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.

Outlines

00:00

🧐 Introduction to Private Equity

In this video, host Richard Coffin introduces private equity, a sector managing over $13.1 trillion globally and $3.5 trillion in North America. While often confused with hedge funds, private equity has a negative reputation, blamed for problems like store closures, unemployment, and rising healthcare costs. Coffin discusses well-known firms like Blackstone and KKR, noting their influence over major brands and raising concerns about their secretive nature. The video will explore whether private equity is truly as evil as it seems and whether individuals should invest in it.

05:01

💸 Private Equity Structure and Strategies

Private equity firms focus on helping clients invest in privately owned businesses. These firms use pooled client funds to acquire companies and turn them around for profit. The most popular strategy, leveraged buyouts (LBOs), involves borrowing large sums to purchase mature businesses, placing the debt on the acquired company. Despite the high risk, private equity offers attractive returns and diversification benefits, often outperforming public markets. However, these firms charge hefty fees, typically 2% of assets and 20% of profits.

10:01

🔪 Downsides and Controversies of Private Equity

Private equity strategies often lead to layoffs and cost-cutting measures, which can reduce the quality of services and products. This is especially troubling in critical industries like healthcare, where private equity ownership has negatively affected patient care and increased mortality rates. In real estate, private equity firms have been accused of exacerbating housing affordability issues by buying up single-family homes and raising rents. Moreover, private equity companies have a high failure rate, contributing significantly to U.S. bankruptcy filings.

15:03

🤔 Why Private Equity Firms Act Aggressively

Private equity firms often prioritize short-term profits over long-term sustainability. They sometimes sell a company’s assets, such as real estate, to generate quick capital while saddling the company with debt. The firms’ separation from liability allows them to profit even when the companies they own fail. They benefit from fee structures and cost-cutting measures while portfolio companies bear the consequences. Due to complex ownership structures, private equity firms can also evade legal responsibility, using tactics like bankruptcy to shed liabilities.

💼 Private Equity’s Regulatory Loopholes and Tax Advantages

Private equity firms enjoy minimal regulatory oversight, as they typically cater to wealthy individuals and institutions. They charge opaque fees and report inconsistent performance metrics. Investors may struggle to understand the true value of their investments, which are often appraised internally. Moreover, private equity managers receive favorable tax treatment on their 20% performance fees, taxed as capital gains rather than income. Despite efforts to increase transparency, regulatory pushback has limited oversight in this space.

📈 Private Equity Performance and Investor Considerations

While private equity has seen impressive returns, the gains have largely benefited the private equity firms themselves. Investors have received average returns, often comparable to public markets. The firms’ opaque valuation methods and fee structures have led to accusations of inflated performance figures. With rising interest rates and growing concerns about a bubble in the private equity space, investors may find themselves trapped in underperforming funds, paying high fees without the expected returns.

🏢 Private Equity’s Influence on Critical Sectors

Private equity’s impact on industries like healthcare and real estate has drawn attention from lawmakers and advocacy groups. Although some claims about private equity’s dominance in housing markets are overstated, the industry’s role in reducing healthcare quality and exacerbating housing crises is well-documented. As private equity firms face increasing scrutiny, regulatory changes may be on the horizon, potentially curbing their influence in critical sectors.

📉 Future of Private Equity Amid Rising Interest Rates

The future of private equity is uncertain as rising interest rates make leveraged buyouts more difficult and reduce the potential for high returns. Fundraising has already declined, and private equity’s influence in industries like nursing homes has decreased. Despite these challenges, private equity remains a major force, having raised $649 billion in 2023. Improved regulation could align the interests of private equity firms with their investors and stakeholders, ensuring more ethical practices moving forward.

👍 Conclusion and Final Thoughts

Richard Coffin wraps up the video by encouraging viewers to consider the broader impacts of private equity. While the industry has a deservedly negative reputation, not all private equity firms follow the same practices. Some, such as venture capital funds, have contributed to positive developments in technology and business. The video concludes by thanking viewers for watching and encouraging engagement through likes, comments, and subscriptions.

