Prior research on private equity has focused almost exclusively on the financial performance of private equity funds and the returns to their investors. Private Equity at Work provides a new roadmap to the largely hidden internal operations of these firms, showing how their business strategies disproportionately benefit the partners in private equity firms at the expense of other stakeholders and taxpayers. In the 1980s, leveraged buyouts by private equity firms saw high returns and were widely considered the solution to corporate wastefulness and mismanagement. And since 2000, nearly 11,500 companies—representing almost 8 million employees—have been purchased by private equity firms. As their role in the economy has increased, they have come under fire from labor unions and community advocates who argue that the proliferation of leveraged buyouts destroys jobs, causes wages to stagnate, saddles otherwise healthy companies with debt, and leads to subsidies from taxpayers. Appelbaum and Batt show that private equity firms’ financial strategies are designed to extract maximum value from the companies they buy and sell, often to the detriment of those companies and their employees and suppliers. Their risky decisions include buying companies and extracting dividends by loading them with high levels of debt and selling assets. These actions often lead to financial distress and a disproportionate focus on cost-cutting, outsourcing, and wage and benefit losses for workers, especially if they are unionized.
See here.
«include buying companies and extracting dividends by loading them with high levels of debt and selling assets. These actions often lead to financial distress and a disproportionate focus on cost-cutting, outsourcing, and wage and benefit losses for workers, especially if they are unionized.»
ReplyDeleteIn the past 30 years this has become the strategy for entire countries. Like the USA and the UK.
The antecedent to this strategy is the Bain Capital Matrix, and the strategy is essentially the standard one applied to "dog" businesses (and countries) in that approach.
The strategy has been popularized and advocated (for slightly different reasons) by Michael Jensen, a business school professor who has had more influence on recent politics and economics and business than most people.
The story is well and tersely told in chapter 6, page 265 of "Wall Street: The Book" by D. Henwood, an exceptionally useful book that is now available for free (donations suggested) from:
http://www.wallstreetthebook.com/