The theory behind capitalism and free markets is the better allocation of resources based on supply and demand. It can be rough and painful at times, but with proper guardrails, it has worked well for us.
The key to the social benefit of capitalism is that it is balanced with regulations. It is hard to argue, given our history, that unregulated capitalism is good for society. From horrid working conditions of the early 20th century, to mass poisoning and pollution through the mid to late 20th and continuing (Superfund Sites now), to the financial abuse (mortgage industry meltdown that took the global economy with it), and a host of other one-offs, there is no shortage of examples of unregulated or even illegal activity in unfettered capitalism to demonstrate the harm it can do.
Over the past couple of decades, a new threat to our societal good has emerged. In some sectors, it is a nuisance; in others, it is outright dangerous.
Private Equity companies can help businesses. They can provide an exit for owners, a consolidation option in a diminishing market, or a source of capital and expertise for quick growth for struggling companies. Generally, the PEs find undervalued private companies (or companies to bring private), resource them and then sell them with a relatively quick turnaround.
This is good for society… at least I think it is. But things have gone sideways.
The annoying part is when the PEs buy up many small private companies in a sector within a geography, then reduce service and increase prices. When the PEs do vertical integrations, they also force business through other companies in their portfolio that you would not work with otherwise.
We see this with veterinary services in our area. Prices are going up, and service has been much less. This is annoying and I’d rather not have to deal with it. But, if a Vet wants to sell their practice to a PE so they can retire, who am I to stop them?
Unfortunately, it does stop at just being annoying. It is getting abusive in physical, financial, and societal ways.
PEs have been abusing laws designed to manage risk and protect those who take it. They purchase a company, drain the cash, drive up debt, sell off valuable assets, and then declare bankruptcy, leaving suppliers, customers, and other stakeholders with receivables that will never be seen.
This isn’t a case of a bad strategy, poor execution, or a poorly run business. The strategy is perfectly sound, well executed, and has absolutely nothing to do with running a business well.
Private Equity:
- The PE firms have every intention of taking on services without paying for them.
- The PE firms have every intention of acquiring revenue for services with no intent to deliver.
- The PE firms have every intention of maxing out lines of credit with no intention to repay.
In this strategy, the Private Equity firms add no value to the economy or society. Their goal is to extract, even steal is an appropriate verb, money with the sole purpose of funding their next theft for even greater returns.
In any industry, this abuse of the system should be illegal; it is fraud that has been legalized through the inaction of our legislators to regulate. At the very least, they should be excluded from bankruptcy protections.
One of the challenges is that, through the creation of legal entities, individuals responsible for this fraud are not culpable. You simply can not find a venue to go after them. So, while patients at nursing homes suffer real physical and emotional harm because of these PE strategies, there is no recourse.
There is an effort to prevent PE firms from continuing this financial abuse, which leads to real harm. This effort is focused on the healthcare industry. While the argument for consolidation is that it will create efficiency and reduce costs, the experience is the opposite. This is particularly true with PE companies.