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
Argument‹2 of 5›: Private equity is behind most recent big retail bankruptcies

Most big bankruptcies recently are due to private equity.

The argument

The claim is about a pattern rather than about individual misfortune: private equity groups have been behind most of the recent bankruptcies in local newspapers, retail, and grocery stores. Those are three sectors with little in common commercially, which is what makes the common ownership structure the salient variable rather than any one industry's decline. The supporting figure comes from analysis by FTI Consulting, which found that two thirds of the retailers that filed for Chapter 11 in 2016 and 2017 were leveraged buyouts. The leveraged buyout is the mechanism the argument holds responsible. The private equity groups load debt onto the companies and dividend out the cash to themselves, so the purchase is in effect financed by the target rather than by the buyer. The company is then left servicing borrowings it did not choose, without the reserves it would need to absorb a bad season, a shift in consumer habits or a rise in the cost of that debt. Bankruptcy, on this reading, is not a surprise outcome but the predictable end state of a balance sheet arranged to move cash out of the business. The distributional point is what gives the argument its force. When the company fails it often leaves a trail of job losses and underfunded pensions, while the dividends already extracted stay with the owners: heads they win, tails the company, employees, and suppliers lose. The asymmetry is structural rather than accidental, because the cash is taken out early and the liabilities fall due later, by which time the parties who bear them had no say in the decision that created them. Judged by that record, private equity leads to higher default rates and more bankruptcies, and to worse outcomes for the customers and workers of the firms it acquires.

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.