Welcome to Big, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…
Today I’m going to do a bit of follow-up on private equity, the force taking over global business. In the last issue of Big, I wrote about the history and philosophy of PE, and why it’s such a remarkably impactful trend. Here’s one reaction, which I think hits at something important.
I think this is correct. Private equity is a social force, a philosophy on how to structure society to maximize short-term gains for financiers. It puts pressure on all of us in ways we don’t realize because our political dialogue for decades has been structured around the assumption that business and finance are technical subjects only tangentially connected to society.
In this issue, I’m going to try and give you a sense of the scope of PE.
But first a few updates…
GE’s Boeing Problem: Now General Electric is taking cash flow hits from Boeing because it both sells to Boeing and buys from Boeing. The lesson here is don’t concentrate a vital important industry in the hands of one company and then turn that company over to arsonists. Or something. Or maybe whatever nothing matters.
Democratic debates: Over the past few days there have some debates on CNN. I don’t have much to add to the noise. They didn’t talk monopoly or business for the most part, though Amazon came up a few times for not paying taxes. Elizabeth Warren and Cory Booker were generally coherent. Kamala Harris and Joe Biden had an irritating 10 minute back and forth on health care, one of the most concentrated and corrupt segments of the economy. It became obvious neither one understands or cares about how pricing or health care delivery actually work, so it was like two people trying to fight each other wearing those weird fake sumo outfits that make it impossible to move. Really dumb and annoying. I was embarrassed to be a Democrat, because so many of my leaders just don’t care about how we do commerce. Blech.
Koch and Google Alliance: One of the more important subterranean trends in politics is the powerful alliance between the conservative force of Koch industries and the tech platforms. There are of course cynical nods to social justice collaboration, like over addressing problems with the bail system. Over the past four years, Koch groups have spent $10 million defending big tech from regulations. They have conducted online advertising campaigns against Republican Senators Marsha Blackburn and Josh Hawley, both skeptics of big tech. The Capitol Forum reports that the Koch network may be considering action against Republican state attorneys general who are right now talking tough on big tech if they file suit. It’s not clear to me why Koch is doing this, though it could be because the heir to the Koch world, Chase Koch, sees himself as a tech disruptor.
What Does Private Equity Really Own?
I got some interesting reactions to Tuesday’s issue. The gist of what I wrote is that PE is a political trend that came out of the 1970s in which we decided to place control over our productive capacity in the hands of financiers.
Here’s one response.
PE is destroying the guitar business, as they have taken over Fender and Gibson. The result: direct sales (competing against their own distribution network), favoritism to the largest online resellers, and weakening of their own companies due to indebtedness.
Don’t forget Ed Lampert. He took over Sears and destroyed it, along with K Mart.
So PE is taking over the guitar industry.
What else is PE involved in? In a word, everything but the very biggest stuff. The big companies, like Boeing, Monsanto, Google, etc, tend to control the largest institutions in our economy. But an increasing number of medium size industries are structured by these pools of capital (which incidentally look a lot like the conglomerates of the 1960s).
PE controls $4 trillion of assets and employs over 11 million workers, which is a lot. This understates the influence of the industry, because PE is dynamic, and is constantly restructuring companies and then selling them, sinking them into bankruptcy, or taking them public. There are 3-5 announcements of acquisitions a day. For a sense of proportion, America only has roughly 3500 public companies.
To show the nooks and crannies of PE, I am going to list a few of the industries in which it is invested. I drew these from Axios, which has a great private equity newsletter, as well as some of the acquisitions the Federal Trade Commission cleared. I’m picking these at random, though I tried to focus on industries that do real tangible things as opposed to consulting services.
A font oligopoly: Yes, private equity firm HGGC owns Times New Roman through the purchase of Monotype Imaging, which owns the rights to Times New Roman, Helvetica, and a host of other fonts.
Emergency care, firefighting, ambulances (source)
Industrial gases such as oxygen, nitrogen, argon, hydrogen and helium. (CVC Capital Markets)
Renal care centers for dialysis (Bain Capital)
Portable Toilets for Concerts (APAX Partners)
Vending Machine Providers (New Heritage Capital)
Foot Care Product Maker Dr. Scholl’s (Yellow Wood Partners)
Loyalty Program Provider for Retailers (Clarus Commerce)
Automotive structural metal components and assemblies maker Tower International (KPS Capital Partners)
“Tech-enabled, boutique hotel operator” Life House (Blue Flag Partners)
PE owns everything from eye care physician practices in Alabama to every kind of software to specialty packaging in everything from pharma chemicals to medical devices to to high density polyethylene piping makers to maintenance services for military vehicle platforms to Madame Tussauds.
