April 16, 2025 | Poetic Justice For Private Equity

Private equity, like so many other Wall Street “innovations,” is a benign-sounding idea that has morphed into a kind of financial cancer. Let’s see if it kills the patient.

First, the concept: Private equity refers to the practice of rich guys pooling their money and hunting for companies to buy. Once they get one, they use their “superior business skills” to “maximize profits.” Unfortunately, those profits flow mostly to the owners, while workers and customers are frequently bled dry.

Why is this a systemic problem? Well, once private equity gets a taste of an individual business, it frequently decides to subsume the whole field. Well-financed predators start rolling up dental, law, and medical practices and changing work rules to extract every last drop of customer money. This is why your doctor rushes into your examination room, spends ten minutes prescribing you pharmaceuticals, and then rushes back out. The algorithm requires him to see an impossible number of patients — and prescribe them lots of drugs — each day.

It’s also why entire neighborhoods have been converted to high-cost rentals.

The stories are myriad, and the degraded quality is felt in every corner of the economy. For more details, see the Private Equity Stakeholder Project, which chronicles PE’s depredations.

PE Die-Off

With the US heading into recession, those rolled-up private equity mini-empires will soon be exploding like a string of cheap firecrackers. Eric Salzman, writing for Matt Taibbi’s Racket News, just posted some dire predictions for PE-owned firms and, alas, the people who depend on them. Here’s an excerpt:

A Reckoning is Coming For the Private Equity Economy

PE titans could lose millions, but working-class Americans might pay a bigger price.

Two weeks ago, we wrote about private equity firms using a “dividend recap” strategy to pay themselves special dividends.

This occurs when companies owned by PE firms take out a huge loan and pay their investors with the loan proceeds, saddling the companies with high debt, but ensuring investors make their money no matter what.

We focused on Clarios International, noting how susceptible to calamity such highly leveraged companies are if something goes wrong.

President Trump’s war on globalization through tariffs has ramped up the odds of a global recession. Goldman Sachs has forecast a 45% chance of a U.S. recession — and this occurred after Trump announced a 90-day pause on reciprocal tariffs on all countries except China. Before that, Goldman’s recession forecast was at 65%.

It’ll come as no surprise then that investors are running for the hills and trying to dump their shares in private equity. Unfortunately for investors, private equity managers have many tools to slow them down.

That’s bad news for the roughly 12 million Americans directly employed by private equity-backed companies, and the nearly 8 million who work for their suppliers.

Private equity firms rely on two main things to be successful:

• Strong demand for private equity debt in the form of leveraged loans and high yield bonds
• Robust demand for their companies when they need to exit

Last week, Goldman Sachs more than doubled their default predictions for leveraged loans from 3.5% to 8% and raised its estimate of high yield bond defaults from 3% to 5%. Responding to this bleak news, leveraged loan and high yield bond mutual funds as well as exchange-traded funds last week had their highest ever weekly “outflow” of investors, prompting Goldman to call it “Flowmegeddon.”

Read the rest here.

John Rubino April 16th, 2025

Posted In: John Rubino Substack

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