Zana’s Reviews > Bad Company: Private Equity and the Death of the American Dream > Status Update

“Friedman’s stipulation that bosses and workers have equal power requires bosses and workers to have equal information. In the fifty-five years since his essay, the growing dominance of private equity has destroyed that precondition. Workers often don’t know who their bosses are, much less what their business strategy is or whether they plan to drive the company into bankruptcy and profit off the scraps.”

‘In Friedman’s free enterprise system, bosses and workers each have power over one another, each fully in control of their own destinies. “No individual can coerce any other,” he wrote, “all cooperation is voluntary, all parties to such cooperation benefit or they need not participate.”’

“Fannie and Freddie do not limit how much landlords can increase rent, nor require them to report those increases. If a private equity firm lists a certain number of affordable apartments on its loan application, it makes no difference to the federal government how many of those units remain affordable....”

‘One study found that roughly half of all newspaper jobs disappeared between 2004 and 2019, and one in four newspapers altogether. Thousands more had devolved into what the study called “ghost newspapers,” which continued printing in order to make money on ads but carried essentially no local news.’

“Under a sale-leaseback agreement, a private equity firm divides a portfolio company into two parts: one for the company’s core business, and one for its real estate holdings. The firm then sells off the real estate assets to the highest bidder, pocketing the profits, and signs lease agreements on behalf of the company to remain in its headquarters....”

“Companies acquired by private equity firms are much more likely to go bankrupt than their peers, research shows: 20 percent of them enter bankruptcy proceedings within ten years, compared to 2 percent of other companies. This is an all-but-inevitable outcome of the high debt loads involved in leveraged buyouts...”

‘When KKR, Bain, and Vornado bought the company, they upended that strategy via what is known as a sale-leaseback agreement. Within a few months of the acquisition, much of Toys R Us’s real estate was sold to two newly created property companies, or “PropCos,” controlled by Vornado. Now, in addition to its loan payments, Toys R Us also had to pay rent on the very same properties it had once owned....’

“Private equity firms themselves don’t borrow money to fund their acquisitions. Rather, they have the company they are acquiring do it on their behalf.”

‘As the New Yorker put it in 2012, “for an industry that’s often held up as an exemplar of free-market capitalism, private equity is surprisingly dependent on government subsidies for its profits.”’

‘...Like many types of corporations, private equity firms are based offshore, which allows their returns to compound tax-free. Interest payments on borrowed money, meanwhile, are tax-deductible. But most importantly, private equity profits are treated not like those of every other imaginable type of business, but as “carried interest,” a structure unique to the finance industry.’