Keywords

💡Private Equity

Private Equity (PE) refers to investment funds that pool capital from various investors to buy and manage companies that are not publicly traded. In the video, it is highlighted as a significant player in finance with a large asset base, often misunderstood and associated with controversial practices. The script discusses how PE firms operate, their strategies, and their impact on various sectors, including retail, healthcare, and real estate.

💡Asset Management

Asset Management pertains to the process by which institutions or individuals manage, invest, and oversee financial assets. The video mentions that private equity controls a substantial amount of assets under management, indicating its influence in the global financial landscape.

💡Investor Inflows

Investor Inflows refer to the capital that investors put into a particular investment vehicle, such as a private equity fund. The video notes the tremendous investor inflows into private equity, suggesting its popularity and the confidence investors have in this asset class.

💡Leverage Buyout (LBO)

A Leveraged Buyout is a strategy where a private equity firm uses a significant amount of borrowed money to acquire a company, often loading the debt onto the acquired company. The video explains that LBOs are a popular and controversial strategy within private equity, often involving high risk and the potential for high returns.

💡Illiquidity

Illiquidity in the context of the video refers to the difficulty in converting an investment into cash quickly without a significant loss in value. Private equity investments are often illiquid, which can pose challenges for investors looking to withdraw their capital.

💡2 and 20

The '2 and 20' fee structure is a common compensation model in private equity, where funds charge a 2% annual management fee and a 20% performance fee on profits. This structure is highlighted in the video as a significant cost for investors and a source of revenue for private equity firms.

💡Job Layoffs

Job Layoffs are mentioned in the video as a common consequence following a private equity acquisition, where companies often cut costs to increase profitability. This can lead to negative impacts on both employees and the quality of services or products offered by the companies.

💡Real Estate

The video discusses private equity's involvement in real estate, particularly in buying single-family homes to rent them out. This practice has raised concerns during real estate affordability crises and is seen as contributing to housing issues.

💡Bankruptcy

Bankruptcy is referenced in the context of companies that private equity firms have acquired failing, despite the high-risk, high-reward strategies employed. The video points out that private equity's failure rate is high, leading to job losses and other economic impacts.

💡Regulatory Oversight

Regulatory Oversight refers to the supervision and regulation by governmental agencies. The video suggests that private equity has minimal oversight, which has allowed for secrecy and potentially abusive practices within the industry.

💡Carried Interest

Carried Interest is the share of profits that private equity managers receive as part of their compensation, typically 20%. The video discusses how this is treated as a capital gain for tax purposes, providing private equity managers with preferential tax treatment.

Highlights

Private equity controls $13.1 trillion in assets globally and $3.5 trillion in North America.

Private equity has been blamed for issues like retail closures, rising unemployment, and higher medical costs.

Private equity is often confused with hedge funds but is even more disliked due to its impact on various industries.

Blackstone, KKR, Carlyle Group, and Apollo are some of the major private equity players managing hundreds of billions of dollars.

Private equity owns prominent brands like Baskin Robbins, Dunkin' Donuts, Michaels, and Ancestry.com.

Private equity firms often use leveraged buyouts, borrowing 80-90% of the purchase price to acquire companies.

Despite being popular for potential high returns, private equity faces criticism for layoffs and negative impacts on industries like healthcare.

Private equity controls 8% of private hospitals and 5% of nursing homes, often leading to lower staff hours and higher mortality rates.

PE firms have been accused of driving up housing prices by buying single-family homes to rent them out.

Leveraged buyouts have led to failures in companies like Toys R Us and Red Lobster, with private equity responsible for 16% of US bankruptcies in 2023.

Private equity firms are often shielded from liability when companies fail, minimizing their financial risk.

Private equity investments are illiquid, and investors can struggle to withdraw money while still paying fees.

Despite the controversies, private equity funds have reportedly outperformed public markets by more than 3% annually after fees.

There is growing concern that private equity managers may be inflating asset values to maintain the appearance of strong performance.

Regulators have started investigating private equity practices, especially in healthcare, and rising interest rates have slowed investor inflows.

