The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis [Hardcover]

Josh Kosman (Author)

Book Description

Release date: November 12, 2009

An authoritative exposé of the mysterious and potentially dangerous world of private equity

Few people realize that the top private equity firms, such as Blackstone Group, Carlyle Group, and Kohlberg Kravis Roberts, have become the nation’s largest employers through the businesses they own. Using leveraged buyouts that load their acquired companies with loans, private equity firms have generated more than $1 trillion in new debt—which will come due just when these businesses are least likely to be able to pay it off.

Journalist Josh Kosman explores private equity’s explosive growth and shows how its barons wring profits at the expense of the long-term health of their companies. He argues that excessive debt and mismanagement will likely trigger another economic meltdown within the next five years, wiping out up to two million jobs.

He also explores the links between the private equity elite and Washington power players, who have helped them escape government scrutiny. The result is a timely book with an important warning for us all.

Editorial Reviews

From Publishers Weekly

With exhaustive research and a rogues' gallery of interviews, journalist Kosman puts together a convincing and disquieting argument that private equity firms are about to cause the next great credit crisis. Many people don't realize that private equity is just a new name for a leveraged buyout, and that private equity firms make their money by loading their acquired companies with debt, garnering short-term gain at the cost of the businesses' financial longevity. Exposing the pernicious practices of various high-profile firms (including Mitt Romney's company, Bain Capital, notorious for its company-destroying practices), Kosman reveals how they cripple their acquired businesses competitively, limit growth and cut jobs without reinvesting the savings, all without even generating good returns for their investors. But if only half of PE-owned businesses go bankrupt, that would leave almost two million Americans out of jobs. What's to be done? Kosman is a proponent of legislation that encourages buyers of companies to hold on to them for at least five years. This alarming book will keep anxious credit watchers on their toes—and hopefully inspire some pressure to keep PE firms from going the way of mortgage brokers. (Nov.)
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.

Review

"The Buyout of America takes a different approach. It is less concerned with blow-by-blow deal-making or personal stories than with the real-life economic effects of private-equity deals. Mr. Kosman brings to the subject a relentlessly critical approach that is refreshing, simply because so many stories about the buyout firms are the sort of puff pieces that result from delicate negotiations for access. He documents dozens of companies acquired in buyouts--such as hospitals, mattress manufactuerers and a car-parts maker--whose service or products went downhill, whose employees suffered pay cuts or layoffs, and whose fortunes plummeted, sometimes ending in bankruptcy.

Time and again, Mr. Kosman details how the rest of us suffer at the hands of the buyout barons, 17 of whom are members of the Forbes 400. The private-equity firms pay lowball prices, he says, shortchanging public investors, by teaming up with management to pre-empt competing bids. They cream fees from their acquisitions, generating profits no matter how the companies fare. The companies cut more jobs than publicly owned competitors and sidestep proposed reforms by currying favor with politicians. Mr. Kosman finds a University of Chicago study showing that, for the years 1980 to 2001, the private-equity firms' investors got returns that fall short of the broad market average, after fees.

Mr. Kosman provides exhaustive specifics."
--Wall Street Journal

See all Editorial Reviews

Product Details

• Hardcover: 288 pages
• Publisher: Portfolio Hardcover (November 12, 2009)
• Language: English
• ISBN-10: 1591842859
• ISBN-13: 978-1591842859
• Product Dimensions: 6 x 1 x 9 inches
• Shipping Weight: 1 pounds
• Average Customer Review: 4.1 out of 5 stars  See all reviews (18 customer reviews)
• Amazon Best Sellers Rank: #793,084 in Books (See Top 100 in Books)

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Most Helpful Customer Reviews

