May 15, 2014
For Immediate Release: May 15, 2014
New York, NY -As private equity’s largest buyout in history enters bankruptcy proceedings and the SEC investigates questionable industry practices, the Russell Sage Foundation announces the publication of Private Equity at Work: When Wall Street Manages Main Street. This book is the first comprehensive examination of the private equity industry and its effect on the U.S. economy. Co-authored by economist Eileen Appelbaum of the Center for Economic and Policy Research and Cornell University professor Rosemary Batt, Private Equity at Work explores the history, economic performance, and positive and negative consequences of private equity leveraged buyouts.
The book offers a new, original analysis of how private equity firms are affecting jobs and the sustainability of companies in a slow economic recovery. It also draws on extensive research to explain how the private equity business model creates incentives for excessive use of debt, putting healthy companies and their workers at risk. While demonstrating the constructive effects that some private equity firms have had, the book’s research debunks commonly-held myths about the industry and provides a nuanced analysis of private equity’s contribution to economic inequality and unemployment. It also offers critical insights into policies that improve transparency, increase accountability and curb the negative effects of private equity.
Private Equity at Work examines:
- The low risk, high reward structure of the private equity business model: Appelbaum and Batt explain how private equity invests little of its own money in leveraged buyouts but gains a disproportionate share of the returns. This classic case of moral hazard leads private equity firms to saddle companies with excessive debt, putting them at risk of financial distress.
- The excessive use of debt and its consequences:The authors show how debt magnifies the returns to private equity partners but increases the risks to companies and workers, leading to job loss, lower wages, and cuts in health and pension benefits.
- How American taxpayers are subsidizing private equity firms: The book explains how high debt levels reduce the tax liabilities of private equity owned companies. Private equity partners also benefit from the carried interest tax loophole, which allows them to pay the much lower capital gains rate on some of their earnings.
- How the industry makes inflated claims about investment performance: Appelbaum and Batt find that the use of a flawed measure of performance—considered standard in the private equity industry and the financial press—regularly overstates private equity investment returns.
- The relationship between private equity firms and labor unions: Private Equity at Work reveals how unions and private equity firms are tied together in often overlooked and surprising ways. While private equity firms often attempt to reduce costs by cutting union jobs, wages and benefits, union pension plans often invest heavily in private equity. Public sector and union pension funds now represent more than a third of all commitments to private equity funds.
- The role of private equity firms as managers: Though private equity investors act as employers, the law treats them as mere investors. The book’s analysis shows how private equity firms skirt financial, pension, and employment regulations to which publicly traded companies must adhere.
- The policies that can improve transparency and accountability in the industry: The authors provide a set of useful recommendations to improve transparency, close the carried interest loophole, reduce incentives for risky behavior and financial engineering, and make private equity partners accountable as employers.