Bad Company: Private Equity and the Death of the American Dream (Book Review)

If you'd asked me a week ago what I knew about private equity, I could have told you about Toys R Us. That company was acquired by private equity and then run into the ground. Now that I've read Bad Company: Private Equity and the Death of the American Dream―An Exposé of Private Equity's Devastating Impact on American Lives, Communities, and the Economy, I could probably tell you a lot more.

This book isn't just about Toys R Us, though. The author, Megan Greenwell, deftly weaves the stories of four people together, from before their encounter with private equity, during, and then after as matters resolve. These are tales of retail, newspapers, hospitals, and apartments, all impacted through acquisition by private equity. But what is private equity?

"In the simplest terms, 'private equity' describes a system in which a firm bundles money from outside investors—including university endowments, public pension funds, state-owned investment funds, and ultrawealthy individuals—which it uses to buy and operate companies, the firm and the investors have a symbiotic relationship: the firm gets to use the investors' cash for its own business goals, while the investors earn returns when the firm's portfolio companies are sold or go public. Sometimes the way to make the most money involves strengthening the portfolio company itself But even then, the benefit is only incidental, the company's success a mere side effect of increasing profits for the private equity firm and its investors." (p. 8)

That all doesn't sound too bad, except for the last part about company success being a side effect and not the goal of what private equity firms do. It gets worse though.

"And often, making money for the firm and its investors doesn't require making any money for the portfolio company. Private equity firms earn management fees, transaction fees, and monitoring fees that typical companies do not. They benefit from tax breaks that allow them to keep much more of their profits than other types of businesses. They can sell a company's assets and pocket the proceeds rather than reinvesting them. There are stunningly few limits to the methods a private equity firm can use to profit off a company it owns, whether or not the company profits too. Even the company going out of business entirely can be lucrative for its private equity owners." (p. 9)

Portfolio companies exist simply as assets to be stripped of any value. While private equity firms don't generally close them down immediately and strip them for parts, it's a matter of death by a thousand cuts. Real estate is sold, making portfolio companies pay rent for what they previously owned, employees are paid the bare minimum, and often services are cut. So much money goes to paying the debt incurred by the acquisition (the debt being made the responsibility of the acquired company and not of the private equity firm) that there is little or no money to invest back in the business. This is how Toys R Us died, and it's the potential destiny of every portfolio company owned by private equity.

Legislation will not be forthcoming to address the wrongs of private equity, as the industry invests millions in lobbying congress to look favorably on private equity. Many politicians are literally invested in the firms, and Mitt Romney was head of such a firm (Bain Capital).

"Making it difficult to know what's going on is exactly the point of so much about how private equity operates. For decades, the industry has invented its own rules: pioneering workarounds to tax and disclosure laws, slipping through loopholes, so thoroughly disguising its tactics that they're often incomprehensible to observers and and even employees of portfolio companies. Few people understand what private equity is; even fewer understand the often devastating consequences—to workers, customers, and communities—until they are forced to live through them." (p. 235)

As I said above, this book follows four individuals as they deal with the consequences of private equity firms actions. Despite the title, there is an element of hope to this book, as most of the people featured found a way to a better-than-expected outcome. Read it if you are interested in learning more about how private equity operates. It's a good, accessible introduction to the topic.