This Is Your Life, Brought to You by Private Equity
nytimes.com
nytimes.com
Utmost importance even for a casual reader to get a sense of the relative size of the industry under discussion and how well PE-managed firms perform on average, not just a few cherry-picked examples that cast the PE industry in a slightly negative light, kind of dancing around the issue without making any argument head on.
50 largest PE firms manage $1.5t in assets. Total global equity market is $48.6t (from Dimensional's 2015 Matrix Book). Total market value of world's financial assets is probably >$200t (including land, commodities, currency, etc.).
Here is some data for those who are interested:
http://www.pionline.com/article/20150406/PRINT/304069998/big...
The NYT manages to foul up the Safari browser's Reader View again. This is getting tedious.
They seem mainly a way to make the otherwise vague, elementary-school-level writing more visually-interesting.
https://news.ycombinator.com/item?id=11977710
Do not get tripped by the top comment.
It is not. It's just an infographic with a basic level of interactivity.
It doesn't claim to be an extensive or comprehensive report on the influence of PE in the US market and everyday life.
Just a reductionist overview of the topic, nothing more nothing less.
For example: it's an info graphic if you show some number of cars unevenly distributed across two lanes on a road and explain that each car in lane A represents 10,000 rental cars and each car in lane B represent 10,000 driver-owned cars, and the sum of the infographic cars * 10,000 happens to equal the number of cars on USAmerican roads, assuming that the infographic specifies that its subject is rental-vs-ownership of cars on USAmerican roadways.
See? An info graphic is a fancy chart or graph. Every rule from your highschool science textbook about charts and graphs applies to infographics.
Pictures that don't adhere to those rules are just pictures.
No, it's just a graphic. There's no info, and it's inflammatory.
It tells you what X is by listing all the bad things X has done. That's like telling someone what the US is by saying "The US tried to purge the North American natives in the 19th century."
It doesn't tell me what "the US" actually refers to, and it poisons the well against it. You are no better at implementing a classifier to distinguish "US" for "not US", and now you're armed with entirely negative things about the US.
(I was originally going to do Germany there, but Godwin's Law and all.)
> No, it's just a graphic. There's no info, and it's inflammatory.
IME, "infographic" is a term in which the "info" portion relates to "information" in much the same way that "factoid" relates to "fact" (or "truthy" relates to "truthful".)
They did that on purpose. That's because NYT is left-wing newspaper just like The Guardian. Note that, socialist Paul Krugman is columnist for NYT.
The only job of Guardian, NYT, Huff Post and many others is to say negative about capitalism, private enterprise and free-markets. And to say positive about big government, wealth distribution and other left-wing agenda.
The same about Hollywood and entertainment industry (e.g. MTV), they are mostly left-wing.
I think left-wing ideas and left-wing propaganda completely monopolise western world (almost entire Europe, AU, CA etc).
It's sad but true.
There are people who view the world, politics and the economy differently than you do, and they're writing about what they know. No secret propaganda agenda.
Socialist Paul Krugman is a columnist for the NYT? They must have two Paul Krugmans, then, as the better-known one [0] is not even close to a socialist.
[0] https://en.wikipedia.org/wiki/Paul_Krugman#Economic_views
Here's a short article in English:
http://www.futurepolicy.org/food-and-water/remunicipalisatio...
Wikipedia article about water privatization in France:
Privatization of a monopoly is almost always a terrible idea.
(For what it's worth, water costs have risen much faster than inflation in the US too, where it's primarily managed by local governments. http://imgur.com/a/SNstZ)
I think that needs to be changed to "well regulated private monopoly". When the monopoly starts to unduly influence the regulators then it's no better than an unregulated one.
This is one of the best and most accurate sentences I have read in awhile.
Key bits from the abstract:
"Analysis of health inspections conducted for over 50,000 stores in Florida shows that food safety and sanitation improve after private equity takeover, especially in areas related to food handling, kitchen maintenance and consumer advising."
"Restaurants also reduce employee headcount and lower menu prices. This evidence suggests private equity firms are not simply financial engineers but rather active operators that improve management practices in the firm. Moreover, efficiency gains do not come at the expense of product quality."
