‘Private’ Equity Is a Misnomer: Government Support Has Been Driving the Restructuring of US Corporate Structure and the Transfer of Wealth to Buyout Firms Over the Past 40 Years

Abstract

With a focus on the US this paper demonstrates that so-called ‘private’ equity is a vehicle through which the government-subsidized banking system picks winners and losers in an economy where an even playing field was left behind almost half a century ago. The paper documents the origins of private equity when the too-big-to-fail banks found an alternative outlet for syndicated lending in the finance of leveraged buyouts after the LDC lending crisis, and the continuation of the close relationship between too-big-to-fail banks and the buyout, aka ‘private’ equity, industry today. The paper explains how buyouts pervert the corporate form, transforming the win-win for the economy of separating ownership from control in order to raise financing for large projects into a win-lose for the economy of separating the corporate debtor from the controlling borrower for the benefit of the borrower. The outcome is both an over-indebted corporate sector and a transfer of wealth from economic stakeholders to the ‘private’ equity buyout firms. The extent of over-indebtedness in the US corporate sector generated by buyouts has resulted in repeated Federal Reserve bailouts of so-called ‘private’ equity since the aftermath of the 2007-09 financial crisis.

Keywords: leveraged buyout, private equity, too big to fail, Federal Reserve, leveraged loan, corporate governance

JEL Classification: E5, G2, N22