Transcripts

greetings everyone welcome to the plane

Bagel I'm your host Richard coffin today

I wanted to talk about an area or a

topic that's kind of become a bit of a

dirty word over the years in the space

of Finance uh it's an area that these

days controls 13.1 trillion in assets

under management globally and $3.5

trillion just within North America

having seen tremendous investor inflows

over the past couple of decades uh with

their reach expanding to everything from

restaurants to hospitals with this group

being none other than private Equity a

space that's often confused with hedge

funds and they do have a lot of

similarities but ass seemingly even more

despised uh with many blaming a lot of

current US problems on the space of

private Equity uh ranging from the

closure of retail stores Rising

unemployment the housing crisis higher

clinic and medical costs and even more

recently the bankruptcy of Red

Lobster just tragic all around but

perhaps more ominous than the claims

that this group has taken away the

average person's ability to both

purchase their first home and enjoy

endless shrimp is the fact that most

people have never heard of these

companies before Blackstone the largest

private Equity company with over $1

trillion in Assets in management might

be a more well-known part of the group

in part because people just keep mixing

it up with the much larger Black Rock

but other companies like KKR Carlile

group Apollo and a number of other large

players in the space have all managed to

maintain pretty low public profiles

despite the fact that many of these

companies each individually man manage

hundreds of billions of dollars really

contributing to this dark ominous image

of a secret Puppet Master Corporation

operating everything from the shadows

and with the area having grown over

tfold since the 2008 financial crisis

they've come to control some pretty

prominent Brands including Baskin

Robbins Duncan Donuts Michaels and even

ancestry.com which raises a number of

questions who exactly are these

companies are they really as evil as

people say they are should I be

concerned that they've been collecting

spit samples from over 3.5 million

subscribers and most

importantly should should I invest in

private Equity because these days there

are Services rolling out that bring

private Equity offerings to retail

investors well that's all what I'm going

to try to sort out in today's video and

in the past I have tackled the more

conspiracy esque theories around large

asset manager secretly controlling the

world or trying to destroy given

companies and indeed private Equity does

come up often as a sort of filler

villain for especially meme stock style

Theory

uh but to be clear that stuff sort of

aside the bad reputation around private

Equity is still pretty welld deserved uh

with one National Bureau of economic

research paper even arguing that private

Equity ownership of nursing homes has

contributed to over 22,000 additional

deaths over a 12year period so among

other things I'll also try to explain

why it is that private Equity can't seem

to stop getting in trouble now as you

might know when we talk about private

Equity we're really referring to private

Equity firms or funds uh which are

groups that specialize in helping

clients invest in these types of

companies private Equity itself is just

an asset class or type of investment

that encompasses all privately owned

businesses so basically any company

that's not a publicly traded stock is

technically private equity and private

Equity or PE firms specialize in helping

their clients buy these types of

companies since doing so is a lot more

complicated than just buying a stock on

Robin Hood with PE firms pulling client

money together employing teams of

lawyers analysts operations experts to

take over these companies and then

trying to employ best practices or what

have you to make the business more

profitable to earn themselves and their

investors a return now within private

Equity there are a bunch of different

strategies that a group might focus on

uh for example there's Venture Capital

where you effectively invest in startups

but the most popular and controversial

strategy is the leveraged bio which

represents roughly 28% of all private

Market AUM inclusive of debt oriented

strategies as of June 2022 with this

typically involving the PE fund

borrowing a bunch of money typically 80

to 90% of the company purchase price

using that to acquire a usually mature

business saddling the debt onto the

target company and then trying to use

the higher profits from the turnaround

to pay Down The Leverage something that

when successful can be very lucrative

for investors given how little capital

is being put upfront to try and own this

business which touches on why private

Equity has been such a popular asset

class because in addition to this sort

of highrisk high return strategy they've

often been presented as being a superior

asset class in terms of return uh given

the IL liquidity premium the higher

barrier to entry which leaves more

opportunities for realizing returns and

in addition to all that they're argued

to be less correlated to public markets

meaning they might not fall when

everything else does which offers a

diversification benefit and they're