Unfortunately this does not address the main thrust of the New York Times piece, which focused more on natural monopoly sectors such as water, public transit, and emergency response. It does make intuitive sense that private firms would have less of an incentive to improve operations when buying a monopolistic entity that comes with significant pricing power already baked in. Hopefully good research on these is out there or in the pipeline, as it seems like an in-demand and under-served area of academic inquiry.
Disclosure: I worked briefly as an undergrad for one of the paper's authors, on a distinct but similar project.
0: http://people.hbs.edu/asheen/BernsteinSheen_Restaurants_June...
Regarding the article though, I wonder what the purpose of spending 99% of the budget for the article on visuals rather than the actual article was. That's a really lame piece of pseudo-"journalism". It provides a very weak argument (if any), which is unfortunate given the importance of the topic.
Your point about restaurant businesses being a different category seems to be engaging only on the point of PE owned businesses are ubiquitous not on sub-text that PE turnarouds could be bad.
Yes the article is horrible. It's not even an article. But that does not mean you can now go ahead and use anything to refute it. That's illogical. You have to use good logic even when trying to refute something bad.
Which has predictably resulted in basic services being cut and things that even the hardest ultra-hardcore libertarian wants government to do -- like providing police and courts to enforce contracts and property rights -- having to resort to overpolicing in order to collect money from citations, since that's the only revenue stream the "10 CUT TAXES; 20 GOTO 10" mentality will allow.
https://fred.stlouisfed.org/series/W006RC1A027NBEA
https://fred.stlouisfed.org/series/B245RC1Q027SBEA
https://fred.stlouisfed.org/series/S210400
https://fred.stlouisfed.org/series/W070RU1Q027NBEA
If budgets are constrained, it's because spending has simply risen faster than tax revenue.
(Never mind the deep-rooted federal corruption that has destroyed steady returns from debt and thus caused all of this dumb money to be scraping for returns via home run equity investment)
[0] which requires pushing back against growing middle management bureaucracy, which consumes resources while providing no services.
Given the idea that a 100% tax rate would result in near zero zero economic activity (nobody would have money to spend and nobody willingly works for free,) that result in near zero tax revenues. If we accept that a 100% tax rate would result in near-zero tax revenues and if we accept that a zero tax rate would also result in zero revenues, then it follows that there IS a point where revenue and growth are optimized and that point isn't necessarily close to 100% or zero. Many non-conservatives who dispute Laffer would be happy with a 75% tax rate, as their Keynesian (or alternatively, Marxist) belief is more plausible that the reality depicted by Laffer.
However most people, Democrat and Republican, do believe in Laffer -- they just dispute where those revenue and growth maximizing points actually occur. The problem is that many Democrats don't care about Laffer (even though they do agree with the effects of the curve) -- they willingly chose to ignore Laffer because their convictions of economic "justice" supersede the rationality of Laffer. Meaning they know Laffer is correct, but they don't care: they'll sacrifice maximum revenue and maximum growth for maximum "fairness." Ironically, maximum "fairness" results in lower overall tax revenues this starving the very programs they insist are necessary. Then they blame conservatives because clearly x% is too low of a tax rate because "deficits."
Belgium has a much higher tax rate (43% for a single person making the average salary) and New Zealand is about 16%.)
The growth rate of Belgium is 1% and New Zealand is 3.5%. There are definitely more factors involved, but there is absolutely a correlation between growth, tax revenues and tax rates (a correlation illustrated by Laffer.)
My point is that keeping tax rates low os not necessarily the same thing as keeping revenues low. We could argue the opposite with equal ferocity: non-conservatives have kept government revenues low by keeping tax rates high.
To be honest though, conservatives do favor the left side of Laffer, even at the expense of revenues because the growth maximizing point is to the left of the revenue maximizing point. The non-conservatives favor the right side of the curve (closer to the revenue maximizing point) even at the expense of growth.
I could only wish our tax policy were based purely on math rather than politics. Voters decide what growth rate they want, we enter that into the system and the tax rate is dynamically calculated. The tax rate would then be a result of economic reality rather than the cause. The political debate would then "simply" be: how much growth do we want? Unfortunatly tax policy is used to reward or punish those whose politics are on the 'correct' side of the winning political party.
