I can't write with the eloquence of bonddad or Jerome a Paris, but when I read
this I immediately thought it needed to be brought to everyone's attention who is concerned about how wealth is being concentrated more rapidly in the hands of a few, at the cost of driving struggling and sometimes even profitable businesses into bankruptcy.
I'll just post a few choice excerpts and let the experts parse it out. The businessweek article is titled Gluttons at the Gate.
These are crazy times in the private-equity business. It used to be that buyout firms would spend 5 to 10 years reorganizing, rationalizing, and polishing companies they owned before filing to take them public.
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Buyout firms have always been aggressive. But an ethos of instant gratification has started to spread through the business in ways that are only now coming into view. Firms are extracting record dividends within months of buying companies, often financed by loading them up with huge amounts of debt. Some are quietly going back to the till over and over to collect an array of dubious fees. Some are trying to flip their holdings back onto the public markets faster than they've ever dared before. A few are using financial engineering and bankruptcy proceedings to wrest control of companies. At the extremes, the quick-money mindset is manifesting itself in possibly illegal activity: Some private equity executives are being investigated for outright fraud.
Taken together, these trends serve as a warning that the private-equity business has entered a historic period of excess. [...]
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The success has lured more money into private equity than ever before--a record $159 billion so far this year, compared with $41 billion in all of 2003, estimates researcher Private Equity Intelligence. The first $5 billion fund popped up in 1996; now, Kohlberg Kravis Roberts, Blackstone Group, and Texas Pacific Group are each raising $15 billion funds.
And that's the main problem: There's so much money sloshing around that everyone wants a quick cut. "For the management of the company, [a buyout is] usually a windfall," says Wall Street veteran Felix G. Rohatyn, now a senior adviser at Lehman Brothers Inc. (LEH ) "For the private equity firms with cheap money and a very well structured fee schedule, it's a wonderful business. The risk is ultimately in the margins they leave themselves to deal with bad times.
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The consequences of the fast-money mentality could be troublesome.
Intentionally or not, the corporate raiders of the past did some beneficial things for the business world. Then as now, their sole purpose was to generate returns, but they often succeeded in adding value to the broken companies they bought. As tales of their massive layoffs and other cost-cutting spread, the raiders frightened corporate executives into making efficiency improvements preemptively--helping the U.S. economy regain its strength. At their best, private equity firms managed to impose discipline on others.
Now many seem to be leaving companies worse off. The stocks of companies buyout firms have taken public are way off the historical pattern.
(read the whole article)
The article goes on to detail the extent of the "excesses," and they use just that term throughout the article, and how it's changing the business world for the worse.