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Ryan P's Reviews > Plunder: Private Equity's Plan to Pillage America
Plunder: Private Equity's Plan to Pillage America
by
by
** spoiler alert **
I always recommend seeking information from a bias-confirming point of view and a counter-bias point of view (whichever you prefer). I work closely to this industry (as an accountant) and will try to provide some counter arguments below. I did think this was a good book to raise awareness of the negative impacts that PE can have and the government’s compliance/assistance.
My main gripe with the book is that the author blames PE for widespread industry changes. Blames PE firms for 13% rent increase nationwide for single family homes - apartment complexes rose far more. Blames PE firms for high COVID death rates in nursing homes - well documented that this concentrated in states that forced nursing homes to lock down (effectively trapping residents with the virus inside).
Author shows lack of understanding of some PE basics, in that it is fundamentally incorrect that a PE firm would ever seek to lose money on a deal. Also, the 1/5 PE-backed companies bankruptcy stat is driven by the fact that a primary strategy of these PE firms is to buy up “distressed assets” which are companies nearing bankruptcy or in-bankruptcy. They take the risk on turning those around which makes it much likelier that their holdings go bankrupt.
The “dividend recapitalization” in a PE deal is very similar to real estate. The firm puts money in (more than 20% typically) and finds a creditor to supply the debt. The creditor provides money on a “leverage” basis similar to debt to income basis for mortgages. Once a company becomes more profitable, the leverage goes down. If the PE firm would rather not sell the company yet, but would like to re-up the cap table in order for a liquidity event for all shareholders, they can do a dividend recapitalization which conceptually is EXACTLY the same as cash-out refinance on a home (taking out a new loan on the updated value of the asset, keeping the equity gain immediately). The examples in the book are egregious and should be illegal - I think the 2 year hold proposal makes a lot of sense.
Hold periods “short term mindset” - in reality, the value proposition of a PE firm is that they will lock up investor money for 5-7 years in order to make outsized returns. They are incentivized to make extremely quick changes to result in more growth. However, how is it at all different from publicly traded companies? It is well documented that executive goals are narrowly focused on short-term incentives and performance. The daily reminder of the stock prices drives that point home for many CEOs.
Author makes good points on PE’s harmful impact on residential real estate, nursing homes, and for-profit universities. Not sure what solution is for real estate, maybe making a maximum % of investor owned single family homes in a county? Nursing homes should have mandated nurse to patient ratios (this should be law for all healthcare).
On the carried interest law - the argument in favor of this is that the PE associates receive effectively equity in the firm’s holdings (usually on a mandated basis). It really does act like an investment in my opinion. If the earnings on those investments is treated as ordinary income, I think you’d need to get rid of the capital gains rates as a whole? Again could look at hedge funds - they get capital gains treatment since they are publicly traded securities.
Corporate veil - PE firms are not held accountable for actions of their portfolio companies (companies they own). If you pierce the corporate veil here, I think it would hurt more small business owners who make an LLC to avoid being sued personally. The corporate veil is a key tailwind to American entrepreneurship. I do agree that PE firms should be held more accountable for actions taken via the portfolio companies, but the solution is more nuanced than the author details.
My main gripe with the book is that the author blames PE for widespread industry changes. Blames PE firms for 13% rent increase nationwide for single family homes - apartment complexes rose far more. Blames PE firms for high COVID death rates in nursing homes - well documented that this concentrated in states that forced nursing homes to lock down (effectively trapping residents with the virus inside).
Author shows lack of understanding of some PE basics, in that it is fundamentally incorrect that a PE firm would ever seek to lose money on a deal. Also, the 1/5 PE-backed companies bankruptcy stat is driven by the fact that a primary strategy of these PE firms is to buy up “distressed assets” which are companies nearing bankruptcy or in-bankruptcy. They take the risk on turning those around which makes it much likelier that their holdings go bankrupt.
The “dividend recapitalization” in a PE deal is very similar to real estate. The firm puts money in (more than 20% typically) and finds a creditor to supply the debt. The creditor provides money on a “leverage” basis similar to debt to income basis for mortgages. Once a company becomes more profitable, the leverage goes down. If the PE firm would rather not sell the company yet, but would like to re-up the cap table in order for a liquidity event for all shareholders, they can do a dividend recapitalization which conceptually is EXACTLY the same as cash-out refinance on a home (taking out a new loan on the updated value of the asset, keeping the equity gain immediately). The examples in the book are egregious and should be illegal - I think the 2 year hold proposal makes a lot of sense.
Hold periods “short term mindset” - in reality, the value proposition of a PE firm is that they will lock up investor money for 5-7 years in order to make outsized returns. They are incentivized to make extremely quick changes to result in more growth. However, how is it at all different from publicly traded companies? It is well documented that executive goals are narrowly focused on short-term incentives and performance. The daily reminder of the stock prices drives that point home for many CEOs.
Author makes good points on PE’s harmful impact on residential real estate, nursing homes, and for-profit universities. Not sure what solution is for real estate, maybe making a maximum % of investor owned single family homes in a county? Nursing homes should have mandated nurse to patient ratios (this should be law for all healthcare).
On the carried interest law - the argument in favor of this is that the PE associates receive effectively equity in the firm’s holdings (usually on a mandated basis). It really does act like an investment in my opinion. If the earnings on those investments is treated as ordinary income, I think you’d need to get rid of the capital gains rates as a whole? Again could look at hedge funds - they get capital gains treatment since they are publicly traded securities.
Corporate veil - PE firms are not held accountable for actions of their portfolio companies (companies they own). If you pierce the corporate veil here, I think it would hurt more small business owners who make an LLC to avoid being sued personally. The corporate veil is a key tailwind to American entrepreneurship. I do agree that PE firms should be held more accountable for actions taken via the portfolio companies, but the solution is more nuanced than the author details.
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