88 of 93 people found the following review helpful

4.0 out of 5 stars A redefinition of "equitable" November 16, 2009

By Robert Morris HALL OF FAMETOP 100 REVIEWERVINE™ VOICE

Format:Hardcover

In the Introduction, Josh Kosman offers what he calls a "little primer" on how private equity firms operate, explaining that they "buy businesses the way that homebuyers acquire houses. They make a down payment and finance the rest. The financings are structured like balloon mortgages, with big payments due at some point in the future. The critical difference, however, is that while homeowners pay the mortgages on their houses, PE firms have the businesses they buy take out the loans, making THEM responsible for repayment. They typically try to resell the company or take it public before the loans come due." It soon gets even more interesting. "As long as the PE firms could refinance, or turn around and sell off their holdings before the biggest loan payments came due, spectacular flameout bankruptcies could be avoided...PE firms would like to have us all think the reason they try so hard to raise earnings in their businesses [by `starving companies of operating and human capital'] is so that companies can use these profits to pay down the money they borrowed to finance their own acquisitions. But the records show that during the 2003-7 buyout rush, that wasn't generally the case. Instead, they used the profits s a basis to borrow more money. The new loans, which were piled in top of the original debt taken on to finance the LBO, were used to issue dividends" to the (you guessed it) PE firms. What if all, most, or even only some of the companies collapse? No problem. The PE firms have incurred no debt while receiving dividends as well as substantial management fees. "Despite the credit crisis in 2009," Kosman notes, "PE firms are sitting on roughly $450 billion in unspent capital and itching for more deals." Of course they are. Given their circumstances, would wouldn't?...

Kosman explains how and why PE firms "put their companies into crippling debt and, unlike entrepreneurs, who manage their businesses to succeed in the marketplace and grow, they manage their companies largely for short-term gains." PE firms hurt their businesses competitively by limiting their growth, cutting jobs without reinvesting the savings, do not even generate good returns for their own investors. According to Kosman, they are "about to cause the Next Great Credit Crisis," one that could leave about two million of the 7.5 million Americans who work at PE-owned companies unemployed, and more than one thousand businesses bankrupt. "Leadership is needed to rally opposition to close the tax loopholes that make this very damaging activity possible."

In a book certain to generate controversy, Kosman provides a wealth of information (financial data and statistics as well as real-world situations) to support his observations, recommendations, and especially his accusations. After reading the book and then re-reading several key passages that I highlighted, I wish Kosman had included other perspectives on the issues he raises. For example, the thoughts of those who head the most active PE firms, of federal officials associated with relevant regulatory agencies, and of analysts who are best qualified to discuss PE firms. It seems that PE firms could play an important role in the process of what Charles Darwin characterizes as "natural selection," one from which some businesses survive (and perhaps even thrive) while others do not. Kosman asserts that these firms must not be allowed "unnatural" advantages that corrupt free market competition. Whether or not his call for action results in any significant reforms of what he calls "tax loopholes" remains to be seen. Read more ›

11 of 12 people found the following review helpful

4.0 out of 5 stars Eye-opening look into PE hyper-greed, but also one sided March 2, 2010

By Roy Massie VINE™ VOICE

Format:Hardcover

Josh Kosman writes as a journalist experienced in coverage of Wall Street and other large financial deals. He brings his extensive journalistic background of about 10 years data gathering to bear in this sweeping indictment of Private Equity (PE) firms.

Kosman has a mountain of data and stories to tell which clarify the dangers PE firms impose on our economy. It's not just the 10% of American workers that are either terminated or extremely overworked being affected. The investors marshaled by the PE management also often come up short - losing money in pension funds, investment bank loans and other macro-economic areas that further hurt the economy.

The author provides names and extensive details making his book a strong opening salvo for the discussion he wants to bring the American people (and others) into. He has a web site listed in the book that is also for this purpose. Kosman predicts that defaults on PE investment loans between 2012-15 will lead to the next credit crisis and it is about the same size as the mortgage crisis we are in now. The same easy lending policies that allowed subprime loans for houses also funded massive leverage buyouts via PE financiers. The PE financiers are so greedy in Kosman's account that it is incredible, yet he backs it up pretty convincingly. The lavish lifestyle and cavalier attitude towards society of LBO kings is pretty well known anyway, but this book details the savage business practices that leave a wake of destruction where only the PE interests are assured of walking away whole.

It is amazing how much these PE financial wizards get away with in Kosman's accounts and that leads to what I think is the books' primary weakness.... Despite his mountain of data, I am left wondering: why doesn't the investment community sort these guys out for what they are? Setting aside the damage to companies and individual careers, if they do not deliver for their investors any more than Kosman says how do they keep getting funded?

In several places the author indicates he tried to get comments from PE spokesmen but usually could not attain it; no surprise there since they probably feel they have better things to attend to - where's their upside in helping him? As another indication Kosman may not be thinking broadly enough, he barely offers a single sketchy scenario on how the next PE induced credit crisis can be avoided, and that is easier corporate lending so the PE debts can be refinanced for another round. This idea is not really explored, just mentioned. Even if that life vest is available, it just postpones a calamity over a period of years so it is not so intense all at once. If he's right then maybe there are no good ways out, but I would have liked to have seen an opinion from an investment banker or other economist who might be more objective about the potential options.

