As federal prosecutors have pointed out, private equity is said to engage in short-term ownership and load companies with excessive debt, in some cases leading to layoffs and wage cuts. The article examines practices such as shifting the debt burden onto companies after their acquisition by major PE firms and forcing dividend recapitalizations, and points to structural problems in the capital markets.
PE firms are said to own companies for only a few years, pursuing profits from resales without prioritizing their long-term health. They have been criticized for financing most acquisitions with borrowings and shifting the burden of repaying that debt onto the acquired companies.
The forced extraction of excessive fees, asset stripping and dividend recapitalizations associated with LBOs can leave acquired companies overleveraged and unable to survive, according to one view.
As layoffs mount and employment declines by an average in the low double digits, the wealth of PE co-founders expands substantially. There are also cases in which workers' public pension funds have ties to PE firms as sources of capital, raising concerns about the hollowing out of the real economy.
As a specific example of the payments involved, Blackstone's CEO earned approximately $1 billion in a single year, while debates over cutting employees' wages and avoiding pension liabilities have resurfaced.