What About Private Equity?

The industry is getting off easy while it destroys companies and jobs

This from The Wall Street Journal’s Overheard on the Street is the stat of the day (okay, it ran yesterday):

Nearly half the 163 U.S. nonfinancial companies that defaulted last year were backed by private equity.

Now I don’t have a number for how many U.S. nonfinancial companies overall are backed by private equity, but you can bet it’s nowhere near half. This disproportionate failure isn’t because private-equity companies are really bad at picking investments. It’s because they levered up their acquisitions with cheap debt to goose their returns, and now these companies, who employ (or employed) lots of people, can’t meet their debt service, much less invest in the business. That’s helping choke the economy.

This raises a critical point about private equity: Why isn’t that industry being included in financial reform? What about Blackstone?

If these firms destroy or hobble companies by loading them up with debt, sometimes to pay themselves massive dividends that recover all their equity with no earnings, where’s the legislative scrutiny. How many jobs have been lost because of the excess debt loaded onto otherwise healthy companies? It can’t be insignificant.

Should there be a limit on the amount of debt you can pile on an acquisition? Isn’t this a debate we should be having?

And for that matter: Why are hedge funds getting off so lightly?

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.