often presented as being less volatile

meaning they don't swing around in price

as much I'll we get to those points

later now the asset class does have its

drawbacks some of the strategies are

higher risk it can be pretty IL liquid

meaning that it can be difficult to get

your money out of the investment uh with

some funds being able to gate or

otherwise block investor withdrawals and

the superior return they offer does come

at a pretty hefty price uh with most

funds charging 2 and 20 meaning a 2%

annual fee based on the value of your

investment plus 20% carried interest or

a performance fee that pays out 20% of

profits above a given threshold but

despite this private Equity has

continued to be a pretty popular

strategy uh which is why the investors

who ultimately own the $1 13 trillion

being managed here include the likes of

pension plans endowments and even

country Sovereign funds which all sounds

pretty good but then what's the problem

well there are a few and they typically

involve other stakeholders but even

investors in PE funds face a number of

issues with one of the more public

problems being the layoffs that

typically follow a PE acquisition uh

with this seemingly being a favorite

tool in the Arsenal PE firms to try and

squeeze more profits out of the

companies they acquire and in fact one

2021 paper that looked at 6,000 buyouts

from 1980 to 2013 found that employment

at Target companies shrunk an average of

4.4 percentage points in the first two

years relative to a peer group when

omitting post biot Acquisitions and

divestures with retail sector in

particular receiving the short end of

the stick here with the area expected to

have lost 600,000 jobs as a result of PE

firms and hedge funds taken over

companies over the last 10 years now

layoffs can make sense when a company is

overstaffed and could use forther

optimization but these layoffs and other

cost cutting measures are often blamed

for hurting the quality of products and

services offered by these Target

companies which sucks when your morning

honey cooler isn't as fresh as it used

to be but is particularly concerning

when it comes to the other more critical

industries that private Equity has

gotten involved with most notably

Healthcare with private Equity having

come to own 8% of private hospitals and

5% of total nursing home facilities with

one ASP study finding that private equ

investment in the latter resulted in a

12% relative decline in RN hours worked

per resident day and as you'd expect

it's had some negative impacts with

private Equity owned private hospitals

seing a lower CMS star rating and

nursing facilities seing a 14% increase

in their deficiency score index lower

overall inspection and Staffing ratings

and even as cited earlier a higher

mortality rate among residents now in

addition to healthcare private Equity

has also caused a Ruckus with real

estate for managing funds that

exclusively go around and buy up single

family properties with the goal of

renting them out to tenants which as you

can imagine during a real estate

affordability

crisis is not cool man with advocacy

groups arguing that not only are private

Equity firms taking inventory from other

buyers but that they also have a

tendency to hike rates evict tenants and

overall neglect their properties more

than other ownership types in the

pursuit of profits so already you can

see why some people aren't all that fond

of private Equity uh but perhaps the

most frustrating aspect here is that

despite the layoffs and the

deterioration of the products and

services they offer the companies that

these firms promise to turn around still

fail pretty frequently whether it be

Toys R Us or again the more recent

bankruptcy of Red Lobster private

equity's high-risk approach has a pretty

high failure rate with the space

accounting for 16% of us bankruptcy

filings in 2023 and the first four

months of 2024 in one study even

suggesting that companies held by

leveraged buyout firms have a 20%

bankruptcy rate in their first 10 years

10 times higher than that of a control

sample which is actually part of what

contributes to the high unemployment

that seemingly stemmed from private

Equity activity and as you can imagine

for again those critical Industries

these sort of bankruptcies and failures

can have pretty severe implications for

many other stakeholders which all brings

us to the question why are private

Equity companies seemingly so reckless

and aggressive don't they want to have a

better rate of not failing well part of

it is that private Equity firms tend to

have a pretty short time Horizon of

anywhere from 3 to seven years meaning

that they often have an exit strategy

that focuses on short-term profitability

rather than long-term sustainability for

example a pretty common strategy for

private Equity firms is to take all of a

company's real estate holdings and sell

it to the market only to then rent back

those positions so that the PE firm has

access to a sudden pool of capital even

though Long Term that just forces the

company to now pay rent in addition to

trying to pay down their massive debt

balance but a more controversial aspect

here is that private Equity firms don't

inherently need their companies to

succeed to make money uh thanks largely

