From, Farhad Manjoo, “Private Equity Doesn’t Want You to Read This” — New York Times — Aug. 4, 2022
One of private equity’s main plays is the leveraged buyout, which involves borrowing huge sums of money to gobble up companies in the hopes of restructuring them and one day selling them for a gain.
But the acquired companies — which range across just about every economic sector, from retailing to food to health care and housing — are often overloaded with debt to the point of unsustainability. They frequently slash jobs and benefits for employees, cut services and hike prices for consumers, and sometimes even endanger lives and undermine the social fabric.
It is a dismal record: Private equity firms presided over many of the largest retailer bankruptcies in the last decade — among them Toys “R” Us, Sears, RadioShack and Payless ShoeSource — resulting in nearly 600,000 lost jobs, according to a 2019 study by several left-leaning economic policy advocates.
Other investigations have shown that when private equity firms buy houses and apartments, rents and evictions soar. When they buy hospitals and doctors’ practices, the cost of care shoots up. When they buy nursing homes, patient mortality rises. When they buy newspapers, reporting on local governments dries up and participation in local elections declines.
It is unclear even if private equity pays off for the investors — like university endowments, public pension funds and wealthy individuals. . . .
Still, the industry has been growing quickly, and it had a record year in 2021. According to McKinsey, private equity’s total assets under management reached almost $6.3 trillion last year. . . .
With the help of lax regulation and indefensible tax loopholes, private equity’s apparent destructiveness can be enormously profitable for its partners. Private equity firms make money by extracting hefty fees from their investors and from the companies they purchase, meaning they can succeed even if their investments go kaput. [A study] found that between 2005 and 2020, the industry produced 19 multibillionaires.
“It’s a heads-I-win, tails-you-lose model,” said Jim Baker, the executive director of a watchdog group called the Private Equity Stakeholder Project.
But it gets worse; not only do private equity partners make money even if their companies blow up, they also get a pretty good deal from the government on what they earn. Private equity funds generally charge their investors two different fees: a management fee of 2 percent of invested assets per year (funds are held for an average of about six years), and a “carried interest” fee that is 20 percent of any investment gains realized in the fund.
In most other industries, the Internal Revenue Service would categorize a fee like carried interest as ordinary income (like how your salary is taxed) rather than a capital gain (like how your stock market winnings are taxed). . . .
But that’s not how it works for partnerships like private equity, hedge funds and venture capital firms. Under I.R.S. guidelines . . . Millionaire and billionaire partners in private equity firms pay a far lower tax rate on much of their income than many of the rest of us.
Barack Obama called for [this] loophole to be eliminated. Donald Trump pledged to eliminate it. So did Joe Biden. Even several financial tycoons have called for its repeal — Jamie Dimon, Bill Ackman and Warren Buffett among them.
Despite widespread opposition, though, the tax break has somehow endured — as Tim Murphy wrote recently in Mother Jones, it has been “the most unkillable bad idea in a town with no shortage of them, a testament to the unstoppable combination of money and inertia.”
[P.S. The pending “Inflation Reduction Act” would have slightly narrowed this tax break; but Kyrsten Sinema, the last uncommitted Democratic Senator, has made dropping that part of the bill a price for her support.
Unkillable? Hell, this billionaire protection loophole is not even woundable.]