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Fri Oct 25, 2019, 01:40 PM

Warren vs. Private Equity firms

Matthew Chapman

If laypeople understood what private-equity owned firms do, this would make them want to vote for Warren even more.

The PE industry isn't inherently bad it finances some small businesses that can't get capital elsewhere but in the US, due to lax laws, most PE firms now make money by buying healthy companies, shifting their own debt into them, plundering their assets and firing the workers.

A good case is Toys R Us.

Many people assume Toys R Us went bust because they were unprofitable. But that's not true they were actually turning a profit. They went bust because a PE firm bought them, then forced Toys R Us itself to pay the debt the PE firm ran up buying them.

The intent of PE is to be a mutually beneficial relationship: the PE firm cuts waste at the firm they buy and increases their profit, to the benefit of both.

But nowadays in practice, it's usually a hostile takeover that strips companies and kills jobs to enrich the PE execs.

So what are Elizabeth Warren's proposals?

-Hold PE firms responsible for a portion of debt from a leveraged buyout.
-Require worker salaries and pensions be settled first in the event of a PE-held company's bankruptcy.
-Require workers get a vote on public boards of directors.

The Economist is right: those proposals *would* shrink the PE industry because the kind of hostile takeovers that are now the bulk of PE revenue would be unprofitable or illegal.

PE firms could still exist, but they'd have to act in the interest of the companies they buy.

I don't see any problem with that.

Some European countries already restrict PE firms this way and it hasn't killed capitalism. It's actually made capitalism work better, because profitable companies don't get randomly chewed up and shit out by a small group of rich people.

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