Kraft Heinz cut expenses too deeply under private equity management, its new CEO says

[Cirsium]

24. Yes, it is

Your post reads like a boilerplate PR screed for the financial industry.

Inside the Private Equity Scam—and the Livelihoods It Has Destroyed

Ostensibly, private equity firms flip underperforming private companies kind of like houses: The firms raise capital to buy “distressed assets” wholesale, take out (often massive) loans to cover a rehabilitation job, and pay their investors when the business either goes public or is sold. Greenwell locates the origin of these leveraged buyout arrangements in the “bootstrap deals” of the 1960s, when financial firms took on companies that were successful but too small to go public. Within a decade, opportunistic executives started targeting larger companies. By the ’80s, hostile takeovers of Fortune 500 companies became common, if not exactly the norm.

Today’s private equity landscape is vast: Once you’re attuned to the industry’s hold on nearly every aspect of American life, it feels impossible to escape. My local grocery, an iconic New York institution once owned by a family that pledged to hire union-represented locals and maintain the lowest prices in the city, was sold in 2020 to a national chain after a takeover from Sterling Investment Partners. On my beat, covering the health care industry, I was regularly confronted with the realities of staffing shortages and closures stemming in part from private equity firms’ attempts to bring budgets down to cover their debt. And I saw private equity’s obsession with becoming “agile” and “lean” reflected in the way the Department of Government Efficiency has deliriously hacked away at programs it has neither the capacity nor the will to understand.

As recounted in Greenwell’s book, stories like these aren’t simply anecdotal. Private equity’s influence on the economy, and our livelihoods, is significant. Twelve million Americans, she writes, work for companies that are owned by private equity. The industry operates 8 percent of private hospitals, four out of five of the largest for-profit day care chains, and currently controls $8.2 trillion in assets—a number that accounts for more than the GDP of any country besides China and the United States. And, where 2 percent of companies go bankrupt within 10 years of their founding, that number jumps to 20 percent when private equity is involved. Between 2009 and 2019, 1.3 million Americans working in retail lost their jobs as a direct result of the industry’s touch.

Private equity’s central conceit is that financiers, not skilled workers or industry experts, are best positioned to figure out what makes any given business work. In her reporting, Greenwell makes a detailed argument for the fundamental misguidedness of this stance. Many private equity managers don’t know very much at all about the businesses they run. They’re experts in markets, not trades. So it’s no wonder they hop from industry to industry deploying the same tactics, cutting jobs and saddling companies with debt and inking extractive real estate deals. Hospitals, newspapers, rental apartments, and toy stores have wildly different business models. But to a private equity firm, they’re all the same.

https://newrepublic.com/article/198351/private-equity-scam-destroys-livelihoods

Why Private Equity Should Not Exist

So what is private equity? In one sense, it’s a simple question to answer. A private equity fund is a large unregulated pool of money run by financiers who use that money to invest in and/or buy companies and restructure them. They seek to recoup gains through dividend pay-outs or later sales of the companies to strategic acquirers or back to the public markets through initial public offerings. But that doesn’t capture the scale of the model. There are also private equity-like businesses who scour the landscape for companies, buy them, and then use extractive techniques such as price gouging or legalized forms of complex fraud to generate cash by moving debt and assets like real estate among shell companies. PE funds also lend money and act as brokers, and are morphing into investment bank-like institutions. Some of them are public companies.

While the movement is couched in the language of business, using terms like strategy, business models returns of equity, innovation, and so forth, and proponents refer to it as an industry, private equity is not business. On a deeper level, private equity is the ultimate example of the collapse of the enlightenment concept of what ownership means. Ownership used to mean dominion over a resource, and responsibility for caretaking that resource. PE is a political movement whose goal is extend deep managerial controls from a small group of financiers over the producers in the economy. Private equity transforms corporations from institutions that house people and capital for the purpose of production into extractive institutions designed solely to shift cash to owners and leave the rest behind as trash. Like much of our political economy, the ideas behind it were developed in the 1970s and the actual implementation was operationalized during the Reagan era.

Now what I just described is of course not the rationale that private equity guys give for their model. According to them, PE takes underperforming companies and restructures them, delivering needed innovation for the economy. PE can also invest in early stages, helping to build new businesses with risky capital. There is some merit to the argument. Pools of capital can invest to improve companies, and many funds have built a company here and there. But only small-scale funds really do that, or such examples are exceptions to the rule or involve building highly financialized scalable businesses, like chain stores that roll up an industry (such as Staples, financed by Bain in the 1980s). At some level, having a pool of funds means being able to invest in anything, including building good businesses in a dynamic economy where creative destruction leads to better products and services. Unfortunately, these days PE emphasizes the “destruction” part of creative destruction.

The takeover of Toys “R” Us is a good example of what private equity really does. Bain Capital, KKR, and Vornado Realty Trust bought the public company in 2005, loading it up with debt. By 2007, though Toys “R” Us was still an immensely popular toy store, the company was spending 97% of its operating profit on debt service. Bain, KKR, and Vornado were technically the ‘owners’ of Toys “R” Us, but they were not liable for any of the debts of the company, or the pensions. Periodically, Toys “R” Us would pay fees to Bain and company, roughly $500 million in total. The toy store stopped innovating, stopped taking care of its stores, and cut costs as aggressively as possible so it could continue the payout. In 2017, the company finally went under, liquidating its stores and firing all of its workers without severance. A lot of people assume Amazon or Walmart killed Toys “R” Us, but it was selling massive numbers of toys until the very end (and toy suppliers are going to suffer as the market concentrates). What destroyed the company were financiers, and public policies that allowed the divorcing of ownership from responsibility.

https://www.thebignewsletter.com/p/why-private-equity-should-not-exist