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Private Equity at Work: When Wall Street Manages Main Street
Private equity firms have long been at the center of public debates on the impact of the financial sector on Main Street. Are these firms white knights that ride in to save failing businesses or are they predatory intermediaries that bankrupt otherwise healthy companies and destroy jobs? The first comprehensive examination of private equity firms, Private Equity at Work provides a detailed yet accessible guide to this controversial business model. Economists Eileen Appelbaum and Rosemary Batt carefully evaluate a full range of evidence including original case studies, reviews of legal documents and media coverage, and a synthesis of existing academic scholarship to demonstrate the effects of private equity on American businesses. Their investigation shows that while private equity firms can have some positive effects on the operations and growth of small and mid-sized companies, the interventions of these firms more often than not lead to significant negative consequences for many American businesses and workers. While prior research on private equity has focused almost exclusively on the financial performance of private equity-owned companies, Private Equity at Work provides a new and invaluable roadmap to the largely hidden internal operations of these firms, showing how their business strategies disproportionately benefit investors. In the 1980s, leveraged buyouts by private equity firms saw high returns and were widely considered the solution to corporate wastefulness and mismanagement. And since 2000, nearly 11,500 unique companies representing at least 8 million employees have been purchased by private equity firms. More recently, however, private equity firms have come under fire from labor unions and community advocates who argue that the proliferation of leveraged buyouts destroys jobs, causes wages to stagnate, and saddles otherwise healthy companies with debt. Appelbaum and Batt show that private equity firms financial strategies are designed to extract maximum value from the companies they buy and sell, often to the detriment of those companies. These risky decisions include selling property assets, terminating contracts with unions, and outsourcing operations in order to cut costs. Because the law defines private equity firms as investors rather than employers, private equity owners are not held accountable for their actions in ways that public corporations are. Thus, any debts or costs of bankruptcy incurred fall on businesses and their workers, not the private equity firms that govern them. For employees this often means loss of jobs, health and pension benefits, and retirement income. Appelbaum and Batt conclude with a set of policy recommendations intended to curb the negative effects of private equity while preserving its constructive role in the economy. These include policies to improve transparency and accountability, as well as changes that would reduce the excessive use of financial engineering strategies by firms."
396 pages, Paperback
First published March 31, 2014
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Displaying 1 - 11 of 11 reviews
May 22, 2017
These guys are the real moguls.
December 26, 2016
Well researched and, in my opinion, relatively well balanced. Appelbaum and Batt, despite limited data on PE fund returns, show how private equity may not be a particularly attractive asset class. They also indicate the various ways PE funds may be exploiting the legal system rather than actually improving companies.
While it was easy to understand on the first read, there's so much information that I'll definitely be revisiting this book in the future.
I strongly recommend this book for any who's remotely interested in private equity.
While it was easy to understand on the first read, there's so much information that I'll definitely be revisiting this book in the future.
I strongly recommend this book for any who's remotely interested in private equity.
November 13, 2016
a great source of case studies and data, with empirical studies on the effects of private equity investments from 1980s onwards.
February 23, 2018
A comprehensive academic view of the private equity sector in terms of its history, results/returns, business model, impacts on the acquired businesses and their other stakeholders, and regulation proposals. With data and anecdotes, the authors present very valid arguments against many of the practices of LBO firms and demystified its high claimed returns. They also objectively laid out ways that PE firms had and could benefit small to mid-sized firms both operationally as well as in capital allocation decisions.
That being said, the authors' critical views of a shareholder orientation in a capitalistic economy is somewhat misguided. The real conflict is not so much between shareholders vs. managers/employees/unions/community, as it is between short-term shareholder interests vs. long-term shareholder interests. More often than not, the long-term shareholder interests are aligned with that of the company's other stakeholders, although short-term interests can be exploited by one or several parties at the expense of others. This is not unique to shareholder activism, but unions and managers can often enrich themselves at the expense of other stakeholders as well.
That being said, the authors' critical views of a shareholder orientation in a capitalistic economy is somewhat misguided. The real conflict is not so much between shareholders vs. managers/employees/unions/community, as it is between short-term shareholder interests vs. long-term shareholder interests. More often than not, the long-term shareholder interests are aligned with that of the company's other stakeholders, although short-term interests can be exploited by one or several parties at the expense of others. This is not unique to shareholder activism, but unions and managers can often enrich themselves at the expense of other stakeholders as well.
December 3, 2023
I've researched several books on this topic and ultimately chose to invest my time in this one. This book provides a comprehensive examination of private equity firms, challenging the debate on whether they are saviors or predators in the business world. Based on original case studies and academic scholarship, it reveals that, surprisingly, while private equity can benefit some companies, it often leads to negative consequences for American businesses and workers.
The authors delve into the internal operations of these firms, illustrating how their strategies can harm employees, resulting in job losses and reduced benefits. The book concludes with policy recommendations to mitigate these negative effects while preserving the constructive role of private equity in the economy.
The authors delve into the internal operations of these firms, illustrating how their strategies can harm employees, resulting in job losses and reduced benefits. The book concludes with policy recommendations to mitigate these negative effects while preserving the constructive role of private equity in the economy.
July 9, 2024
Interesting detailed examples of private equity's typical playbook for acquisitions and where there are misalignments between new ownership and employee base or creditors, vendors and suppliers. A call for further regulation seems harsh when these bad scenarios happen far less than made to believe from authors viewpoint, and by even fewer actors.
October 8, 2026
Solid. Well researched and well written clear explanation of the state of asset management. Very thorough and careful analysis.
