business news in context, analysis with attitude

A piece in The Atlantic leads with a statistic that may come as a surprise to a lot of people:

"In 1996, about 8,000 firms were listed in the U.S. stock market. Since then, the national economy has grown by nearly $20 trillion. The population has increased by 70 million people. And yet, today, the number of American public companies stands at fewer than 4,000."

And then it poses a question:  "How can that be?"

One answer, The Atlantic writes, "is that the private-equity industry is devouring them. When a private-equity fund buys a publicly traded company, it takes the company private—hence the name. (If the company has not yet gone public, the acquisition keeps that from happening.) This gives the fund total control, which in theory allows it to find ways to boost profits so that it can sell the company for a big payday a few years later. In practice, going private can have more troubling consequences. The thing about public companies is that they’re, well, public. By law, they have to disclose information about their finances, operations, business risks, and legal liabilities. Taking a company private exempts it from those requirements."

The Atlantic writes that "private equity has matured into a multitrillion-dollar industry, devoted to making short-term profits from highly leveraged transactions, operating with almost no regulatory or public scrutiny. Not all private-equity deals end in calamity, of course, and not all public companies are paragons of civic virtue. But the secrecy in which private-equity firms operate emboldens them to act more recklessly—and makes it much harder to hold them accountable when they do … Across the economy, private-equity firms are known for laying off workers, evading regulations, reducing the quality of services, and bankrupting companies while ensuring that their own partners are paid handsomely. The veil of secrecy makes all of this easier to execute and harder to stop."

You can read the entire story here.

KC's View:

It isn't an absolute, but I think it is fair to say that when private equity has invested in the supermarket industry, it hasn't always gone well - their short-term priorities can be at odds with those of a retailer trying to serve its customers.  Private equity often builds up debt as a way of creating short-term rewards, and then looks to drive down costs (even necessary costs, like on customer service, in some cases) so that the long-term rewards from a sale of the company can be maximized.  Some folks see big rewards, but some retail brands are severely damaged, and the dominoes continue to fall, affecting a lot of people, but rarely the private equity folks.

Fascinating article - and I remain shocked that there are about half as many public companies in the US today as there were 27 years ago.