How the Private Equity Industry Is Looting the Middle Class

http://www.alternet.org/economy/how-private-equity-industry-looting-middle-class



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Private equity shenanigans can also hurt the middle class by encouraging looting. For instance, as Crain's New York recently reported, in the last decade, private equity firms have collected $2 billion in so-called "transaction fees," which the business publication says "are bonuses the firms take for conducting their business of buying, managing and selling companies." This scheme has been called the "crack cocaine of the private equity industry."

As just one example of how it works, the New York Times recently examined a merger of two orthopedic implant manufacturers and how that merger resulted in a Wall Street jackpot. Indeed, according to the Times, the financial firms involved in the deal ended up extracted "a 20 percent share of gains from the sale, as well as management fees of 1.5 percent to 2 percent charged to investors" and "a share in an estimated $30 million in 'monitoring fees.'" The Times noted that "this deal will be a gift that keeps giving" to the private equity firms involved because "they will be paid millions more in fees for work that they are never going to do."

In other words, millions of dollars are taken out of companies creating tangible economic value and jobs. The money instead is sent to the speculators.

The good news, of course, is that we know how to curtail some of the worst effects of private equity's expansion. For one thing, the SEC can follow up its evaluation with fines and prosecutions. Additionally, states can pass laws mandating at least some modicum of transparency in their pension funds' dealings with the private equity industry. And, as Eileen Appelbaum of the Center for Economic and Policy Research has written, the tax code can be changed to make sure that the fees claimed by private equity managers are no longer treated as capital gains and therefore taxed at a discounted rate.