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.
on March 2, 2010
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.
on November 28, 2011
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.
Josh Kosman's The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis is a must-read for anyone who wants to understand just what private equity firms really do, the disastrous effects they have had on American business, and how the massive debt loads they leave in their wake are yet another financial time-bomb waiting to implode. Well researched and written with great detail and clarity, this book serves both as a highly educational primer and a warning of what may lie ahead for all of us.
When Kosman describes what PE firms actually do, what comes to mind is the scene from the gangster film Goodfellas where Ray Liotta's character relates what happened when the mob 'invested' in another character's restaurant business and proceeded to milk it dry, load it up with all kinds of debt and then burn it down to collect the insurance money. The only real difference between that and what PE firms do is that PE firms do it legally. The mindset, however, is exactly the same.
Highly recommended for anyone with an interest in learning about just what private equity firms do and why it matters.
on July 19, 2011
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.
on November 22, 2012
Private Equity (PE) firms have been in the news a great deal of late, especially with the candidacy of Mitt Romney for president. This book does a good job in explaining how the PE firms operate, their history, what risks they take, and how their efforts might be minimized and/or controlled by government. Details of some of the largest PE takeovers are covered.
In short, the book is a good overview for readers who want to know more about Private Equity firms. I recommend it.
PE firms are not Hedge funds. Those take investor money and invest it in a variety of schemes to increase the value of the money in the fund and for the investors. PE firms are not venture capitalist firms, either. Those entities invest in companies with the goal of making them stronger and increasing their worth, without the need of excessive debt acquired in the process.
Private Equity firms, in contrast, put down cash, usually no more than 30-40% of the purchase price of the acquired company, to acquire a company. The company, itself, finances the rest of the money required for the purchase. Within five years, the Private Equity firm plans to sell the company. Frequently, it sells to yet another PE firm.
For PE firms the whole exercise is to make money. Pure and simple. The more the PE firm can sell the acquired company for, or pull out of the company before it is sold, the better. Neither the long-term success of the company nor the status or future of its workers are much of a concern for the PE firm.
In the 1990s, the PE industry was known for "leveraged buyouts." Per the book, the industry simply changed its name to "private equity." PE was red hot in 2007, growing substantially from the beginning of that decade. Some of the big names were the Blackstone Group, the Carlyle Group and Bain Capital. In 2007, PE buyouts totaled nearly $500 billion. The big banks loved it. They made tons of money from fees on the loans PE took out to finance takeovers.
KKR is another major PE firm. It started acquiring companies back in the 1970s, completing the very first hostile takeover, a buyout of the Beatrice Companies. By 2008, it owned companies with total employees of nearly one million, making it, effectively, the second biggest U.S. employer, behind only Wal-Mart. It made the biggest deal of that era in the buyout of Nabisco for $30 billion.
But if there is any good news in all this, it is that the U.S. tax code was changed so that PE firms like KKK could not buy a company, then sell off its parts and not pay taxes on those gains. With this part of the tax code changed, much of the incentive to buy a company, the sell its parts was lost. But before this change, it was a strategy that worked like a charm. What remains, however, is that PE firms can borrow heavily to buy and/or further leverage a company, then write off the interest on all the loans. Congress has been unable to pass legislation to remove this essential benefit to PE firms.
What fueled much of the success of the PE firms in the early part of this century were investments by pension funds and other major holders of wealth. By the early 2000s, these groups were looking for improved returns. They poured billions of dollars into PE firms, which typically lock investors in for a minimum of seven years. It was new-found money for PE firms.
Of major concern, per the author, is the sheer number of major U.S. companies are now owned/run by PE firms, and how many of these companies could go bust in the future because of excess debt. Like a consumer loan, where the lender receives their return on investment before any principle is paid down, PE firms tend to suck their investments, plus profits, out of a company before the company has improved enough to stand on its own two feet. At their worst, PE firms get their money back. But, more likely, they get their money back and more, primarily by distributing handsome dividends to their investor/shareholders, at the expense of the acquired company.
Per the book, about half of the major takeovers by PE firms have resulted in bankruptcies. Allied Stores, Burlington Industries, Federated Department Stores and Owens-Corning are on this list of casualties. A rare success was the PE takeover of General Instruments, the history of which has a chapter in the book.
PE firms argue that they take over companies to make them more profitable, to save them, and, as a result, to create more jobs. But the string of well-known names of companies taken over, overburdened with debt, reduced of many seasoned employees and more, goes on and on: Hertz Rent a Car, Warner Music and KB toys are but a few examples. The book gives detailed information about how firms like Bain Capital, under Mitt Romney, did their thing to mattress company Sealy in 1997. It is not, for the most part, a pretty picture. KB Stores, another Bain Capital takeover, as the result of its bankruptcy, closed 600 stores and fired 5,000 employees. Bain Capital, it would appear, still made a profit in the failure at KB. Another concern is that PE firms seem to like takeovers of medical and/or hospital firms.
