Is private equity good for the economy?

Private equity is behind most recent big retail bankruptcies

Question: Is private equity good for the economy?
Position1 of 3›: Private equity leads to higher default rates and more bankruptcies and worse outcomes for customers and workers
Argument1 of 5›: Private equity is behind most recent big retail bankruptcies

Most big bankruptcies recently are due to private equity.

The argument

Private equity groups have been behind most of the recent bankruptcies in local newspapers, retail, and grocery stores. In fact, analysis by FTI Consulting found that two thirds of the retailers that filed for Chapter 11 in 2016 and 2017 were leveraged buyouts. The pirate equity groups load debt onto the companies and dividend out the cash to themselves, which often leads to bankruptcy and a trail of job losses and underfunded pensions. Heads they win, tails the company, employees, and suppliers lose.

Premises

[P1]Private equity firms typically acquire companies via leveraged buyouts, loading them with debt while extracting cash through dividends to themselves. [P2] This debt burden has driven a disproportionate share of recent bankruptcies, with two thirds of 2016–2017 retail Chapter 11 filings being leveraged buyouts. [P3] These bankruptcies leave employees, suppliers, and pensioners bearing the losses while private equity owners keep their gains. [C] Therefore, private equity drives higher default rates and bankruptcies with worse outcomes for workers and other stakeholders.

Counter-arguments

Defenders of private equity reply that leveraged buyouts disproportionately target already-struggling firms — bricks-and-mortar retailers being hollowed out by e-commerce — so the correlation with bankruptcy partly reflects selection rather than PE causing failures that would not otherwise have happened. Many buyouts also inject capital and operational expertise and turn companies around, and PE owners take real losses when deals fail, so the 'heads we win, tails you lose' picture is incomplete. The FTI figure does not establish the counterfactual of whether those retailers would have survived independently.

Rejecting the premises

[Rejecting P1] Loading debt and taking dividends is one PE model, but firms also inject equity and operational expertise and absorb losses when deals fail, so the 'heads we win, tails you lose' characterisation is incomplete. [Rejecting P2] Leveraged buyouts disproportionately target already-distressed retailers hit by e-commerce, so the two-thirds figure partly reflects selection rather than PE causing otherwise-avoidable failures. [Rejecting P3] Many buyouts preserve or grow companies and jobs, so the bankruptcies are a subset, not the representative outcome. [Rejecting C] The correlation does not establish that private equity causes worse outcomes overall once selection and successful deals are taken into account.