PEs as villains

While private equity bosses may have negatively impacted numerous companies and lives, is a black-and-white portrayal with no shades of grey justified?

These Are the Plunderers: How Private Equity Runs – and Wrecks – America 

Authors: Gretchen Morgenson & Joshua Rosner

Publisher: Simon & Schuster

Pages: 324

Price: Rs 1,299

The authors of this highly engaging book dislike the private equity (PE) industry and particularly their chieftains immensely. And they have written a readable, no-holds-barred but lopsided narrative of a key component of our business ecosystem.

The authors portray the PE bosses as rich villains of Wall Street who have ruined countless companies and lives. It is a black-and-white portrayal with no shades of grey. Gretchen Morgenson is a veteran financial reporter who won a Pulitzer almost two decades ago for her reporting on Wall Street. Joshua Rosner is a Wall Street veteran and heads Graham Fisher and Co, a research consultancy. They are so intent on painting the entire industry as ruthless profiteers that they pick and choose only examples that suit their narrative and ignore everything else. The prominent PE firms, possibly worried about the way the narrative would shape, refused to engage with the authors — and that only feeds into their mistrust of the sector.

The global PE industry today manages trillions of dollars in assets. In the second quarter of the calendar year 2023, an EY study said that PE firms had reported $114 billion worth of deal activity. The typical PE firm tries to identify companies they can buy out entirely (or in cases, take majority stakes) and help make it more valuable in double quick time and then exit from the investment. The typical time frame to exit is seven to eight years from time of investment, though there are plenty of exceptions as always.

And while there is much to criticise about many PE deals and post-deal behaviour, to paint all players with the same brush is ignoring facts. The PE industry serves an important function — it brings capital to many promising firms that would otherwise fail to access such capital. They also sometimes drive important changes — currently, the search for green investments by many PE firms have given a fillip to the ESG strategies of many mid-sized companies. As in any industry, there are relatively good PE firms and bad ones, and there are examples of disasters post-investment as well as successes.

Plunderers  gets some things right and there is plenty of excellent reporting that shines through in the book. The authors spend a lot of time tracing how lives were ruined and companies were driven to the ground because the PE firm that took over wanted to cut costs and starved the operations of the capital it needed. The PE firm’s bosses made millions and sometimes billions while many other stakeholders — employees and customers — had to face the brunt of the cost-cutting. In some areas, as in the US healthcare sector, a PE firm’s actions ensured that there were too few doctors and nurses to take care of the patients who needed attention.

The authors have a particular obsession with Leon Black, co-founder and former chief executive officer of Apollo Capital Management. Much of the first half — and in fact a bit more — of the book deals with either his shenanigans or examples of companies whose deterioration or ruin could be traced back to Apollo. Certainly, Mr Black was not a particularly admirable character and finally had to retire from his firm when his deep relationship with Jeffrey Epstein came to light. In many ways, Mr Black fits in with their idea of the perfect PE villain. He became a billionaire, leaving plenty of broken companies in his wake.

Given that the PE universe is quite big and diverse, it is a bit disconcerting that the book focuses on a handful of players instead of looking at others. As with far too many books, this is a US-centric book completely ignoring the rest of the globe where PE players also have a strong presence. In India, for example, the PE firms operate in a somewhat different fashion than the examples in the book.

The authors assign relatively little blame to policymakers, economists, and businesses that were targeted. This is a bit troubling. The PE firms flourished also because of the free market philosophy that the US policymakers embraced so wholeheartedly, with few checks and balances in place. Yes, there were the excesses of the era that saw the rise of leveraged buyouts — as anyone who read the classic tale recounted in Barbarians at the Gate would remember. But in many cases, the examples ignore the other side of the story. In far too many cases, the PE firm can take over only because the management or owner wants to exit. Samsonite, the iconic luggage brand and one the book talks about, was one of those.

Then, in many cases, PE firms get an entry simply because the share market has assigned too low a value to a company. In some cases, the investee firms were already doing badly and had grown fat and effete, presenting a perfect opportunity to an acquirer. And then there are other financial players  —such as the legendary Carl Icahn — whose search for value would weaken a company enough to drive it right into the arms of a PE investor.

This is one of the peculiar books that this reviewer found a racy read even while disagreeing with many of the things in it. And that says a lot about the storytelling capabilities of the authors.

The reviewer is former editor of Business Today and Businessworld, and founder of Prosaic View, an editorial consultancy