The Reason Private Equity Ruins Everything

It's not that private equity moguls are so much greedier than other greedheads. It's that their tax-preferred business model promises investors outsized returns that can only be reaped by predation.

Wall Street’s Charging Bull statue looms over new home construction. (AP Photo/J Pat Carter and J Pat Carter/The Lever)

Have you ever noticed that so many of the worst things in the whole world seem to be linked to this thing called private equity? It’s not your imagination — private equity ownership is linked to higher hospital and nursing home death rates, higher rents, higher prices for medical services, higher business bankruptcy rates, higher layoff rates, and higher fees charged to investors (read: pension funds and university endowments).

So the question is why — why are the worst forms of predatory capitalism so linked to this particular business model? Some might say simply “greed” — but that’s not exactly correct. After all, private equity moguls probably aren’t that much more greedy than the typical greedhead oligarch running a publicly traded corporation or owning a private conglomerate.

No, the answer is the business model itself.

Private equity firms make their money by charging exorbitant fees to its investors — typically a 2 percent management fee, and then 20 percent of all returns on the underlying investment gains. These fees are way higher than those charged by stock index funds. And so to convince investors to pay those fees - rather than just investing in a run-of-the-mill Vanguard fund — private equity firms must promise their investors returns that far outpace the stock market.

In theory, such outsized returns might make the exorbitant fees worth it for the investor. But here’s the rub for the rest of society: To have any hope of beating those stock market returns, private equity firms must quickly and rapaciously extract maximum value from companies they buy rather than investing in the long-term value and sustainability of those portfolio companies.

Private equity firms often flip businesses rather than building them. That means they typically aren’t interested in fortifying portfolio companies. They aren’t typically interested in buying companies and building them to deliver long-term solid returns via quality services, good jobs and good outcomes.

Private equity firms are instead interested in giant short-term market-outpacing profits for their investors, who’ve been told that’s what they’re paying for when they fork over those exorbitantly expensive investment fees.

And so portfolio companies owned by private equity are where we see the opposite of investment — we see instead the kind of corner cutting, service degradation and price gouging that immiserates everyone. That enshittification may seem pennywise/pound foolish in the long term for the portfolio companies, but in the short term for the private equity owners, it generates cost savings that are then extracted to finance the promised returns for investors (and the PE firm’s executives).

Of course, there’s a separate rub for investors themselves: data show that private firms often underperform cheap stock index funds while they still charge those exorbitant fees. But the point still stands: the private equity model is especially rapacious because its unique selling proposition to investors is a rapacious business model.

But, you ask, why would investors still put money into private equity and pay those high fees if they aren’t getting better returns than cheap stock index funds? In the last six years, private equity firms have raked in $1.5 trillion more from investors than they’ve paid back out. So why would investors keep putting money in?

That’s a whole other story of corruption and capture.

Officials at pension funds, unions and university endowments — who are gambling with others’ money rather than having their own personal skin in the game — are at times wined and dined by financial firms and so-called placement agents soliciting investments. Because pension, union and endowment officials control literally billions of dollars, they are often given the royal treatment in their same line of work are not — think: travel to fancy conferences, stays in lavish hotels, etc.

These officials — many of whom are laypeople rather than investment professionals — are often wowed not just by perks, but also by Wall Street predators’ slick presentations that make it seem like they are masters of the financial universe who can elicit huge returns that will alleviate other budget shortfalls these investors face.

They are wowed, in other words, by private equity firms’ explicit promises of predation - promises that private equity will use investors’ money to so intensely pillage portfolio companies, communities, workers and customers that the returns will far outpace the excessive fees.

It’s a false promise that’s laying waste to America — and it doesn’t have to be this way.

America doesn’t have to provide tax breaks that financially preference the private equity business model. We don’t have to give private equity kingpins a loophole that lets them pay lower taxes rates on their earnings than almost everyone else. We don’t have to provide a tax break boosting private equity’s practice of loading up portfolio companies with debt and then stripping them for parts.

But those are deliberate choices by a government that’s owned by private equity. And so we will continue to live in private equity’s enshittifying world — until there is a change in policy.