Introduction
Private equity firms have become increasingly influential in the global economy, controlling nearly 12 million workers by 2020. While marketed as business saviors, their primary strategy—leveraged buyouts—often follows a pattern that mirrors organized crime tactics, albeit legally. This analysis examines how leveraged buyouts work, their economic impact, and the systemic issues they create.
Understanding Leveraged Buyouts
The Mechanics
A leveraged buyout (LBO) occurs when a private equity firm acquires a company using substantial debt, with the target company—not the acquiring firm—responsible for repayment. In 2021 alone, approximately 8,500 LBOs occurred in the United States, valued at $1.2 trillion.
Key characteristics include:
- Companies burdened with up to 90% of their value in debt
- Private equity firms risk only 10% equity investment
- Target companies become responsible for loan repayment and interest
The “Bust Out” Strategy
The methodology mirrors what mob media calls a “bust out”:
profitable businesses are loaded with debt, stripped of assets, and often left bankrupt. While criminal in organized crime, this practice is legal when called a ‘leveraged buyout.‘
Impact on Workers and Companies
Job Destruction and Labor Conditions
Private equity acquisitions typically result in:
- Average 13% job cuts following takeovers
- 1.3 million retail jobs eliminated from 2009-2019
- Increased employee healthcare costs
- Reduced retirement contributions
- Fewer raises and benefits
Case Study: Toys R Us
The 2005 acquisition by private equity firms demonstrates the pattern:
- Immediate $3 billion debt burden
- By 2007, 97% of profits spent on interest payments
- Inability to invest in innovation (missing internet opportunities)
- Eventual bankruptcy and closure
Broader Business Impact
Statistics reveal concerning trends:
- 20% of public companies taken private by PE go bankrupt within 10 years (vs. 2% normally)
- Two-thirds of 2016-2017 bankruptcy filings were PE-owned companies
Consumer and Societal Costs
Healthcare Impact
Private equity’s expansion into healthcare has created measurable harm:
- 25% of hospitals now PE-owned
- $407 average increase per inpatient day
- 10% of U.S. nursing homes PE-owned
- 50% higher antipsychotic medication use in PE-owned nursing homes
- 10% higher mortality rates
- Estimated 1,000 annual deaths attributed to PE ownership
Other Consumer Harms
The pattern extends across industries:
- PetSmart dog deaths doubled after BK Partners acquisition
- Taylor Swift’s master recordings sold without consent to Shamrock Holdings
- Reduced product and service quality across sectors
Financial Performance and Fee Structures
Investor Returns Reality
Despite claims of superior performance:
- Private equity returns match or underperform public markets
- Oxford research shows no better performance after accounting for fees
- American Federation of Teachers found underperformance since mid-2000s
- Warren Buffett questioned return calculation honesty
The “Two and Twenty” Fee Model
Private equity firms extract wealth through:
- 2% annual fee on all invested capital
- 20% of profits above certain thresholds
- Additional “monitoring fees” for board services
- $30 billion annual fee drain from investors
- $230 billion transferred to firms since 2006 via performance fees
Wealth Transfer Dynamics
The system facilitates wealth transfer:
- From teacher/nurse retirement funds to PE executives
- PE billionaires grew from 3 (2005) to 22 (2020)
- Combined worth of $153 billion among PE multibillionaires
- New Jersey State Employees Fund lost 14% to fees in five years
Regulatory Capture and Political Influence
Lack of Oversight
The industry operates with minimal supervision:
- Few SEC employees oversee thousands of funds
- Essential information hidden from public view
- 38 states prohibit fee disclosure
- Self-reported returns with no verification requirements
Government Connections
Regulatory capture enables continued operations:
- Government officials cycling between PE and public service
- Trump administration attempted PE expansion into 401(k)s
- Biden administration reinforced similar policies despite campaign opposition
- $4 million in PE donations to Biden campaign
- Estimated $14 billion wealth transfer from individual retirement investors
Potential Solutions
Transparency Requirements
The SEC under Gary Gensler proposed reforms:
- Mandatory truthful return reporting
- Disclosure of all fees charged to investors
- Increased transparency requirements
Legislative Solutions
Congressional proposals include:
- Stop Wall Street Looting Act (2021)
- Debt limitations in buyouts
- Increased transparency requirements
- Tax loophole closures
Conclusion
Private equity’s leveraged buyout model creates systemic economic harm while generating wealth for a small group of executives. Despite promising superior returns, the industry delivers mediocre performance while extracting massive fees. The pattern of loading companies with debt, cutting jobs and services, and ultimately bankrupting businesses represents a significant drag on economic growth and worker welfare.
Without regulatory reform and increased transparency, private equity will continue transferring wealth from retirement funds to billionaires while destroying viable businesses and essential services. The proposed SEC rules and legislative solutions offer pathways to address these systemic issues, but political will remains uncertain.
A Message from The Page
Here’s a verbatim message from the video
Have you ever wondered why so many major retail chains have filed for bankruptcy or closed locations recently? Toys r Us, Baskin Robbins, J Crew, Hertz, 24 Hour Fitness, Dunkin Donuts…. It’s pretty much an entire mall. It’s not just because of the pandemic:
There’s a shadowy mafia that has been ripping off the entire US economy while making themselves rich. Really rich. This group is responsible for bankrupting hospitals, your favorite retail chains and even ripping off Taylor Swift. They’re called Private Equity. And your company might be next. We took a deep dive into the shocking strategies that the Private Equity Mafia uses.
Hope is not all lost though. There are things we can do to fix these problems. Transparency, for one:
Enter the Securities and Exchange Commission, or SEC, the federal agency charged with stopping bad actors from manipulating the markets. The SEC, led by Biden appointee Gary Gensler, has proposed changing their rules so that private equity firms would have to, you know, tell the truth about their returns of their funds, and disclose transparent information about all the fees that they charge. Obviously the lobbying groups representing private equity firms are up in arms about the idea that they might have to disclose even some basic information to their investors. Meanwhile in Congress, the federal Stop Wall Street Looting act, introduced in 2021, would limit the amount of debt used in buyouts, increase transparency, and close tax loopholes.
And what can you do, yourself? Well, unionize. A unionized workforce is better protected against a leveraged buyout.
Without those changes, the private equity mafia is going to keep getting away with their schemes to line their pockets with YOUR money.
This article was written by AI Assistant, based on content from: https://www.youtube.com/watch?v=z5PLEZiSZVw