to how their Investments are structured

when a private Equity Fund carries out a

leverag buyout as mentioned they often

saddle that debt onto the acquired

business meaning that there's a degree

of separation between the fund and the

liability for the debt they've taken on

if that company fails and is unable to

pay back the debt the fund is not often

liable for the amount owed so beyond

their initial investment which again is

often only 10 to 20% of the company's

whole purchase price there's not much

Financial liability that the funds face

for their company's failing with this

lack of liability even sometimes

extending to legal matters with

companies often able to dodge

responsibility for the actions of the

companies they effectively run thanks to

their complex ownership structures in

fact according to Federal prosecutor

Brandon Belo we've even seen examples of

PE firms abusing bankruptcy laws using

the mechanism to extinguish things like

pension liabilities which mind you

represents money owed to employees only

to then reacquire the business after

bankruptcy under a different arm to

ultimately end up in a better financial

position and while the investors of

these PE firms might lose when the

companies they hold go bankrupt because

the private Equity firms are often

charging both their investors and the

companies they manage fees they can

still benefit and end up positive while

everyone else in the situation loses

with PE firms often criticized for

benefiting from any of the cost cutting

actions they've carried out regardless

of how intense they are while leaving

their portfolio companies to uh deal

with all the consequences with Red

Lobster for example in part failing due

to its high rent payments which it

wouldn't have had to deal with if its

private Equity owner hadn't sold off all

of its real estate and while all this

Probably sounds pretty abusive and Shady

because private Equity firms typically

cater to higher net worth individuals

and institutions they have pretty

minimal oversight from regulatory bodies

who are really more focused on

protecting smaller investors who most of

the time can't even access private

Equity Funds given that they usually

require you to be an accredited or

qualified investor often meaning that

you need to have a minimum amount of

money to invest with them which has

allowed them to remain pretty secretive

not just about the fees that they charge

both the companies they operate and even

their investors but even their

performance meaning that investors of

their funds might not even have a clear

upto-date picture of how their

Investments are doing but surely it must

be worth it right why else would

investors subject themselves to this

sort of arrangement if they aren't

seeing the returns to justify investing

with private equity

well there it is a little difficult to

assess the return of private Equity

because it's private uh and the common

measures of return such as irr aren't

directly comparable to public stock

market returns but regardless some

papers do suggest that private Equity

has seen Superior performance over the

last little while with one 2012 paper

finding that the average US buyout fund

outperformed the market after fees by

more than 3% a year likewise a CIA study

found that the average annual

performance of private Equity held

across State pensions over the past 23

years was 11% compared to the Russell

3000 which earned 6.2% however there are

some other conflicting arguments here

with another paper arguing that when

performance is compared to other perhaps

more appropriate benchmarks private

Equity has performed about the same as

public Equity indices since at least

2006 with most of the benefit from these

high-risk High return strategies

seemingly going to the PE funds

themselves rather than their investors

thanks to their High obscure fees in

fact the same paper which is titled An

Inconvenient fact private Equity returns

in the billionaire Factory highlights

that private Equity has single-handedly

added 19 billionaires or more than one a

year over a 15-year period supporting

the notion that while private Equity

firms have gotten stinking Rich from

their approach the returns seen by their

investors has more or less just been

fine in fact some firms have even been

accused of abusing their investors

thanks to their minimal reporting

requirements and the valuation method of

their Holdings because in addition to

their fees being obscure so too are the

values of the positions they hold you

see compared to publicly traded stock

which because it's often traded by the

second gives you a pretty good idea of

how much money you can get for your

investment the value of a private Equity

investment isn't really known until the

asset is sold and up till that point you

can really only use estimates or

appraisals to try and guess how the

position has performed which not only

can lead to artificially low volatility

since there's just less pricing taking

place but because appraisals are often

done internally or through a company

hired by pe managers and because PE

funds can charge a high fee when

appraised values increase it can create

a conflict of interest but there being a

growing concern in the industry that PE

