NYT columnist Farhad Manjoo published an opinion piece last week about the excesses of the quick-growing trillion dollar private equity investment industry, which had a record year in 2021. had a record year in 2021, with total assets under management reaching almost $6.3 trillion.
The New York Times, August 4, 2022: Private Equity Doesn’t Want You to Read This
Manjoo said that private equity gets away with “An accelerating, behind-the-scenes desiccation of the American economy” because of “the seeming impenetrability of its practices. They observed that the industry counts on the public’s lack of interest in “abstruse practices of financial engineering.”
Manjoo wrote, “With the help of lax regulation and indefensible tax loopholes, private equity’s apparent destructiveness can be enormously profitable for its partners. Private equity firms make money by extracting hefty fees from their investors and from the companies they purchase, meaning they can succeed even if their investments go kaput. Phalippou found that between 2005 and 2020, the industry produced 19 multibillionaires.”
Manjoo quoted PESP’s Executive Director Jim Baker description of private equity: “It’s a heads-I-win, tails-you-lose model.”
It was also noted that it is unclear if private equity actually pays off for investors: “Since at least 2006, according to a study by the economist Ludovic Phalippou, the performance of the largest private equity funds has essentially matched returns of comparable publicly traded companies.”
The opinion piece detailed how the private equity industry makes money through management and carried interest fees “even if their companies blow up” and how “they also get a pretty good deal from the government on what they earn” through capital gains rather than income tax: “Millionaire and billionaire partners in private equity firms pay a far lower tax rate on much of their income than many of the rest of us.”
The recent proposal to close the carried interest loophole “would have merely narrowed” not eliminated the enormous tax breaks, but “Passing it would have been a good start toward reforming the private equity industry,” wrote Manjoo. “Even if it passed, though, much more would need to be done.”
Manjoo also spoke with the Center for Economic and Policy Research co-director Eileen Appelbaum, who discussed the continuing merits of the Stop Wall Street Looting Act. The act would impose lots of new rules on the industry, including limiting tax deductions on excessive debt and adding worker protections for when debt binges lead to bankruptcy.
Appelbaum told Manjoo that one of the most important ideas from the Act is joint liability, which would hold private equity firms responsible for the debt incurred by portfolio companies if the companies go belly up.
Manjoo concluded: “That struck me as an elegant and sensible idea. If private equity firms claim they should get credit for their ‘sweat equity,’ why shouldn’t they be held responsible when the sweat turns to tears?”