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Sound Advice: September 24, 2025

Private equity may be good for investors, but it's terrible for the companies involved. 

The impact of private equity (PE) on companies is a polarizing subject, with strong arguments on both sides.

Arguments That Private Equity Is Harmful for Companies:

  • Increased Risk of Bankruptcy: Companies acquired by private equity are about 10 times more likely to go bankrupt than those not owned by PE firms. Some studies have found a 20% bankruptcy rate among PE-owned companies, which is substantially higher than industry averages.
  • Job Losses: On average, private equity takeovers result in significant job losses, with a Harvard and University of Chicago study showing an average 4.4% decline in jobs two years after acquisition. High-profile examples like Toys R Us and Red Lobster involved massive layoffs and eventually bankruptcy under PE ownership.
  • Heavy Debt Burdens: PE firms frequently use leveraged buyouts, making their portfolio companies take on significant debt, which can limit flexibility, constrain investment in long-term growth, and increase financial instability—especially if economic conditions worsen.
  • Short-Term Focus and Cost Cutting: Many critics argue that PE firms focus on extracting short-term value via aggressive cost-cutting, reducing wages and benefits, and charging large management fees—often at the expense of long-term sustainability and the well-being of workers and communities.
  • Broader Economic Impact: When PE-owned businesses fail, the fallout extends to suppliers and local economies, compounding the negative effects of job losses and bankruptcies on entire communities.

Arguments That Private Equity Benefits Companies (and the Economy):

  • Job Creation and Growth: According to industry reports, private equity-backed businesses directly employ millions of people, many in small businesses, and pay above-average wages. In the U.S., PE-backed businesses employed 13.3 million people in 2024 at average wages of $85,000—an increase from previous years.
  • Economic Contributions: The sector has contributed trillions to U.S. GDP, accounting for about 7% of the total economy, and pays significant tax revenue to federal, state, and local governments.
  • Improved Productivity & Professionalization: Some research shows that PE ownership can drive operational improvements, raise productivity, and enhance professional standards, especially in manufacturing, technology, and sectors needing industry expertise. PE investors sometimes guide companies to greater efficiency, focused strategy, and innovation.
  • Support for Innovation & Ownership Opportunities: PE capital has helped foster innovation, supported company expansion, and provided ownership opportunities for employees, aiding wealth creation among workers.
  • Resilience in Crisis: Some studies have noted that PE-backed companies have shown greater resilience during economic crises than similar non-PE firms—a pattern observed during the COVID-19 pandemic. 

Summary Table: Effects of Private Equity on Companies

Negative Effects of PE Ownership

Positive Effects of PE Ownership

Higher bankruptcy risk (10x that of peers)

Growth in jobs and high average pay

Layoffs, job cuts, and lost benefits

Operational improvements and innovation

Heavy debt loads increase financial fragility

Greater economic contribution and tax revenue

Focus on short-term profit over long-term health

Some show stronger crisis resilience

Communities harmed by business closures

Professionalization and better governance

Conclusion:
Private equity can deliver substantial returns and improvements for investors and, sometimes, for companies themselves, especially if firms are well-run and supported for the long term. Even so, the model often brings significant risks for portfolio companies, workers, and communities, especially when short-term financial engineering is prioritized over business fundamentals. The net result for companies depends greatly on the specifics of the PE firm, the sector, and the individual transaction. For many companies, private equity involvement can indeed be "terrible," but for others—especially those given resources, expertise, and time—it may be transformative in a positive way.

N. Russell Wayne

Weston, CT  06883

 203-895-8877

 www.soundasset.blogspot.com

 

 

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