Waking Up to a Nightmare: Regulators and the PE Industry
The eyes of regulators have long been averted from the private equity industry’s more questionable tactics. From leveraged buyouts that cripple the companies they’re supposed to save, to dividend recaps that funnel money to executives while leaving employees high and dry, PE shenanigans have been overlooked.
But now, global regulators appear to be rubbing the sleep from their eyes. This shift doesn’t come as a surprise, but rather a long-awaited wake-up call to the PE juggernaut. It’s a case of “better late than never” as they finally begin to confront the behemoth where mismanagement and financial engineering often run rampant.
The Unchecked Rise and Risky Tactics
Let’s first look at how we got here. For decades, private equity firms have been heralded as saviours of capitalism, swooping in to ‘fix’ struggling businesses. Pre-acquisition promises often wax lyrical about operational efficiency, strategic repositioning, and the injection of much-needed capital.
Instead, we find tales of leveraged buyouts and buy-in management buyouts (BIMBOs). These predatory practices saddle firms with unsustainable levels of debt, often leading to future failures. Internally, the use of ‘earnouts’ and ‘carried interest’ incentivize executives at the expense of regular employees and the long-term health of the business.
Delay No More: Regulators Step In
Traditionally, regulators weren’t seriously involved in curtailing the tactics of private equity firms. However, a recent surge in public animosity, high-profile corporate failures linked to PE ownership, and increased pressure from policy-focused groups have firmly caught their attention.
In the US, the Department of Justice announced in 2020 that it will review the competitive practices within this sector. Across the pond, the UK shadow chancellor is pushing for changes to laws governing how PE firms operate. Additionally, the European Parliament has initiated discussions on PE regulation.
Red Flags, Ignored For Too Long
Case studies like Toys R Us and Bed Bath & Beyond provide eerie snapshots of the financial manipulation that goes unchecked. These stories, full of sale-leasebacks, dividend recaps, and downright mismanagement, are increasingly coming under scrutiny.
We see household names, once reputable and financially sound, driven to the brink of collapse, and sometimes beyond. The common denominator in these tragic narratives? A root cause analysis points directly back to aggressive PE involvement.
Muster to the Mess: What Next?
As regulators begin to challenge the PE world, we can look forward to an industry more accountable for its actions. One focusing on long-term growth and working with existing management, rather than destabilizing for short-term gain.
But let’s be clear: none of this indicates a sudden moral awakening in the realm of high finance. This should be seen as a natural progression in a world realising the full impact of unchecked PE tactics.
These developments shouldn’t be taken lightly or cast aside as mere scapegoating. The PE industry’s practices need a close examination, and it’s reaffirming to see regulators getting the picture. Whether this leads to a significant reshaping of the industry is yet to be seen. We’ll certainly serve up the popcorn for this showdown.