The Buyout Of America -- How PE will cause the next great credit crisis

Fairly one-sided article (and book). Don't get me wrong - there are many negatives about private equity. There are a large number of big corporations that are under severe financial stress right now (Harrah's, Clear Channel, etc.) because the debt they were saddled with by PE. But painting the whole industry with such a broad stroke isn't right.<p>Private equity offers the opportunity for management to make unpopular management moves and away from the quarter-by-quarter mentality of Wall Street. This is often exploited by firms. But some add real value:<p>How One Private Equity Firm Beat the Odds <a href="http://www.businessweek.com/investor/content/nov2009/pi20091113_685259.htm" rel="nofollow">http://www.businessweek.com/investor/content/nov2009/pi20091...</a><p>How Texas Pacific Cleaned Up at J. Crew:The private equity firm reaped many times its investment by giving the preppy retailer the freedom that few public companies enjoy <a href="http://www.businessweek.com/bwdaily/dnflash/content/feb2007/db20070206_483648.htm" rel="nofollow">http://www.businessweek.com/bwdaily/dnflash/content/feb2007/...</a>

I heard an interview with the author on Fresh Air last night. Based on that I'm buying the book.<p>The fact that prominent private equity companies wouldn't want to be quoted doesn't surprise me. He's been reporting on the industry for around 15 years, and I'm sure they know who their critics are. I'll settle for the facts, figures, interviews with people who sold companies to them, etc.

Bad debt needs to be unwound but without indication that debt was chasing bad assets like real estate there's no evidence that a massive failure is likely. It's possible (and probable) that companies financed too much and overspent for any assets they bought because of the larger asset bubble we were in since 1998 or 2002 at the latest. Real estate is particularly troubling because over the over investment in one sector, the clustering of errors by so many people, and the pyramiding of debt that fractional reserve banking allows. I'm not sure without specifics you can say anything is coming from that sector of the economy. The specifics listed don't seem to imply any systemic concerns.<p>I'd expect that the commercial real estate bust that we're in right now is far more dangerous than anything described in this article. I'm expecting that the government is going to have to inflate like crazy to keep that from blowing up. So far I've seen little evidence that any firms that don't have massive political connections are going to be saved so any bankruptcies that you see will be dealt with like any others that happen every day in a normal, healthy economy. Liquidation is not the end of the world after all-it's part of life.

Some interesting statistics from the article:<p>- Private-equity owned companies employ 10% of the private sector work force<p>- 9 of the 10 biggest PE buyouts ever occurred between 2006 and 2008<p>- University of Chicago study showed that, for the years 1980 to 2001, the PE firms' investors got returns that fell short of the broad market average, after fees.

The ultimate problem are the lenders to the PE firms: someone is always on the other side of leverage. The big banks make bets on the PE firms' investments by lending them money with little collateral. If these lenders did their HW, the price of such defaults or shocks to cash flow streams would be reflected in interest rates.