Private Equity Has an Achilles' Heel

Private equity is in the news! Private equity is in your workplace. Private equity is in your pocket, taking money out. Many people consider these shadowy financiers to be an unstoppable force. Many people are wrong.

Private equity firms are, quite simply, pools of money that buy companies, shake them up—either by improving them, or gutting them and sucking them dry, or a mix of both—and then try to sell them off for a profit. (See our explainer of the private equity industry here.) We here at Splinter are hardly unbiased observers of the private equity industry: Our former owner, Univision, which was saddled with billions of dollars of debt due to a private equity buyout, just sold us off to another private equity firm. Furthermore, the union that we belong to, the Writers Guild of America, is currently embroiled in a fight with the major Hollywood talent agencies over conflicts of interest and unfair economic practices that have allowed the agencies to skim an enormous amount of money off of TV and movie deals. And guess who the union says is pressuring those agencies to take more and more from their clients? Private equity.

Private equity firms have purchased large stakes in some of Hollywood’s most powerful agencies. The union says that the profits-above-everything mentality of those investment firms is driving the agencies’ ruthless quest for new revenue—much of which should be going to clients instead. We are of course hopelessly biased in favor of the union’s true point of view, so rather than litigating the details of that particular dispute here, let us draw your attention to a related, tactical issue: the fact that private equity firms are not so rich and untouchable that activism cannot reach them. They do have an Achilles’ heel.

The big pools of money that PE firms use to buy companies has to come from investors. Non mom-and-pop investors; big ones. Among the biggest private equity investors of all are pension funds, which invest money that will eventually be used to pay benefits to retirees. Some of those pension funds are for local, state, or federal government employees. Some of them are for employees of private companies. And some of them are pension funds for unions themselves.

Private equity itself is one of the most perfectly soulless industries every invented by capitalism: it exists wholly to produce profits, using entire businesses as fuel. There are many PE firms out there, and they range from the more benign to the more rapacious, but the fundamental structure of all of them is extractive. Their main sources of income are A) selling companies for more than they bought them for (which can and sometimes is accomplished by truly improving management and making the companies better in all ways, but is often accomplished in large part by slashing jobs and benefits for workers, and funneling the savings into the pockets of private equity investors), and B) levying pricey “management fees” on companies while they own them, which amounts to the same thing that a leech does to its victim. Sometimes private equity firms buy a company, suck it dry, and then dump it in bankruptcy, making off with tidy profits while thousands of employees lose everything. Even in less extreme situations, it can reasonably be argued that most of the dollars that accrue as private equity profits represent dollars that should, in a more just world, be accruing to the benefit of the actual employees of the company. If private equity firms were merely management consultants who came in to spiff up faltering businesses with some good advice, they would not be so incredibly profitable. The real profits come from taking money out of companies.

It is a true irony of capitalism that in order for working people to have enough money to live on in retirement, they must create pension funds that, in turn, often invest in the very enterprises that fuel the inequality and unfairness that makes it so hard for working people to have enough money to live on in retirement. Pension funds need profits themselves, and they pour money into private equity firms, some of which embrace business models that are inimical to the interests of workers. Those pension funds are the best point of leverage for anyone who wants to pressure a private equity firm to do something, because their money ultimately comes from working people, not from Wall Street. The Writers Guild “has contacted more than a dozen public pension funds” regarding its dispute with agencies for precisely this reason. Major unions, whose members represent many billions of dollars of pension fund contributions, can lean on those pension funds, who can in turn lean on private equity firms to stop doing something terrible, or risk losing those pension investments. There have been good books written on this topic.

The pressures of capitalism make these things difficult. People want to enjoy their retirement benefits. Their pension funds need a certain amount of annual investment profits in order to have enough money to pay those benefits. Absent any pressure to the contrary, those pension funds will tend to invest in whatever will get them the highest return, which can often be private equity, even if some of those private equity firms earn those high returns by, in essence, extracting the wealth that should be going to the very workers who are paying into the pension funds. It is not hard to see how fucked up this system is from the outside, but the incredible short-term profit pressures can make it very difficult to change.

But not impossible. Money talks. Learn about your union. Learn about its pension. Learn what it is invested in. And think about how those investments serve the long-term interests of equality and fairness for working people. The money should go to the people who do the work. With that as a guiding principle, it’s not hard to see what’s right and wrong. It would be tragic for regular people to blindly fund the vampires that are sucking us all dry.