Private equity (PE) has long been criticized for its aggressive wealth creation at the expense of jobs. To evaluate these claims, Falcon constructed and analyzed a new dataset that covers 200 U.S. buyouts of middle-market companies from 2010 to 2016.
The Myth of PE Vampires
The discrete nature of private equity transactions creates a fragmented and limited understanding of the industry’s operations. During those rare occasions when PE enters the public eye, it is often because something has gone wrong. Such was the case when KKR, Bain Capital and real estate investment trust Vornado bought Toys ‘R’ Us in 2005.
From the outside, Toys ‘R’ Us seemed like the kind of steady but uninspiring company that provided employees with good jobs and shareholders with modest value. After its acquisition, the new owners more than doubled its debt load, and as reported in The Atlantic in 2018, “interest expense[s] consumed 97 percent of the company’s operating profit,” hobbling the company and eventually driving it to bankruptcy after a decade.
Because of high-profile failures like Toys ‘R’ Us, critics claim leveraged buyouts incentivize short-term gains and profiteering at the expense of long-term growth and sustainability. Crucially, short-term gain for the PE backers also means slashing payrolls and disabling worker protections.
Furthermore, disapproval of private equity has become part of the cultural zeitgeist. In 2019, Massachusetts senator Elizabeth Warren compared the industry to “vampires” who often “(bleed) the company dry and (walk) away enriched even as the company succumbs.” <...