By 2008, there was more PE action in England than in the U.S., and a chart in the book shows that the "influence" of PE firms in 2007 was less in the U.S. than in six European countries, including the United Kingdom. Right behind the U.S. in this chart is France, Finland and a host of other European nations.
Back in the U.S. and on Wall Street, there is a mutual fund that represents investments in PE firms and Hedge funds: Fortress Investment Group. And PE firms are also into Initial Public Offerings (IPOs) as a way to make money. The scale of PE wealth and ownership is incredible, as PE firms apparently own about 2,000 American companies which have approximately six million Americans working for them.
If PE firms had goals of improving company performances, increasing jobs and all, then things could be fine. But, per the author, "the only winners in private equity are the partners...." The well-known "carried interest" tax loophole is still on the books. The industry, collectively, controls about $500 billion in investable money, or more. Its power of the PE industry may be too great to control, by government or even by itself.
For the most part, the author seems to see himself as a messenger, not a solution.
But he does give us a reference for up-to-date information: [...]
Treasury secretary Nicolas Brady(King George 1&11)said that when you put together a leveraged buyout, what you essentially do is eliminate the 34% that used to go to the Federal Government in the form of taxes. This means the shareholders make out like banditos on the speedy gonzales track but in the long term its the communities, employees, & bonholders who end up with the toxic realities.
The system has, since FDR been shifting(Shaft Change) the burden of tax from the FIRE sector to labors back(I'am Shocked!).
Josh Kosman has made a clear cut case that the next shoe to drop will be the private equity market. A straw thats really several tons of hay, this the camel back won't needle its way out of the rich man's burden. He affirms that the idea that PE firms put cash into companies is a widely held misconception. That PE firms almost always saddle them with the bill and subsequently larger debt. Private equity firms buy businesses through leveraged buyouts, which simply means loading the company down with HUGE debt. The PE firms put the companies they aquire under intense pressure, more than they would ever feel in public markets. PE firms hurt the companies they own, their customers, & their employees. But, boy do the central bankers love them, next to the derivatives, and subprime loans of course. The simple plan was to make the companies pay for their own aquisitions by having them take out loans equal to approxiamately 90% of their own purchase. The real economy and democracy suffered. They would have its debt as an operating expense deducted from the profits(simply transferring those profits in the form of interest to the central bank where nothing is produced) through the depreciation tax schedules(transferring tax burden off the FIRE sector onto labor), thereby greatly reducing taxes. The final step in the plan was to sell these companies before the DOA event. The victim businesses would be targetted for potential tax loopholes, cuts to staff & workers, selling off pieces of the business in an efficient cannibal model.
Great detail, great examples and anaylsis of the coming crash.
Highly Recommended !!!!!!!
P.S. Google Catherine Austin Fitt's Tapeworm
on January 3, 2014
Many ordinary folks never even heard of Bain Capital and the private equity industry until the US presidential elections of 2012. Now the cat is out of the bag. Read this book if you seek to understand the forces destroying the US economy.
on January 27, 2013
I regard this as an extraordinarily important book that should be widely read and widely discussed. It would have been particularly important for this to have occurred prior to the recent presidential election. Reading this book importantly informed me about socio-economic (and hence political) issues that I only poorly understood before reading the book, but the book had a great and important clarifying impact upon me. All the talk about "job creators" and the job-creating effect of hedge funds came through in an altogether different light as a result of reading this book. I urged C-span to feature the author on one of their interviews, but to my knowledge that never happened, nor did the book receive the attention it deserves in main-stream media, or, for that matter, in the alternative media. I am not enough of any economist to comment upon the author's contention that the extensive buyouts of hedge fund companies will bring down our economy. For me, the important part of this book - and it was very important - lay in elucidating what hedge funds are, how they operate, and the effects they often have upon workers, their retirement pensions and health benefit programs, and indeed the fate of the taken-over companies themselves. Few things are more central to our thinking about the nation's economy, and the tie-in with political choices we are presented with. This book is the antidote - and a very powerful antidote - to much of the "spin" put forth during the recent presidential campaign. This book deserves much more widespread attention then it appears to have received. I rate it as one of the more important books I have read in recent times.
on May 18, 2012
If you want to have a superb understanding of how Mitt Romney got so rich, this book paints a picture of the entire private equity industry and clearly shows the difference between "private equity" and "venture capital".
After reading this, you'll also understand why mattresses cost ten times as much as they should and why a brand such as Hostess is teetering on bankruptcy.
This is a very valuable, well-documented read from an industry insider.