Americans Pay the Price for Private Equity Firms’ Sins

[Disir]

A few weeks ago, a top official at the Securities and Exchange Commission reported on what he called a “remarkable” amount of potentially illegal behavior in the private equity industry—aka the industry that buys up, changes and sells off smaller companies.

In its evaluation of private equity firms, the SEC official declared that half of all the reviews discovered “violations of law or material weaknesses in controls.” The announcement followed an earlier Bloomberg News report on how the agency now believes “a majority of private equity firms inflate fees and expenses charged to companies in which they hold stakes.”

At first glance, many probably dismiss this news as just an example of plutocrats bilking plutocrats. But that interpretation ignores how such malfeasance affects the wider economy.

One way to understand that is through the simmering debate over pension obligations in states and cities across the country.

Citing data from the National Association of State Retirement Administrators, Al Jazeera America recently reported that the average amount of pension dollars devoted to private equity and other so-called “alternative investments” “has more than tripled over the last 12 years, growing from 7 percent to around 22 percent today.” With public pensions now reporting $3 trillion in total assets, that’s up to $660 billion of public money subject to the rapacious fees being exposed by the SEC. Those fees are paid through a combination of tax increases and pension benefit cuts.

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.”

Americans Pay the Price for Private Equity Firms? Sins - In These Times

And the only thing that is keeping this happening is a lack of political will to stop it.