Private equity has been quietly acquiring companies and corporations over the past 25 or so years. This is really problematic in my view because not only does this ownership model encourage the...
In 1996, about 8,000 firms were listed in the U.S. stock market. Since then, the national economy has grown by nearly $20 trillion. The population has increased by 70 million people. And yet, today, the number of American public companies stands at fewer than 4,000. How can that be?
Private equity has been quietly acquiring companies and corporations over the past 25 or so years. This is really problematic in my view because not only does this ownership model encourage the worst tendencies of capitalism by super prioritizing quarterly(actually yearly, quantified as EBIDTA). They scoop up companies and brands using some of their own money as well as a lot of borrowed money. Believe it or not, they are able to have the very loans used to purchase these companies put on the books of the very company they bought! Quite the accounting sleight of hand there. Not only that, they will have the controlling private equity company purchase whatever property the acquired company owned, and then have the company rent the property back from the private equity firm. All of this stacks the deck against the acquired company in terms of profitability. Its by far the most extractive form of capitalist ownership. These firms scour around, looking for healthy companies to pillage, and they've become quite rich in the process, leaving a trail of hollowed out husks of formerly sustainable, healthy businesses in their wake.
The prime example of this is toys r us. Here was a business that was nominally profitable, owned the property their stores were built on in a large percentage of their locations which could keep overhead low. They were working through the transition to digital sales. Bought out by private equity, sold their property to the PE firm and forced to rent it back and from there it spiraled. Locations closed, people fired in droves, and eventually the entire brand imploded.
Something needs to be done to curb this trend in the ownership of a large swath of the American economy. This ownership model is highly exploitative and extractive, and is completely incompatible with any kind of sustainability.
Interesting to see this when a lot of complaints about the economy is public corporations having a fiduciary responsibility to maximize profits. I know just enough to think I know more than I do...
Interesting to see this when a lot of complaints about the economy is public corporations having a fiduciary responsibility to maximize profits.
I know just enough to think I know more than I do so I won't editorialize, but I will share the article's own BLUF:
When a private-equity fund buys a publicly traded company, it takes the company private—hence the name. (If the company has not yet gone public, the acquisition keeps that from happening.) This gives the fund total control, which in theory allows it to find ways to boost profits so that it can sell the company for a big payday a few years later. In practice, going private can have more troubling consequences. The thing about public companies is that they’re, well, public. By law, they have to disclose information about their finances, operations, business risks, and legal liabilities. Taking a company private exempts it from those requirements.
A lot of complaints on the internet are from people who have no idea what they're talking about. The fiduciary part is widely overstated - I often see "X CEO must legally do Y" which is just...
A lot of complaints on the internet are from people who have no idea what they're talking about. The fiduciary part is widely overstated - I often see "X CEO must legally do Y" which is just clearly false, you don't even have to look far to see examples.
Public merely means that the company satisfies a set of regulations put out by the government that allows their shares to be purchased by the general public (as opposed to only "accredited investors"). This has somehow morphed into a whole set of unrelated ideas, like that public companies must be run by commitee (not the case, you are not required to sell a majority of the sells in the IPO, and these days many companies have voting share rules that enable the minority holding founder to have absolute control, e.g Zuck and Meta), or that public companies must aim for short term profits (Amazon famously ran a loss for over a decade as a public company!).
You should want companies to be public! It would be overly burdensome if everyone's lemonade stand had to have annual shareholder reports, of course, but at a certain size it is good for everyone.
Public companies would be better if they were properly distributed somewhat equitably across the public. But as it is, it's mostly just the same large handful of people and companies trading...
Public companies would be better if they were properly distributed somewhat equitably across the public. But as it is, it's mostly just the same large handful of people and companies trading fractional ownership like it's a game of cards. And facilitates nasty things like hostile takeovers.
Fiduciary duty (and all the rules surrounding our economy as a whole really) creates a nasty set of incentives that keep playing out. It is one hell of a coincidence that companies that were previously privately owned and go public often start seeing their core values vanish and product/service quality plummet in a few short years.
The shareholders are like children being handed candy. And if a parent has to explain to their child that they've been handing 1 pieces to every day that today they turned down an opportunity to give the children 2 pieces every day, the children will fire the parent and instill a parent that gives them 3 pieces of candy instead, regardless of the consequences.
Those are again not attributes inherent to being public. For one, they're actually in opposite to each other, in that the more spreadout voting shares are, the more likely hostile takeovers are....
Those are again not attributes inherent to being public. For one, they're actually in opposite to each other, in that the more spreadout voting shares are, the more likely hostile takeovers are. But neither are inherent to being public. A private company can have a hostile takeover, if the founder is no longer majority shareholder (this would usually be the case via private investment rounds).
Maybe more Americans should own stock, but there's few barriers anymore. That'd mainly be an issue from the angle of them not having enough money, or not having financial literacy. Neither is an issue with companies being pubic.
Fiduciary duty (and all the rules surrounding our economy as a whole really) creates a nasty set of incentives that keep playing out.
I mean this is quite a simple regulation to prevent people from being scammed. If you have are a financial operator, you should be legally required to do the best for your client. Otherwise you get things like, financial advisors telling people they should invest in their own companies. The idea of not having fiduciary duty is absurd.
