Mehrsa Baradaran has an important op/ed piece in the New York Times you may have missed: The Neo-Liberal Looting of America. The coronavirus pandemic has exposed the damage private equity has done to the United States. Thousands of jobs have been lost through the bankruptcies of J Crew, Nieman Marcus, and Hertz after its PE owners layered $billions of debt on their portfolio assets, PE-owned long-term care facilities have cut skilled nursing staff and PPE resulting in untold thousands of deaths as infections raged through their facilities, PE-owned hospital emergency room groups have been aggressively laying off MD’s and nurses. But the PE executives continue to rake in $millions.
In the last decade, private equity management has led to approximately 1.3 million job losses due to retail bankruptcies and liquidation. Beyond the companies directly controlled by private equity, the threat of being the next takeover target has most likely led other companies to pre-emptively cut wages and jobs to avoid being the weakest prey. Amid the outbreak of street protests in June, a satirical headline in The Onion put it best: “Protesters Criticized For Looting Businesses Without Forming Private Equity Firm First.” Yet the private equity takeover is not technically looting because it has been made perfectly legal, and even encouraged, by policymakers.
The magnitude of the greed is breathtaking.
The number of private equity barons with personal fortunes of more than $2bn has risen from three in 2005 to 22, according to a new analysis which estimates investors paid $230bn in performance fees over a 10-year period for returns that could have been matched by an inexpensive tracker fund costing just a few basis points. “This wealth transfer from several hundred million pension scheme members to a few thousand people working in private equity might be one of the largest in the history of modern finance,” said Ludovic Phalippou, professor of finance at Oxford Saïd Business School.”
That’s $230 billion that could have been deployed to raise wages of employees, of investing in plant and equipment, or in product innovation. But they also get special tax treatment denied to the rest of us:
Their standard fee structure involves collecting around 2 percent of the investor money they manage annually, and then 20 percent of any profits above an agreed-upon level. This lucrative arrangement also lets them tap into the very favorable “carried interest” tax loophole, allowing them to pay much lower capital gains tax rates on their earnings, rather than normal income taxes like most people.
Now the limited partners in these private equity funds include university endowments and public pension funds. So isn’t it a net positive if the PE returns are securing the retirements of public employees? But, according to the Financial Times the research shows that PE funds perform no better than the market as a whole:
Mr Phalippou’s analysis indicates that large US public pension plans earned about $1.50 (net of fees) for every $1 invested in private equity funds between 2006 and 2015. This translates into annualised returns of about 11 per cent, little different from the US stock market over the same period.“The performance of PE funds, net of fees, matched that of public equity markets since 2006,” said Mr Phalippou.
My hope is that Elizabeth Warren will be appointed Secretary of Treasury in the Biden Administration and can finally push through her Stop Wall Street Looting Act.