. 2023. Brendan Ballou. Public Affairs.
People stop of their tracks after they see the quilt of the book I’m reading – with its horrifying depiction of a skull. “What are you reading? It can’t be a happy topic!”
Private equity investing is not an on a regular basis conversation amongst friends – but given the dimensions and growth of the investment opportunity, in addition to its potential impact on the broader economy, it needs to be an on a regular basis conversation amongst investment professionals.
creator Brendan Ballou presents a meta-analysis of the worst private equity investing practices, forcing investors to take a deeper take a look at their illiquid private equity exposures. With experience as a federal prosecutor and special counsel for personal equity on the U.S. Department of Justice, Ballou presents a comprehensive study that can inform decision makers’ analytical and ethical approach to the asset class. It will shake you up. It also serves as a call to motion to watch specific and repetitive private equity activities that profit the operators and nobody else.
Like me, you might have a significantly different personal history with private equity investing than the creator. More than 30 years ago, business leaders and investors sought systematic ways to enhance operational and financial efficiency. The concept spread throughout corporate America although it originated in Japan. This was specifically in regards to the “continuous improvement” of an organization by eliminating waste. Just-in-time (JIT) inventory management became a buzzword on corporate earnings calls. This form of harsh medicine was the cure for what was ailing U.S. business. Think of the looting by “pirates” like “Chainsaw Al” – Albert J. Dunlap, notorious corporate raider and creator of . We examine him almost on daily basis as he engages in business relationships that appear so mean to existing employees, suppliers and customers. Nevertheless, it was widely believed that such practices were needed.
Ballou’s focus is on the present reality and possible way forward for private equity investing within the United States. It presents industry-specific examples of personal equity at its worst and encourages readers to judge their very own personal and skilled experiences with it. As he delves into the hard-hit industries—particularly housing, nursing homes, prisons, retail, for-profit education, and health care—the persistent “tools of the trade” of typical private equity firms emerge: leasebacks, dividend recapitalizations, strategic bankruptcies, tax avoidance, roll-offs. oops and unclear corporate structures.
Nevertheless, Ballou also recognizes the potential advantages of personal equity investments, reminiscent of: Such as access to finance (or access at lower costs), expert management by industry specialists, efficient global sourcing, operational and financial improvements, and even improved corporate and worker relations. Customers can profit from greater product consistency, faster access and higher pricing. Private equity firms can potentially profit from economies of scale and skilled management in any respect levels, but within the cases presented, their way of doing business ends in disastrous conditions for workers and customers and the demise of once viable, cash-rich corporations.
The carried interest gap might be private equity’s most useful tax profit; It affects a major a part of the cash generated in the corporate. The typical fee of two% of assets under management is taxed as bizarre income, while the private equity firm’s 20% share of profits earned above a certain threshold is taxed on the lower capital gains tax rate. Talks about eliminating this tax profit have been circulating in Congress for a minimum of 20 years. Despite the Dodd-Frank regulations and the attempted passage of the Stop Wall Street Looting Act in 2019, the looting continues. The creator notes that non-public equity is a robust force in congressional affairs; These corporations have donated greater than $896 million to candidates and members on a bipartisan basis since 1990. In addition, private equity could pose a systemic risk to the economy, particularly because of its expansion into insurance, pension funds and personal credit.
The creator’s wish list of solutions to personal equity abuses strikes me as a litany of not possible dreams, especially considering that some in Congress are talking about achieving everlasting spending cuts by reducing or eliminating certain departments that oversee the business . However, to curb the abuses of personal equity firms in certain industries and stop the worst excesses of personal equity firms, the Department of Justice, the Department of Health and Human Services, the Securities and Exchange Commission and, most significantly, the Internal Revenue Service could take substantive motion and the finance department. Some of Ballou’s proposed solutions are more realistic and practical than others. I commend the creator for publishing this exceptionally well-researched exposé on the industry. His detailed notes expand the content and impact of the book. made me query the merits of personal equity, an investment that I originally believed had a high level of investment integrity and a positive impact on corporate governance.
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