Private Equity at Work: When Wall Street Manages Main Street
Standard scholarly treatment of fee structures and returns in Blackstone's industry.
Summary
Appelbaum and Batt, labour economists, examine private equity's effects on companies, employees and returns, drawing on the academic literature, on portfolio company case studies and on fund performance data. The book is critical but is built on evidence rather than assertion.
On returns they argue the industry's reported outperformance is substantially an artefact: internal rate of return is manipulable through subscription lines and timing, benchmark comparisons ignore leverage and illiquidity, and once fees are counted, median fund returns to limited partners have been close to public market equivalents. On employment they report that studies find modest net job effects in aggregate but substantial reallocation, with job losses at acquired establishments offset by growth at new ones, and wage effects that are negative in several studies.
The institutional argument is about where returns come from. They argue the tax deductibility of interest transfers value from the public to the fund, that limited liability lets a general partner extract dividends and fees from a company it can then allow to fail without recourse, that sale-leaseback transactions convert an operating company's owned real estate into rent obligations that raise its fixed costs permanently, and that monitoring and transaction fees charged to portfolio companies are a transfer from the company to the sponsor.
The authors write from a labour perspective and the framing is adversarial. Private equity practitioners dispute the return analysis, and the academic literature on employment effects remains genuinely contested. The chapters on fee structures and on the legal separation between fund and portfolio company are the most useful and the least disputed.
Key takeaways 7
- Private equity's reported returns overstate performance because internal rate of return is manipulable and benchmarks ignore leverage and illiquidity.
- Median fund returns to limited partners after fees have been close to public market equivalents, which means the asset class as a whole has not delivered the premium its risk requires.
- Monitoring, transaction and advisory fees charged to portfolio companies transfer value from those companies to the sponsor independently of any operating improvement.
- The tax deductibility of interest is a transfer from the public to the fund and accounts for a meaningful share of leveraged buyout returns.
- Sale-leaseback transactions convert owned real estate into permanent rent obligations, which raises the company's fixed costs and its fragility.
- Limited liability allows a sponsor to extract dividends and fees from a company that later fails, with no recourse to the fund or its partners.
- Employment effects are modest in aggregate but involve substantial reallocation, with losses concentrated at acquired establishments.
Who should read it
Limited partners, operators inside portfolio companies and policy readers who want the evidence-based critical case on private equity returns and fee structures.
Where it sits in the reference 5
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