March 28, 2014
Eileen Appelbaum and Rosemary Batt tried to take an academic look at private equity firms and published their results in Private Equity at Work: When Wall Street Manages Main Street. The authors paint the world in black and white. They present the book as a question of whether private equity firms are (1) financial innovators that save failing businesses or (2) financial predators that bankrupt otherwise healthy companies and destroy jobs?
You can guess the answer from the first two paragraphs. The authors spend eight lines on the successful Aidells Sausage Company investment and 19 lines on the disastrous Mervyn’s Department Store investment.
The authors largely treat private equity firms as parasites and propose far-reaching and ill-thought out ideas to curb them. They reach their conclusions from a misunderstanding of private equity, poor comparisons, and a lack of data.
The authors chose to use the corporate-raiding barbarians of the 1980s leveraged buyouts as the origin of private equity instead of Bain Capital’s genesis of management consulting.
The authors routinely use public companies as a benchmark. They fail to note that public companies are merely a small fraction of the operating companies in the United States. It’s hard to get data on private companies, of course, because they are private.
In my mind comparing the bankruptcy rate of private equity-owned companies to the rate of public companies is not a true comparison of failure. I accept the premise that public companies typically carry less debt as a percentage of their capital structure. But I don’t accept the premise that the public company standard is true for non-public companies, whether they are operator owned or private equity-owned.
The authors get trapped in the idea that private equity is all about taking public companies private using high levels of debt. The LBO sector is only one part of the private equity world.
I was particularly annoyed at the authors for their failure to correctly describe the regulatory framework and background for private equity firms. Private equity firms were not subjected to SEC regulation by Dodd-Frank. The SEC always had the power to enforce the anti-fraud provisions of the various securities laws. Dodd-Frank removed a commonly-used exemption from registration as investment advisers. That old exemption was based the number of clients (i.e. funds) the firm managed, not size.
When it comes to performance, the authors have some good data, but much of it is admittedly flawed data on performance. Those flaws don’t keep them from reaching their conclusions. They note that a large chunk of private equity firms do not beat the S&P 500 or similar public company benchmark. They state that many investors would have been better off investing in an ETF. They fail to note that the same is true for mutual funds. The majority of which fail to exceed their respective benchmarks.
The authors also label private equity as focused on short-term shareholder value. They seem to forget that public companies are even more focused on short-term issues. A public company’s value is determined with every trade and the value swings up and down with the stock ticker wrapping around the tote board.
Eventually, the authors sprinkle in some positive stories of private equity. But the book is largely a hatchet job on private equity.
Eileen Appelbaum is Senior Economist at the Center for Economic and Policy Research. Rosemary Batt is the Alice Hanson Cook Professor of Women and Work at the ILR School, Cornell University.
A publicist sent me a copy to review. There were many times while reading the book that I wished he had saved the postage.
This review originally appeared at: http://www.compliancebuilding.com/201...
You can guess the answer from the first two paragraphs. The authors spend eight lines on the successful Aidells Sausage Company investment and 19 lines on the disastrous Mervyn’s Department Store investment.
The authors largely treat private equity firms as parasites and propose far-reaching and ill-thought out ideas to curb them. They reach their conclusions from a misunderstanding of private equity, poor comparisons, and a lack of data.
The authors chose to use the corporate-raiding barbarians of the 1980s leveraged buyouts as the origin of private equity instead of Bain Capital’s genesis of management consulting.
The authors routinely use public companies as a benchmark. They fail to note that public companies are merely a small fraction of the operating companies in the United States. It’s hard to get data on private companies, of course, because they are private.
In my mind comparing the bankruptcy rate of private equity-owned companies to the rate of public companies is not a true comparison of failure. I accept the premise that public companies typically carry less debt as a percentage of their capital structure. But I don’t accept the premise that the public company standard is true for non-public companies, whether they are operator owned or private equity-owned.
The authors get trapped in the idea that private equity is all about taking public companies private using high levels of debt. The LBO sector is only one part of the private equity world.
I was particularly annoyed at the authors for their failure to correctly describe the regulatory framework and background for private equity firms. Private equity firms were not subjected to SEC regulation by Dodd-Frank. The SEC always had the power to enforce the anti-fraud provisions of the various securities laws. Dodd-Frank removed a commonly-used exemption from registration as investment advisers. That old exemption was based the number of clients (i.e. funds) the firm managed, not size.
When it comes to performance, the authors have some good data, but much of it is admittedly flawed data on performance. Those flaws don’t keep them from reaching their conclusions. They note that a large chunk of private equity firms do not beat the S&P 500 or similar public company benchmark. They state that many investors would have been better off investing in an ETF. They fail to note that the same is true for mutual funds. The majority of which fail to exceed their respective benchmarks.
The authors also label private equity as focused on short-term shareholder value. They seem to forget that public companies are even more focused on short-term issues. A public company’s value is determined with every trade and the value swings up and down with the stock ticker wrapping around the tote board.
Eventually, the authors sprinkle in some positive stories of private equity. But the book is largely a hatchet job on private equity.
Eileen Appelbaum is Senior Economist at the Center for Economic and Policy Research. Rosemary Batt is the Alice Hanson Cook Professor of Women and Work at the ILR School, Cornell University.
A publicist sent me a copy to review. There were many times while reading the book that I wished he had saved the postage.
This review originally appeared at: http://www.compliancebuilding.com/201...
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January 23, 2015332.0415 A6466 2014
March 2, 2015
Boring. I felt it was way too academic.
June 25, 2021
If you want to learn about private equity just read this book.
Displaying 1 - 11 of 11 reviews