Book Review: “Private Equity at Work: When Wall Street Manages Main Street”
Over 400 pages of flowing prose, Eileen Appelbaum and Rosemary Batt give us a compelling and exhaustive take on one of the more overlooked—and hard to understand- elements of the financial system. Through a range of examples in businesses large and small, the authors give us ideas of how private equity can be effectively mobilized to grow business enterprises, and how it can be used to strip assets and make managers rich by eviscerating profitable companies. The book is written such that it’s accessible to someone who isn’t a finance guru, but is probably ever more interesting to someone with that background.
PE, a Complicated Beast of Finance
Perhaps the core of the book is an in-depth exploration of how private equity is used to acquire profitable companies and then enrich private equity owners by essentially dismantling the company. Rosemary and Batt argue that bankruptcy law has been weaponized as a tool for “taxpayer-funded capitalism” in which predatory PE investors can derive massive profits while avoiding pension liabilities for workers (union and non-union) and also skirt what would otherwise be substantial requirements from laws like ERISA (1974) and WARN (1988). This “regulatory arbitrage” engaged by these companies—that is, figuring out ways to legally avoid compliance with regulations by exploiting loopholes, regulatory disparities, and clever meandering about the tax code, results in socially detrimental outcomes that can leave thousands of workers unemployed and local and state governments to pick up the tab.
How Losers Still Get Paid: Why Bankruptcy Can’t Rein In Executive Compensation
Growing, or effectively limiting, returns
While providing examples of companies that were acquired by PE investors and successfully grew—and remained successful- there are more examples here explored as a cautionary tale of companies that were bought up and then effectively destroyed. PE investors target companies that have high rates of cash flow because that can be used to generate leverage, which can then be used to pay out things like dividend recapitalizations and management fees to PE principals.
However, the authors point out, this financial engineering doesn’t translate to more profitable returns for limited, versus general, partners. Private equity returns often lag market returns, but because of how rates of return are measured, this is often intentionally misrepresented to investors. In other words, principals and executives make a bunch of money while even the core group of investors—to say nothing of rank-and-file workers- may well get screwed.
Conclusions
Voluntary improvement to PE alone—through various trade association standards- hasn’t effected the kind of transparency, worker protections, and investor protections that could be forced by prudent regulation. (I looked at a similar topic earlier this year in the golden parachutes that continue to unfurl, unabated in the disastrously deregulated era of Trump). The authors cite Dodd-Frank, for example, but also suggest that major revisions are needed to the tax code for things like the carried-interest loophole, or other provisions that allow some PE investments to be considered on the balance sheet as capital assets rather than investments, whose income would be taxed. (This is deep, deep down a rabbit hole of financial haute-nerdery, so if you aren’t into this, just skim it).
A must-read book for anyone interested in understanding private equity, an oft-overlooked part of our financial system.
