Why Does Everyone Hate Private Equity?

Summary

The video delves into the controversial world of private equity, a financial sector managing over $13 trillion in assets. The host, Richard Coffin, explains how private equity firms acquire companies, often using debt, and then implement aggressive strategies to boost profitability. However, these firms face criticism for layoffs, declining service quality, and even bankruptcies, especially in healthcare and real estate. Despite its appeal to investors due to high returns, the sector's secretive practices and lack of regulation have led to widespread concerns about its impact on jobs and industries.

Takeaways

• 💼 Private equity (PE) controls $13.1 trillion globally and $3.5 trillion in North America, with significant investments in various industries like restaurants, hospitals, and retail.
• 🔄 PE is often confused with hedge funds but is more criticized, with accusations of contributing to problems like unemployment, store closures, and higher healthcare costs.
• 🏢 Major private equity firms, such as Blackstone, KKR, and Apollo, manage hundreds of billions of dollars but maintain relatively low public profiles.
• 📈 Leveraged buyouts (LBOs) are a common strategy used by PE firms, involving significant borrowing (up to 90%) to acquire companies, often leading to layoffs and cost-cutting.
• 🏥 PE's involvement in critical sectors like healthcare has been linked to declining service quality, with nursing homes seeing reduced staff and higher mortality rates under PE ownership.
• 🏠 PE's role in real estate, particularly buying single-family homes, has been controversial, with accusations of driving up rent prices and contributing to the housing affordability crisis.
• 💸 Despite high risks and frequent company failures (e.g., Toys 'R' Us, Red Lobster), PE firms can still profit due to minimal liability for debts and cost-cutting strategies.
• 🛑 Regulatory oversight on private equity is minimal, leading to criticism of fee structures, transparency issues, and conflicts of interest that sometimes disadvantage investors.
• 📊 While PE has shown strong historical returns (e.g., outperforming the market by 3% per year in some cases), there are conflicting views about whether its performance truly exceeds public equity.
• ⚖️ Recent regulatory efforts aim to increase transparency in the PE industry, but pushback from the industry and legal challenges have slowed down significant reform.

Q & A

What is the total amount of assets under management globally in the private equity space?

The private equity space controls 13.1 trillion in assets under management globally.

How much does the private equity sector manage within North America alone?

Within North America, private equity manages $3.5 trillion in assets.

What is the most popular and controversial strategy within private equity?

The most popular and controversial strategy within private equity is the leveraged buyout, which represents roughly 28% of all private market assets under management as of June 2022.

What is the typical percentage of a company purchase price that a private equity fund might borrow in a leveraged buyout?

In a leveraged buyout, a private equity fund typically borrows 80 to 90% of the company purchase price.

What are some of the well-known brands that private equity firms have come to control?

Prominent brands controlled by private equity firms include Baskin-Robbins, Dunkin' Donuts, Michaels, and Ancestry.com.

What is the largest private equity company in terms of assets under management?

Blackstone is the largest private equity company with over $1 trillion in assets under management.

What are some of the issues that private equity firms face with their investments?

Issues that private equity firms face include layoffs following acquisitions, deterioration of product and service quality, and high bankruptcy rates among their investments.

What is the average percentage decrease in employment at target companies in the first two years following a private equity acquisition according to a 2021 paper?

According to a 2021 paper, employment at target companies shrinks an average of 4.4 percentage points in the first two years following a private equity acquisition.

How does the private equity model contribute to issues in the healthcare industry?

Private equity ownership in nursing homes has been linked to over 22,000 additional deaths over a 12-year period, and they have been associated with lower staffing ratings and higher mortality rates in healthcare facilities.

What is the typical time horizon for private equity firms?

Private equity firms typically have a short time horizon of anywhere from 3 to 7 years.

How do private equity firms benefit from the bankruptcy of their portfolio companies?

Private equity firms can benefit from the bankruptcy of their portfolio companies because they often structure their investments in a way that limits their liability, allowing them to potentially reacquire the business after bankruptcy in a better financial position.

What is the '2 and 20' fee structure commonly charged by private equity funds?

The '2 and 20' fee structure refers to a 2% annual fee based on the value of the investment and a 20% performance fee that pays out 20% of profits above a given threshold.

How does the tax treatment of carried interest benefit private equity managers?

The carried interest, or the 20% performance fee, is treated as a capital gain rather than income due to a tax loophole, which means it is taxed at a lower rate.