The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis
Critical account of leverage and portfolio company outcomes across the big firms.
Summary
Kosman, a financial journalist, argues that leveraged buyouts damage the companies acquired and that the debt maturities coming due in the early 2010s would produce a wave of defaults constituting a credit crisis.
His argument about company effects is the substantive part. He contends that private equity ownership produces cuts to research, capital expenditure, marketing and staff that raise near-term cash flow at the expense of the business's future, that portfolio companies grow more slowly than their competitors after acquisition, and that dividend recapitalisations extract cash from companies that then cannot service the resulting debt. He works through cases across retail, healthcare, restaurants and manufacturing.
He also examines the fee structures, arguing that sponsors earn transaction fees, monitoring fees and carried interest in amounts that make deals profitable to the sponsor regardless of the outcome for the company or for limited partners.
The forecast that gives the book its subtitle did not occur. The debt maturities were refinanced as credit markets reopened and interest rates fell, and the default wave was avoided rather than delayed. That is a substantial failure of the central prediction and readers should weigh it.
The book is adversarial journalism and the evidence is case selection rather than systematic. Appelbaum and Batt make similar arguments with better empirical grounding. Kosman's account of fee extraction and dividend recapitalisation mechanics is accurate and useful; the aggregate claims are less well supported.
Key takeaways 7
- Private equity ownership commonly produces cuts to research, capital expenditure and marketing that raise near-term cash flow at the expense of future competitiveness.
- Dividend recapitalisations extract cash from a portfolio company by adding debt, which transfers value to the sponsor and raises the company's failure risk.
- Transaction, monitoring and advisory fees make a deal profitable to the sponsor regardless of the outcome for the company or for the fund's investors.
- Portfolio companies frequently grow more slowly than competitors after acquisition, which contradicts the operating improvement claim.
- Debt service obligations force decisions on schedules set by the financing rather than by the business's needs.
- The forecast that maturing buyout debt would cause a credit crisis did not occur, because refinancing markets reopened and rates fell.
- Employees and suppliers bear costs from the transaction that appear nowhere in the returns reported to limited partners.
Who should read it
Readers wanting the adversarial case against leveraged buyouts, noting its central forecast failed and that Appelbaum and Batt argue similarly with better evidence.
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