I work for a PE owned company and have seen both good and bad effects. We are much more focused and centrally organized with a clearer purpose (we are a large company with several divisions). We have experienced some tough cost cutting too that has had detrimental effects, but we will not end up in bankruptcy like 50% of PE owned companies do according to Kosman. Again, I ask: how do PE firms keep getting investments if their raw business results are only good for them and virtually no one else on average? They are not the only bottom line minded greedy business people out there. Kosman's answer seems to be because they promise higher returns than anyone else and so sing their siren song to victim after victim of investors; maybe so.

In any case, I'm glad Kosman wrote this book. It is thick with data and a bit of a dry read but it opens a very important discussion we need to keep in mind for our elected leaders and those in business. Read more ›

8 of 9 people found the following review helpful

5.0 out of 5 stars Excellent book November 28, 2011

By D. Azinger

Format:Hardcover|Amazon Verified Purchase

Ive read alot of books this year, this one is tops.

Very well written; very well researched. Makes an excellent case
for the chaotic influence of private equity on our economy.

The chapter on what private equity did to the mattress industry is a major eye opener. You can't believe what you're reading, and PE is so pervasive it is really scary.

Author really talented guy. Obviously a guy with some integrity who "chose" to avoid a career in PE.

And if you're thinking about voting for Romney;
you might read chapter 6.

Wow -- it's hard to believe this guy is still credible as a businessman and/ or job creator.

Great book. Wish I'd read it sooner.

8 of 9 people found the following review helpful

5.0 out of 5 stars I'll Never Think of Private Equity the Same Way Again July 19, 2011

By Judah

Format:Hardcover

This book is about the history of private equity, what it means, how it operates, and the wreckage the industry generates. Private equity means making money. Money is more important than jobs, than lives, than the environment, than investors, and cash in the pocket is much more important than long term gains.

A PE [private equity] company wants to buy a well performing company with an LBO [Leveraged Buyout Offer] in order to loot the company for as much cash as possible. First the PE firm finds investors, usually retirement funds because they promise extremely unrealistic return percentages, and then they put up about 10% of the purchase price and borrow the rest from a fee loving bank. They get the company.

OK, the first thing the PE firm does is take out a huge amount of loans, or more accurately, they make the successful firm they just bought take out loans in *the name of the firm* -- that means the business is liable, not the PE firm (who also scored a transaction fee from their investors as part of the deal). Then the PE firm fires 5-10% of the company workforce, usually the entire research division and most of customer service, in the name of 'leanness', but what they are really doing is raising as much short term cash as possible. The goal of the PE company is to flip this (formerly) successful business after gutting it of money. If the successful company is a conglomerate, the PE firm 'spins off' and sells the less profitable divisions as separate companies (after loading them with debt).

At this point the PE firm is sitting on a pile of money.... First they use this money to pay off the bank loan which they took out to buy the company, which is why banks love PE firms -- fast loans, some paid off, some sold off as arcane securities (CDO's) and huge fees accrued. Next the PE firm issues dividends to themselves for 'leadership', and they may include the CEO, CFO, or board members in this windfall, if those people were instrumental in selling the cash cow company to the PE firm. At this point the PE firm has always made it's money back, maybe more. The firm may stay on for about 3-5 years, milking the cash cow before it dies of starvation, because paying off company debt is federally tax deductible in the USA. Depending on the robustness of the company, they may issue one or more IPO (Initial Public [stock] Offerings) to raise additional money, or alternatively, make the company take out more loans to issue more dividends to the PE firm.

After the PE firm has bleed the formerly healthy company dry of assets, they sell it, or let it go bankrupt, re-investing *as little as possible* back into the company. In the spirit of the 'quick flip', once a PE firm has quadrupled it's investment, the company is often sold to another PE firm, which proceeds to cut deeper, loot harder, until bankruptcy happens.

This will eventually precipitate a crisis of some sort when all these unpayable loans taken out by companies controlled/owned by PE firms come due. The author estimates about 3 million American jobs will be lost from this looting of industry.

In a nutshell, that is what a PE firm does. For more supporting details and additional money making obfuscations, read the book. Kosman really taught me about how Private Equity enriches a handful of connected men at the cost of thousands of jobs. Read more ›