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Private Equity and the American Economy

Rohan Mascarenhas, Russell Sage Foundation
January 12, 2012

RSF author Eileen Appelbaum appeared on the Diane Rehm Show today to talk about the role of private equity in the U.S. economy. The topic is in the news because of the Republican primary race; some of the candidates have criticized Mitt Romney's tenure at Bain Capital. It's a difficult issue: on the one hand, some view the rise of private equity as a net positive force; these firms theoretically buy inefficient firms, restructure them and make them profitable again. Detractors argue private equity firms are driven more by short-term profits that rely chiefly on cutting labor and product quality before re-selling the firm for a quick profit.

Late last year, the Russell Sage Foundation awarded funds to Appelbaum and Rosemary Batt to systematically study the private equity phenomenon in the American economy. In a recent paper published by CEPR, they examined four case studies of large U.S. and U.K. corporations that had been restructured by private equity. They concluded:

The case studies also suggest that the private equity investors, where they made money, did not do so via performance improvements, but rather through financial engineering or shifts in the distribution of rents from other stakeholders to the new shareholders. At Mervyn’s, they relied heavily on the sale of real estate, the cutting of jobs and benefits of employees, and the reneging onlong-standing vendor contracts. Vendors, creditors, employees, and their communities suffered thecollateral damage. At EMI and Stuyvesant/Cooper Village, the new owners lost money, but littlecompared to other stakeholders, who suffered collateral damage – the artists whose music EMIfailed to promote; the renters who were owed millions in back rent and the communities in whichthey were located.

Here's the full copy of the report:

Financial Capitalism, Breach of Trust and Collateral Damage