However, conflating private equity with wall st., and making a distinction between how firms under private equity ownership behave vs. public equity or closely held (no financial sponsor) seems pointless other than to further some other purpose (which i won't speculate about)
Agreed, and I say this as someone who's generally a fan of the New York Times' journalism. Here they simply seem to be trotting out the "look, it's Wall Street!" trope without offering deeper analysis (at least in this piece). Which is a shame because there are industries where private equity has a laudable record and others where the record is rather checkered.
And this notion, of course, oversimplifies "private equity" into one monolithic actor. As though a competent private equity firm which seeks to maximize value through improving quality wouldn't operate a company differently from one which seeks to extract value solely through levered financial engineering.
The scrolling art is nice though.
School doesn't have money, is struggling. PE lobby firm issues a few press releases pointing out what a failure public schools are. Then another press release about how there is a way out -- go to their schools, and so on.
Or if they happen to lease land and run an tolled expressway, they might lobby local government against expanding or improving local roads, because it means a but in the profits for them, and so on.
The cheapest and most effective way to profits is to often to do just that -- lobbying and regulatory capture. That is what's scary with privatizing everything.
I have a lot more faith in a greedy money driven investor and company to delivery on the end product than the government. At least they will do everything possible to maximize profits. If they get contracts and have a complete monopoly with no free market though, then this is an issue.
Markets only work in the presence of consumer choice, agency, and evaluation. If there are no consequences for bad service, you will continue to get bad service. Similarly, if the consequences for bad service fall on people who do not have a say in which service is chosen, you will still get bad service.
Yes, sometimes this involves slower ambulances or slow internet. This is especially the case when there is no/few alternatives. What are you going to do... not have a water supply? Walk to the hospital mid-heart attack?
One need only to look at Comcast/Time Warner Cable data speeds in markets before and after Google Fiber entered the fray.
Sometimes, maximizing profits involves maximizing consumer satisfaction. More often, it does not. And it's a phenomenon that isn't unique to the private or public sphere.
Including cutting corners and reducing service. That is why I do not believe they are a good idea.
And why did they have to go on and call out named PE groups...(Fortress). What does that achieve NYT?
What is the goal of this in the first place...? If we want to educate people on what PE really does, let's talk. But this is clearly just targeting the masses with a one sided viewpoint to try and get them to associate 2008 again and raise their pitchforks back up. Accomplishes nothing.
Colors of money, market forces, the political alignment of the NYT... None of these are the most interesting part.
The government(s) exists to serve the people, right? To provide safety, predictability in the environment, in our lives. We exchange a little liberty for those benefits and indeed pay taxes, too.
Corporations exist to make money. And to protect their owners from liability, I guess? I'm no expert on why corporations exist, and I certainly can't tell you why they should exist.
This animated series of tweets from the NYT (it's hardly an article!) tells us that corporations, specifically a subset known as "private equity", now own things that the average person does not expect them to own.
For me, the takeaway is: The number of things NOT owned by corporations is decreasing and traditional resistance (by the governments and individuals) is failing or has failed.
I thought it meant "money that belongs to companies".
But after skimming through https://en.wikipedia.org/wiki/Private_equity for ten seconds, I realize that I have no idea what "private equity" is.
This is embarrassing, but experience has taught me that I have to push through these situations, where I suddenly realize that my ignorance on some topic is truly profound...
I thought all companies above a certain size were publicly traded. ...Wait, do I have some incorrect definition of publicly traded?
It means there is stock in the company for sale, right? What percentage (by count) of companies are publicly traded? By volume?
If a large company isn't publicly traded, does that make it a private equity company?
Size doesn't really matter. I suppose you could say size and public status are correlated. Companies who are publicly traded have gone through an IPO and their shares are available for purchase at stock exchanges.
For instance Uber is large but not publicly traded.
If a large company isn't publicly traded it is a private company. I don't think "private equity company" is a term in wide use, but a private company has private equity that is available for VC and private equity firms to invest in.
As a HN user you may be familiar with how VCs work? VC can be thought of as a subsection of the PE industry.
So a VC, an investor... can buy a share of the private company?
And then as the value of the private company grows, so does the value of the VC's share?
If there isn't a public market for such shares, then how does the VC sell the share?
