Encyclopedia of Opinion
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

Private equity is a misnomer and should properly be called leveraged buyouts. Leveraged buyouts, by definition, increase borrowing and raise the probability of bankruptcy.

Supporting arguments · 5

  1. Private equity is behind most recent big retail bankruptcies
    Most big bankruptcies recently are due to private equity.
  2. Customer care deteriorates when private equity buys companies
    In a major stomach-churning investigation titled, “Overdoses, bedsores, broken bones: What happened when a private-equity firm sought to care for society’s most vulnerable,” theWashington Post chronicled the horrific practices that preceded the bankruptcy of ManorCare. In 2007, the Carlyle Group, a pirate equity group, bought ManorCare nursing homes for $6.1 billion and $4.8 billion of that was financed with debt.
  3. Defaults for private equity (leveraged buyouts) can be 10x higher than for non-LBO firms
    You do not need an MBA from Wharton to know that loading up companies with debt will lead to bankruptcy. Research shows that private equity funds acquire healthy firms and increase their probability of defaultby a factor of 10. They are the antithesis of conservative management.
  4. Private equity is a debt driven model
    Private equity is debt-driven and leads to defaults. It should properly be referred to as Leveraged Buyouts (LBO) due to high debt.
  5. Most claims of growth by private equity are false
    Studies have shown that private equity leads to higher defaults, its claims to increase productivity are a sham, and it causes higher rates of job losses and firings in target companies as well as lower wages. (Unsurprisingly, industry-funded studies are much more sanguine.) But perhaps the most damning indictment of the private equity model is that their returns are overstated and their performance simply not as good as they lead investors to believe.