Private Equity at Work: When Wall Street Manages Main Street
Eileen Appelbaum & Rosemary Batt
Russell Sage Foundation. 381 pp. $35
By Alan Tonelson
If Private Equity at Work gets the large audience it deserves, great times should be in store for America’s public relations industry. Eileen Appelbaum and Rosemary Batt’s exhaustive study of the private equity sector and its impact on the US economy gives these often high-flying investors the kind of black eyes that typically produce a stampede to image-makers like Kekst and Company.
Bad enough are many of the relatively familiar concerns the authors meticulously document about this part of the nation’s virtually unregulated shadow banking system. Has anyone who follows the economy or finance, even as a layperson, not heard of the hits often absorbed by workers and communities when companies are bought and sold solely for short-term gains through leveraged buyouts, the dominant manifestation of private equity? And the casino-like nature of these (and many other types of) transactions often have been portrayed as a central flaw of American-style capitalism, especially with the economy still struggling to emerge from a financial crisis and recession triggered by fast-buck finance.
Much more striking, and less well known, is all the evidence presented by the authors exposing private equity as a failure even by the Darwinian standards its companies favor and indeed claim to embody. As Appelbaum and Batt make abundantly clear, the sector flunks numerous major tests of free market virtue. Private equity’s overall returns for investors are sub-par. Its activities often have nothing to do with turning around floundering companies. Its operations tend to be as transparent as a burka. And a major source of returns and earnings for its own general partners and staff stem directly from favors arguably bought with Washington lobbying—most prominently, the tax code’s favorable treatment of debt financing for takeover activity, and lucrative earnings from so-called “carried interest” as lightly-taxed dividend income. The carried interest discount allows financial engineers to avoid paying millions in income taxes.
The combination of humdrum performance (for sky-high fees) and opacity helps produce one of the most stunning revelations of Private Equity at Work: The sector’s victims include not only displaced (and often blindsided) workers and ravaged local tax bases, but many of those who invest in private equity firms themselves. And inside this irony is another that the authors face squarely and admirably, given their unmistakably progressive political orientation: Public employee union pension plans are among the biggest of these private equity investors.