Private firms do not list on public exchanges and their shares aren't available for purchase or sale to just anyone. Many of the more recent unicorns, such as Uber, are currently private.
The size of a company does not determine whether it is public or private. Becoming public means submitted lots of paperwork to the SEC and getting an investment bank to underwrite the sale of your shares on a public exchange. All comes down to whether or not the private owners care to go through that process.
Private equity usually refers to investment firms who specialize in buying shares in non-publicly traded companies. Angel investors and venture capitalists can broadly be included under this label.
In that case, private equity funds are essentially investment funds with a strategy something like this (and I'm trying to be as bland in description here as possible, as private equity fund strategies very often result in some unpopular results - ie. mass layoffs, selling for parts, etc.): purchase a controlling interest in a company (often times financing the purchase with debt acquired by the company they are purchasing), operate the company with a super focus on some sort of efficiency (usually profitability or revenue), and then re-sell the company 3-5 years later at a 2-5X return (ideally, of course sometime that doesn't happen).
the reason they are called private equity funds is that in order to get a "controlling interest", PE funds almost always either target (1) smaller private (usually industrial) companies that are operated by their owners (my cousin works at a fund that focuses on oil-services companies that are private but have $100m+ in annual revenue) or (2) public companies that they think are undervalued by the market or poorly run that they can "take private" by purchasing all the stock and then running more efficiently (these are the big sexy PE deals, biggest recent example is: Dell - http://www.forbes.com/sites/connieguglielmo/2013/10/30/you-w...)
there's a WHOLE lot of other details that I won't get into on how PE funds work, and about how PE funds are now so massive that they almost act like unregulated banks and have a bunch of strategies other than the one I described above, but that's the traditional fund strategy (at least based on my experience) and I think a good place to start.
Another good way to learn would be to learn more about the biggest PE funds themselves:
KKR: https://en.wikipedia.org/wiki/Kohlberg_Kravis_Roberts TPG: https://en.wikipedia.org/wiki/TPG_Capital Silverlake: https://en.wikipedia.org/wiki/Silver_Lake_Partners (work in tech a lot, did the skype deal where they bought from eBay and sold to MS)
Another way to learn more might be learning how a leveraged buy out (LBO) works, as this is one of the more traditional PE fund financing strategies for their deals: http://www.investopedia.com/articles/financial-theory/08/lev...
If you really get into it, the book "Barbarians at the Gate" is considered a classic book written by two WSJ journalists about KKR's takeover of RJR Nabisco, the largest PE deal in history ($25b in 1988), I enjoyed it!
Because they're not banks..
You need to do a bit light reading: Start with legal-dictionary's definition of Equity[0] and Authority[1], and Agency[2]. That gets you the answer on where the authority to issue certificates of any sort comes from. Then apply those entire pages to private ownership. Documents for private corporations are drafted in private, using private authorities, unlike public corporations registered with a state. they can issue shares privately, as well, provided they have an underwriter.
Property ownership (or rather, those entities that own the property) is King in this new economy. Many (All?) YCombinator companies use Delaware as their authority.
(We could apply all of the above to how Corporations are now Persons, but that's a rabbit-hole).
Bottom Line: everyone should incorporate. become a private equity firm.
0. http://legal-dictionary.thefreedictionary.com/Equity
What's not to love about them. Oh, and let's forget they often secretly double dip on fees. i.e charge their LP's management fees, and their portfolio companies advisory fees (which are often not disclosed to their LPs).
Despite all this hating, I'd sooner invest in a PE fund then HF or VC.
[1] regular investors can only lever 2:1 in equities, but PE often leverages 10:1 or more.
Anyone with a net worth above $1mm can become a venture capitalist, given that VCs deal with earlier stage companies which, as a result of their youth, are happy to take small checks for minority investments.
Private equity, because it deals with mature companies and (more often than not) involves controlling stakes, requires very, very large checks. And because investors don't like an undiversified portfolio, the PE firm must have the means to write many very, very large checks.
This isn't an undertaking that just anyone can do. Of course, if someone has the means to raise hundreds of millions of dollars, has a nose for investing, is experienced in both buy-side mergers & acquisitions as well as the operations of a company in a given domain, then co-sign your advice.