And if a parent has to explain to their child that they've been handing 1 pieces to every day that today they turned down an opportunity to give the children 2 pieces every day, the children will fire the parent and instill a parent that gives them 3 pieces of candy instead, regardless of the consequences.
This both happens far less often than the internet thinks - the reverse is more common, honestly, in that poorly performing CEOs get a lot of leeway - and is not unique to public companies.
There is nothing any shareholder can do to do a hostile takeover of Meta, for instance, nor anything they can do to remove Zuck.
Just for clarity’s sake, as one of those people, there can be more than one thing wrong with the modern economy. At a guess, folks are probably annoyed by profit seeking at the expense of...
Interesting to see this when a lot of complaints about the economy is public corporations having a fiduciary responsibility to maximize profits.
Just for clarity’s sake, as one of those people, there can be more than one thing wrong with the modern economy. At a guess, folks are probably annoyed by profit seeking at the expense of something else they care about (fairness, quality, local manufacturing, etc.), not specifically and exclusively an interpretation of a judgment on a lawsuit from a hundred years ago.
Private equity has been quietly acquiring companies and corporations over the past 25 or so years. This is really problematic in my view because not only does this ownership model encourage the worst tendencies of capitalism by super prioritizing quarterly(actually yearly, quantified as EBIDTA). They scoop up companies and brands using some of their own money as well as a lot of borrowed money. Believe it or not, they are able to have the very loans used to purchase these companies put on the books of the very company they bought! Quite the accounting sleight of hand there. Not only that, they will have the controlling private equity company purchase whatever property the acquired company owned, and then have the company rent the property back from the private equity firm. All of this stacks the deck against the acquired company in terms of profitability. Its by far the most extractive form of capitalist ownership. These firms scour around, looking for healthy companies to pillage, and they've become quite rich in the process, leaving a trail of hollowed out husks of formerly sustainable, healthy businesses in their wake.
The prime example of this is toys r us. Here was a business that was nominally profitable, owned the property their stores were built on in a large percentage of their locations which could keep overhead low. They were working through the transition to digital sales. Bought out by private equity, sold their property to the PE firm and forced to rent it back and from there it spiraled. Locations closed, people fired in droves, and eventually the entire brand imploded.
Something needs to be done to curb this trend in the ownership of a large swath of the American economy. This ownership model is highly exploitative and extractive, and is completely incompatible with any kind of sustainability.
Interesting to see this when a lot of complaints about the economy is public corporations having a fiduciary responsibility to maximize profits.
I know just enough to think I know more than I do so I won't editorialize, but I will share the article's own BLUF:
A lot of complaints on the internet are from people who have no idea what they're talking about. The fiduciary part is widely overstated - I often see "X CEO must legally do Y" which is just clearly false, you don't even have to look far to see examples.
Public merely means that the company satisfies a set of regulations put out by the government that allows their shares to be purchased by the general public (as opposed to only "accredited investors"). This has somehow morphed into a whole set of unrelated ideas, like that public companies must be run by commitee (not the case, you are not required to sell a majority of the sells in the IPO, and these days many companies have voting share rules that enable the minority holding founder to have absolute control, e.g Zuck and Meta), or that public companies must aim for short term profits (Amazon famously ran a loss for over a decade as a public company!).
You should want companies to be public! It would be overly burdensome if everyone's lemonade stand had to have annual shareholder reports, of course, but at a certain size it is good for everyone.
Public companies would be better if they were properly distributed somewhat equitably across the public. But as it is, it's mostly just the same large handful of people and companies trading fractional ownership like it's a game of cards. And facilitates nasty things like hostile takeovers.
Fiduciary duty (and all the rules surrounding our economy as a whole really) creates a nasty set of incentives that keep playing out. It is one hell of a coincidence that companies that were previously privately owned and go public often start seeing their core values vanish and product/service quality plummet in a few short years.
The shareholders are like children being handed candy. And if a parent has to explain to their child that they've been handing 1 pieces to every day that today they turned down an opportunity to give the children 2 pieces every day, the children will fire the parent and instill a parent that gives them 3 pieces of candy instead, regardless of the consequences.
Those are again not attributes inherent to being public. For one, they're actually in opposite to each other, in that the more spreadout voting shares are, the more likely hostile takeovers are. But neither are inherent to being public. A private company can have a hostile takeover, if the founder is no longer majority shareholder (this would usually be the case via private investment rounds).
Maybe more Americans should own stock, but there's few barriers anymore. That'd mainly be an issue from the angle of them not having enough money, or not having financial literacy. Neither is an issue with companies being pubic.
I mean this is quite a simple regulation to prevent people from being scammed. If you have are a financial operator, you should be legally required to do the best for your client. Otherwise you get things like, financial advisors telling people they should invest in their own companies. The idea of not having fiduciary duty is absurd.
This both happens far less often than the internet thinks - the reverse is more common, honestly, in that poorly performing CEOs get a lot of leeway - and is not unique to public companies.
There is nothing any shareholder can do to do a hostile takeover of Meta, for instance, nor anything they can do to remove Zuck.
Just for clarity’s sake, as one of those people, there can be more than one thing wrong with the modern economy. At a guess, folks are probably annoyed by profit seeking at the expense of something else they care about (fairness, quality, local manufacturing, etc.), not specifically and exclusively an interpretation of a judgment on a lawsuit from a hundred years ago.