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Is private equity good for the economy? Show more Show less
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Private equity firms have been called "locusts" by the German chancellor Angela Merkel but proponents argue that private equity investors make companies more efficient, create economic growth and provide good economic returns to investors.

Private equity leads to higher default rates and more bankruptcies and worse outcomes for customers and workers Show more Show less

Private equity is a misnomer and should properly be called leveraged buyouts. Leveraged buyouts, by definition, increase borrowing and raise the probability of bankruptcy.
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Most claims of growth by private equity are false

Studies have shown that private equity leads to higher defaults, its claims to increase productivity are a sham, and it causes higher rates of job losses and firings in target companies as well as lower wages. (Unsurprisingly, industry-funded studies are much more sanguine.) But perhaps the most damning indictment of the private equity model is that their returns are overstated and their performance simply not as good as they lead investors to believe.
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The Argument

Private equity firms are not responsible for smaller companies going out of business. Steven Kaplan of the University Chicago and Per Stromberg of the Stockholm School of Economics reviewed a sample of over 17,000 private equity transactions to see how the funds impacted the deals. Only about 6% ended in either bankruptcy or reorganization, giving them a yearly default rate that had a lower overall average than the corporate bond issuer. That feat was particularly impressive, considering that many private equity firms, specialize in turning around risky businesses. Private equity also has a good overall impact on the overall business climate. A research team from the Stockholm School, Harvard, and Columbia University looked at 20 industries in more than two dozen countries between 1991 and 2007 and found that industries with private equity activity grew 20% faster than other sectors. After running several mathematical checks, the paper concluded it was not likely that the private equity funds were simply investing in industries that were already en route for faster growth. Rather, they concluded that the lessons from private equity firms made entire industries more efficient.

Counter arguments

Unions are constantly being bought out and low balled by major corporations and pay their employees unfair wages. A 2011 study from researchers at the University of Chicago, Harvard, and the U.S. Census Bureau examined what happened to workers at 3,200 companies targeted in private equity acquisitions between 1980 and 2005. Although companies fired more workers in the years after a buyout compared to competitors in their industry, they also tended to hire more new workers. The companies were also more likely to buy divisions or sell new ones. As a result of this, companies involved in a private equity deal saw much more turnover as the academics put it, but only a net decrease in employment of about 1% compared to other businesses.

Premises

Rejecting the premises

References

This page was last edited on Monday, 14 Sep 2020 at 04:28 UTC

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