Though index funds or an advisor would be much less risky for someone with those means.
Are you familiar with what "private equity" is? Note that "private equity" is distinct from "private" "equity."
Private equity is an asset class. equity securities and debt (such as, oh, unpaid medical bills, and the right to collect on them) can be purchased as well as corporations/corporate debt.
Are you sure you understand what I'm saying?
Second, what exactly do you accomplish by doing this, except paying a bunch of money in incorporation fees and drafting documents?
There's a reason why corporate shell games are usually played by people with relatively deep pockets: all the benefits that come from using corporate law require lawyers and accountants, and those are expensive.
"Bloomberg Businessweek has called private equity a rebranding of leveraged-buyout firms after the 1980s. Common investment strategies in private equity include: leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital."
So this is just a continuation of the Gordon Gekko LBO firms, made possible by the deregulation of Wall St that occurred around that time.
No surprise here. The Wall St genie is out of the bottle, and it will continue to wreak havoc until we have another Great Depression.
Stripped of cruft, and I'm writing as someone sympathetic to the message, there's not much there there:
<q>
This Is Your Life, Brought to You by Private Equity
Since the financial crisis, the private equity industry has become hugely influential. Here’s how it plays out in your daily life.
By JENNIFER DANIEL, JOSH WILLIAMS, BEN PROTESS and DANIELLE IVORY |
A few years ago, that glass of water might have come from your local government. Today, it could be courtesy of a private equity firm. It may taste the same, but there’s a good chance your bill has gone up.
Private equity firms are essentially savvy bargain hunters. They make money by buying up businesses they consider to be underperforming, looking to maximize profits and eventually sell them off.
These investors have lots of money at their disposal, mainly from rich individuals and pension funds. They also face fewer regulations than banks. Since the 2008 financial crisis, they’ve expanded their horizons and begun shopping for bargains in new places.
Their reach is probably all around you, from the clock on your wall to the toilet paper in your bathroom. And now, private equity firms are increasingly taking over services usually reserved for the government.
Let’s say that, like most Americans, you drive to work.
These roads, bridges and highways are increasingly maintained by Wall Street investors. They either own the road, or manage it on the government’s behalf.
When you get to the office, Wall Street firms can also be found in your parking garage, where they collect your cash.
Even if you don’t drive to work, private equity can follow you onto trains, too.
Some towns without stops complain that they will get the annoyances of train traffic, including noise and delays, without the economic benefits of having a station. Fortress, for its part, says its project is creating jobs and taking cars off the road.
Private equity also helps oversee public golf courses in several states …
… it builds courthouses …
… it invests in private schools down the street …
… and in the local newspaper. New Media Investment Group, which operates in 31 states, is associated with Fortress, the firm building the train in Florida.
Now that you’ve made it to work, you might be sitting inside a building controlled by Blackstone, a huge private equity firm and one of the largest landlords in the country.
Private equity can follow you back home when you pay your monthly mortgage. After the 2008 housing crisis, private equity firms expanded dramatically into the mortgage business, as the nation’s banks struggled.
So, welcome home. It’s dinner time.
You might think that you paid for your fire department with your taxes. But yours happens to be run by a private-equity-owned company, and you’ll likely receive a bill for their services ...
… even if they show up late.
The paramedics who treat you for smoke inhalation might show up late, too. Response times for some ambulance companies under private-equity control have worsened.
So, relax, drink a glass of water and go to bed. Sweet dreams, tomorrow will be a new day with private equity.
</q>
It dumbs things down for sure and the graphics are very cartoony. The message hits spot on. I see this in the Bay area and in other places with well-paying jobs. The PE firms jumped to scoop up real-estate after the 2008 crisis. In the cases I saw, they upgraded 1500-2000 a month apartments to 3200-3600 a month fancy apartments (this is an example from Mountain View btw). The economist inside me says PE firms helped stabilize the economy and are bringing efficiency but the lil voice inside me says they are the scum of the earth and the reason I'll NEVER be able to afford a house and always be hand-to-mouth. As a rah-rah believer in capitalism, PE firms have changed my view and made me realize of the dangers of uncontrolled pursuit of wealth and profit.
</end-rant>
Are you an engineer?