managers are artificially inflating

these valuations or otherwise delaying

write Downs when the value of their

assets have deteriorated to maintain the

appearance of strong performance and to

continue charging High fees with some

going so far as to claim that private

Equity is in a bubble with mass investor

inflow into the space combined with its

involvement in some troubled areas like

commercial real estate making it

difficult for these funds to actually

sell the assets they've acquired over

time at a profit leaving their investors

stuck in these so-called zombie funds

where they can't withdraw their money

but are still stuck paying the fees now

this is something that the SEC has

investigated and started charging some

companies on and we've seen them even

attempt to improve disclosures and

transparencies around fees and

valuations with a recent rule change but

that rule change is actually something

the fifth us Circuit Court of Appeals

ruled against recently after industry

push back and if PE funds benefiting

from LAX regulatory oversight and lack

liability weren't enough to turn you red

uh it turns out that private Equity

managers even receive preferential tax

treatment on their carried interest that

20% performance fee thanks to a tax

loophole that treats this amount as a

capital gain rather than income which

means it's taxed at a better rate

something that the industry has fought

tooth and nail to keep in place with

lobbying so yeah you can see why there's

really no love loss when it comes to

private equity and why they've somewhat

deserved some of their bad reputation

but with all that being said of course

private Equity is very broad category so

it's not to say that all funds that

operate in private Equity are following

a malicious Playbook and it could even

be argued that in some ways these

companies can offer benefits to other

stakeholders venture capital for example

while only investing a small amount in

actual startups has historically spent a

good amount building out infrastructure

for these businesses to help bring new

technologies and products to scale and

it could even be argued that leverage

bout funds while risky do fill a needed

space in finance and at the very least

are attempting to turn around otherwise

failing companies well toys Russ is

often brought up as an example of

leveraged biot failures there are

examples of successes such as Hilton

Hotels where private Equity firms were

able to replace problematic managers and

genuinely improve company operations I

will also highlight that while there is

data to support the notion that private

Equity is playing a role in some issues

faced by the United States that their

role in these issues is sometimes

overstated uh not too long ago for

example there was a headline that

private Equity had purch purchased 44%

of single family homes in the third

quarter of 2023 in reality however this

was just a misinterpretation of a stat

that investors as a whole which includes

individuals like you or me represented

44% of purchases of property flips in

the third quarter 20123 Mega investors

which would include private Equity

alongside other investors with 1,000

Properties or more only themselves

represented 9% of total investor buying

activity in the second quarter of 2023

meaning that at the aggregate level they

only are represented 2.3% of total

single family home purchases a pretty

ridiculous Far Cry from the 44% that

circulated online and of course there

are more convoluted conspiracy theories

and the like about private Equity

secretly controlling the world to try

and take down GameStop uh that don't

have a whole lot of evidence to support

them even still the lack of regulatory

oversight the legal protections and just

the clear conflicts of interest do

present a lot of problems and have

allowed for a lot of abuse in the space

now the good news is that we have start

to see investigations and more of a

Crackdown in the space with private

Equity having drawn some attention from

lawmakers especially for its role in

healthcare and while the assets Center

management for private Equity has grown

nearly 20% annually since 2018 Rising

interest rates have since slowed the

flow of money into private Equity with

fundraising declining 15% in 2023 versus

2022 we've also seen private Equity

ownership in areas like nursing homes go

down and it's unclear whether private

Equity will continue to be as lucrative

as it's been in the past not only will

higher interest rates make leverag biots

more expensive and more difficult to

pull off successfully but investors

crowding into the space has seemingly

made it less attractive closing the

valuation gap between private and public

equity which translates into a lower

expected return or effectively fewer

opportunities for larger gains in the

private space still even with those

caveats the space managed to raise $649

billion last year suggesting that's it's

going to be a pretty important Force for

the near- term and something that we

would hope over time sees smarter regul

ation to better align the interest of

these private Equity firms with other

stakeholders or at least their investors

anyway that's the video thanks for

watching I hope you found this video

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