their regulators, while also being allowed to obfuscate their investor returns and fees. They have even been able to keep the “Carried Interest” PE tax scam in place against many challenges. PE is a symptom of late empire, as scam artists in expensive suits feast on the productive capacity of the nation while gouging their investor clients – the majority of which are financial institutions such as pension funds and endowments.

Trump’s tariff barrage and slashing of government spending may be a toxic mix for the very highly leveraged private equity sector. Firstly, the tariffs slash revenues and increase costs for many companies, with the recession and more generalized inflation effects doing the same. The fall in the stock market also reduces the availability of credit and the prices at which private equity assets can be sold off. With the amount of leverage involved we may very well see some very major losses for PE funds and the financial firms that have extended so much credit to them, together with the pension fund and endowment investors. If this becomes reality we should also expect an avalanche of political contributions and lobbying to get the state to bail out the billionaire private equity partners, their investors and creditors. Once more, capitalism for the poor and socialism for the rich.