The Critique of Private Equity Firms
Posted at 5 a.m. on May 22, 2012
With the political debate focusing in on Mitt Romney’s work at Bain Capital, Mike Konczal looks at three criticisms of private equity firms: abusing tax and regulatory loopholes, risk-shifting between parts of a firm, and dividend looting.
“Under a idea of general, everyday libertarianism, since I own the stick I can do anything I want with it. I can break it in half, burn it in a fireplace, carve it into something else, turn it into woodchips, attach a kite to it, exclude people from using it, etc… Here’s a question – does a private equity firm own their firms in the same exact way that I own my stick of wood?… There’s a lot of references to increasing profits, or making firms more dynamic, or ‘creative destruction,’ but that’s a side effect of shareholders doing whatever they want with their firm.”
“Versions of these three arguments form the core of the private equity critique. Instead of simply carving a figurine or starting a BBQ, private equity uses their stick to game tax law while cashing out short-term value, leaving others in the firm worse off, the firm itself more prone to collapse and harder for any agent to produce long-term value.”