Private equity seems to have its tentacles woven into every part of our lives these days, often unbeknownst to us. The article just posted in another thread about PE in healthcare got me thinking about just how much of our lives are actually affected for better or worse by PE expanding into so many facets of our lives.
https://www.bloomberg.com/news/features/2019-10-03/how-private-equity-works-and-took-over-everything
Good for the investors, often bad for the society as they sometimes stifle innovation, load places up with debt, and look for a somewhat quick exit - hence layoffs, etc.
It’s not always this way though - some do spend and innovate.
I think it’s case by case.
But we are a capitalistic society - and both they are their targets take advantage.
They’ll tell you they bring efficiencies- and often that is true.
I spend a lot of time in this world as I’m on the board of a fairly large (low ten digits) PE-owned tech firm and was previously on a publicly quoted company’s board.
My experience has been that the PE owned company has done far better than its publicly listed competitors who are always worried about making the next quarter’s results and are therefore more prone to short term thinking and announcing (sometimes ill-considered) strategies that sound good to the investors (who often don’t understand the business at all).
A PE firm with deep domain knowledge (really the only type you want involved if you want the company to succeed) should do a better job of figuring out the good and bad bits of the business and industry than public investors ever can, since they have access to all the information they need.
Most people think that PE firms are just about loading the company up with debt and cutting costs. While debt levels are often higher than in a public company, that can be OK if you understand the business really well and the outcomes are predictable. Where it sometimes goes wrong is if the company encounters significant developments that weren’t anticipated, such as an economic shock or new disruptive competition. Then the assumptions underpinning the cash flow model can go badly wrong. But the same happens to overleveraged public companies too.
That’s fair but then there are many firms that pay themselves outrageous dividends and put the company at unsustainable debt levels.
There are both - winners and losers. Some save the organizations. Some improve. Some grab the cash.
Generally when PE is involved it’s good for my stocks - at least initially. And ultimately that’s what most equity owners want - higher prices.
Define “better.”
Nothing boils my blood more than PE. It is NEVER in the interest of the consumer/patient/customer/user to patronize a PE-owned entity. It’s terrible for society. It’s terrible for the country.
Grown faster by adopting a more sensible long term strategy because it doesn’t have to explain itself to public market investors every quarter. Ultimately leading to better service for customers and a better return for investors.
In what way is a private firm always worse than a public firm? And why is a PE-owned firm worse than a firm owned by a hedge fund or a VC fund? It is impossible to generalize like that.
Some companies are run badly, others are run well. At the end of the day, that is down to the management and the board.
You are softening it by calling it a “private firm.” Private equity is a very specific thing that means more than just a private company. First of all, PE has investors. It may not be on the open market, but still there are investors who are in it for money at the expense of employees and customers of the purchased firms.
It’s not. They are all terrible for society, fuel huge income inequality, and are instrumental in leading the U.S. toward oligarchy. Yes, I have thoughts about this.
So you don’t have a pension fund that invests your money for retirement? Where on earth do you think the money comes from to fund both public and private companies? PE firms, like hedge funds and VC firms (which all have subtly different areas of focus), are money managers with Limited Partners putting up the money itself, and in aggregate pension funds are the largest single source of LP funding.
Saying that investors are always acting contrary to the interests of employees and customers makes no sense. Without someone to provide capital to run the firm there would be no employees or customers.
Perhaps living in a non-capitalist society like North Korea would be more to your liking?
Capitalism doesn’t mean free-for-all. Sweden, Denmark, France, Australia, New Zealand, Japan, are all capitalist economic systems. But they don’t eat their young
The long term risk that a capitalist economy faces is the increasing concentration of capital and economic power into the hands of fewer and fewer people, where those holding the capital can increasingly extract monopoly or oligopoly rents on other participants in the economy, while opportunities for the next generation become more determined by inheritance (either directly or through parentally purchased opportunities to display merit needed to enter elite ranks).
The danger manifests itself when many participants feel that they no longer have a stake in the existing system and fell that it must be torn down completely. Both left wing (communism) and right wing (racism, isolationism) varieties exist (with different scapegoat targets; movements are often defined more by what they hate than how they would try to make things better), either of which can lead to unpleasant political instability or poor governance if they gain power.
A capitalist economy that offers opportunity for all participants tends to be the most rewarding for the greatest percentage of people. But capitalist economies can evolve away from that to their own peril and peril to those participating in them.
And they all have many private equity firms and pension funds that invest in them, though some of these countries are relatively lacking in VC firms which contribute to the dynamism of the US economy, hence all the attempts to create Silicon Valley equivalents (Silicon Beach in Australia, Silicon Fjord in Norway etc).
An interesting wrinkle on this was a conversation I had recently with a college student, who informed me they need to get a prestigious high paid job in private equity, consulting or similar, so they can be financially secure. However, they would just do this job for the money and could never enjoy it, because they are a Marxist and don’t believe in capitalism.
This seems to me like a recipe for unhappiness in life and a big change from when I was growing up and the people who didn’t believe in capitalism in college would either grow out of it or become an academic, social worker, journalist, civil servant, hippy etc, not go and work for companies that rely on capitalism for their very existence.
PE has taken over a bunch of the medical practices in our area, to the client’s loss. Of course hospitals have been busy buying medical practices and making them worse with outrageous amounts of paperwork. But the PE firms are really, really clueless in this space. I now communicate with my doctor through the non-HIPPA compliant company website form. These fools don’t realize that patients need a lot of additional help from docs.
The firms buying up houses with cash are driving up prices, putting many people in the position of giving up on ever owning their home, and forced into renting the houses they would have bought in another economy. One third of house sales last year were cash. This drives more capital into the hands of the already rich, and strips much of the middle class of the ability to acquire equity in the normally most common way. Gift article:
One of the reasons why most of the worlds innovative companies are located in the US is PE and VCs.
When the game is set up a certain way, you may have to play it that way, even if you do not like it that way. Indeed, if a communist wants to overthrow the system, they may think that it is better to start with money, power, and insider knowledge gained from finance industry work than from a position of unemployment, poverty and powerless that some of those other professions you list are facing in today’s US economy.
In communist (or crony capitalist) economies, lots of people do not like the game, but are forced to play it as best they could.
I would lean on the side that PE does more harm than good overall. Not in every instance though.
Just like we talk about how too much debt for college loans are crazy the same can be said for many companies. If a company can’t withstand a worse-case scenario with their debt levels then they do a disservice to their customers and employees. Like someone said most PE firms have it built in to return their capital in the way of a mgt fee that keeps debt high.
Too many firms are worried about the short-term public or private.
I heard a saying once “Never get caught looking for pennies on the floor when dollars are flying above your head.”
I think the difference is now that you can no longer earn enough to eat as an academic, social worker, journalist, or civil servant. Or if you work in one of the pockets that still has a living wage, there are forces actively trying to tear that down. So a PE job is seen as a kind of a baseline for survival.
To answer the question, PE is hurting. This is a forum about college, so people on this forum should understand how education is broken in this country, divided between wealthy elite private schools that no one can get into and overcrowded publics that are on a downward spiral. Does anyone think that funneling more money to the College Board or other online education intermediaries is going to improve things?
Private equity replicates this dynamic across all sectors of the economy. Housing and healthcare have already been brought up, as has Silicon Valley, whose favorite mottos of “Break things” and “Be Evil” have continued to infect more areas, bringing “dynamism” and “disruption”, the ethics of Pol Pot.