It’s also a deeply political industry. One mini-scandal was when it was revealed that DC Capital Partners, located in lovely Oldtown right outside of D.C., owns the largest migrant child detention facility in the country. But that’s the tip of the iceberg in terms of government influence. Private equity firms are a regular landing spot for military and political leaders, because they can trade on their knowledge and connections to structure deals and government policies in profitable ways. Tim Geithner, for instance, is now at Warburg Pincus.
Private equity is a highly ideological social force we have to understand to recognize who has real power in our world. It is what FDR once called an informal economic government.
The intellectual and operational founders of private equity in the 1970s claimed they were trying to address real problems facing the business world. They said they wanted to fix the lack of capital for real investment, and they wanted to align the incentives of managers with owners to increase the efficiency of American businesses.
And they were right there were serious problems in American business in the 1970s and 1980s. Here’s Ross Perot, complaining about GM.
At GM, if you see a snake, the first thing you do is go hire a consultant on snakes. Then you get a committee on snakes, and then you discuss it for a couple of years. The most likely course of action is — nothing. You figure, the snake hasn't bitten anybody yet, so you just let him crawl around on the factory floor. We need to build an environment where the first guy who sees the snake kills it.
But the problems of the 1970s and 1980s were a function of inadequate competition, poorly structured capital markets, and Cold War choices to offshore production. Basically business needed to be decentralized. PE did the oppose, and made all of the structural problems worse. The goal of PE was to strip the equity cushion managers had used to manage commercial risk, and to concentrate power. Not all of PE does that, but most of it does. And while we’re seeing some problems now, the real problems will show up when we go into recession, when excessive risk reveals itself.
Now all that said, the big weakness in my argument is that PE provides capital to small and medium size business, and we need a way to do that absent this massive capital allocation force. My view is allocating capital is something we need to address through structuring banking markets, capital markets, public lending and government procurement. In the 1930s the government stepped in to create a mortgage market, agricultural lending supports, and a small business lending market. It did some of the lending itself, but also moved a lot of it through a regulated banking system with a variegated institutional set-up (thrifts, credit unions, commercial banks, insurance companies, investment banks, etc). That's just the reality, capital market structures are political and we have to choose the values underlying them.
There are many policy choices we can make. As an example, I’ve included an email below from Ross Bair, a venture capitalist at Blueprint Local who is trying to reorient investment patterns to become more local. He discussed one aspect of the Trump tax cuts that may be reorienting investment towards productive ends.
At any rate, in the 1970s, we chose a set of values. And we’re living in a world that exemplifies them.
Thanks for reading. And if you liked what you read, you can sign up here for more issues of Big, a newsletter on how to restore fair commerce, innovation and democracy.
From the Mail:
Great piece on private equity. Agree with your line of thought on private equity firms, being largely extractive versus productive.
There's a huge difference between "productive investments" (capital that helps entrepreneurs pay people better, hire new people, buy new real estate, machines, and property) and "extractive investments" (capital whose purpose is to acquire a controlling interest in the firm, and uses that control to sell assets, lay people off, and send capital to the asset managers.)
Companies of course need to raise outside capital to grow. An organizing question could be: is this capital going to productive uses, or is this capital going to buy out old investors, acquire controlling interests, and subtract value?
One interesting bit to follow is the recent Opportunity Zone legislation, which provides a capital gains advantage to investing in economically distressed areas. I have been involved in this legislation and one aspect I really like is that 90+% of the capital in Opportunity Zone funds (which are technically private equity funds) needs to be invested in business activity in these designated areas. Hiring new people and buying new assets counts; buying out old investors and paying management fees does not count. This experimental piece of legislation could provide a roadmap towards good regulation.
One other consideration is the effect that successful companies have on their communities (philanthropy, spin-off new companies, creating civic and leadership opportunities). Private equity acquisitions where the owners are largely absentee kill these benefits. The private equity acquisitions of Rackspace in San Antonio, RJ Reynolds in Winston-Salem, Advance Auto Parts in Roanoke have been harmful for the cities-people who made money in those companies did wonderful civic things. Marion Labs in Kansas City created profit sharing and employee ownership-all of that disappeared when it was acquired by Merrell Dow and moved to NJ.