Skip to main content

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

 

 

Comments

Post a Comment

Popular posts from this blog

Sound Advice: January 3, 2025

2025 Market Forecasts: Stupidity Taken To An Extreme   If you know anything about stock market performance, you can only gag at the nonsense “esteemed forecasters” are now putting forth about the prospective path of stocks in the year ahead.   Our cousins in the UK would call this rubbish.   I would not be as kind. Leading the Ship of Fools is the forecast from the Chief Investment Strategist at Oppenheimer who is looking for a year-end 2025 level for the Standard & Poor’s Index of 7,100, a whopping 21% increase from the most recent standing.   Indeed, most of these folks are looking for double-digit gains.   Only two expect stocks to weaken. In the last 30 years, the market has risen by more than 20% only 15 times.   The exceptional span during that time was 1996-1999, which accounted for four of those jumps.   What followed in 2000 through 2002 was the polar opposite: 2000:      -9.1% 2001:     -11.9% ...
Post a Comment
Read more

Sound Advice: January 15, 2025

Why investors shouldn't pay attention to Wall Street forecasts   Investors shouldn't pay attention to Wall Street forecasts for several compelling reasons: Poor accuracy Wall Street forecasts have a terrible track record of accuracy. Studies show that their predictions are often no better than random chance, with accuracy rates as low as 47%   Some prominent analysts even perform worse, with accuracy ratings as low as 35% Consistent overestimation Analysts consistently overestimate earnings growth, predicting 10-12%                 annual growth when the reality is closer to 6%.   This overoptimism can                 lead investors to make overly aggressive bets in the market. Inability to predict unpredictable events The stock market is influenced by numerous unpredictable factors, including geopolitical events, technological changes, and company-specific news.   Anal...
Post a Comment
Read more

Sound Advice: July 16, 2025

Fixed annuities are poor investments Fixed annuities are often criticized as poor investments for several reasons, despite their reputation for providing stable, predictable income.  Here are the key drawbacks and concerns:   High Fees and Commissions Internal Fees:  Fixed annuities can carry a range of fees, including administrative charges, mortality expense risk fees, and rider fees. These can add up to 2%–4% per year, significantly eroding returns over time. Commissions:  Sales agents and financial advisors often receive high commissions for selling annuities—sometimes as much as 5%–8% of the invested amount. This creates a financial incentive for advisers to recommend them, even when they may not be the best fit for the client. Comparison to Other Investments:  Mutual funds and ETFs typically have much lower fees and commissions, making them more cost-effective for long-term growth. Limited Growth a...
Post a Comment
Read more