Private Equity on Steroids, Everywhere

The tactics of private equity (PE) investors in American business and the damage associated with them have been the subject of criticism and vitriol for at least forty years. PE tactics became widely understood in the 1980s and 1990s because the strategy of combining often dozens of firms into a single conglomerate corporation had become fashionable in the late 1960s and 1970s. With examples like Gulf + Western that combined parts manufacturers with record companies and movie studios, it only took five or ten years for the folly of this management fad to become evident. Even the most notable example of "success" of this strategy of conglomeration – General Electric, which combined firms making aircraft jets, oil rig pumps, light bulbs, kitchen appliances, nuclear reactors and network TV content – turned out to be a twenty year continuous accounting fraud that began collapsing the day its architect retired from the CEO role.

Not much has changed for the reputation of "private equity" in the last forty years. There is an entire genre of content on YouTube devoted to recounting the business circle of life for well known companies from the cradle and dealings with venture capitalists to the grave dealing with vulture capitalists. The vulture analogy is apt because vultures do play a vital scavenging role in nature and a similar function is required for the business circle of life – recirculating resources in the form of people and capital out of obsolete uses into more productive uses.

Private equity has become a hot topic in the current climate for multiple reasons, none of them good. First, PE continues acting in its classic "vulture capital" role, providing daily reminders of its "failure to deliver" on its core promise of returning trapped value to shareholders. Second, PE firms are now essentially competing with banks by providing ongoing financing to mid-tier businesses. These dealings have attracted enormous negative press over the past few months as some of those firms filed for bankruptcy, sometimes only DAYS after completing financing deals, which in retrospect, clearly involved NO due diligence on the part of these PE lenders. Third, PE firms are now participating much more frequently in funding of startups and handling of "Initial PRIVATE Offerings" as more firms opt to avoid "going public" and incurring the accounting hassles associated with trading publicly. Most importantly, the operation of PE firms will become vastly more important if regulations are altered to allow 401k funds and pension plans to invest retirement dollars in privately traded firms without the transparency and accountability of quarterly public reports.

Despite these stories and the appropriate focus on who some of these players are and how the processes function and fail, very little analysis has focused on why private equity tactics continue to be used when they clearly don't work. There are at least three logical conclusions that come to mind. The first obvious conclusion is that it is many executives and investors alike fail miserably at accepting the declining stages of a corporation and continue holding expectations of higher performance that are no longer possible, providing more fodder for vultures. The second obvious conclusion is that repetition of a "failed" strategy occurs because not everyone is losing. Players using this strategy have CLEARLY devised ways to profit from what otherwise appears to be an acceleration of inevitable business failures. That second conclusion leads to a third conclusion for the public and political leaders – if there are any left. Unless the incentives triggering current privatization efforts are changed, current proposals to relax restrictions on investment directions available to 401k and pension plans to allow investment in private equity firms is a virtual guarantee of financial destruction for the entire American economy.

To support these conclusions, some time should first be spent explaining several underlying factors that essentially generate the raw inputs for private equity investors. These factors involve the "belief systems" of corporate leaders they reflect in their decision making, the nature of the corporate structure itself, the theory versus reality of treasury operations strategy and the tradeoffs of public versus private operations. These topics are addressed in the following sections before returning to the new risks coming from private equity firms in the current market.

Executive Belief Systems

Part of the process creating inputs for being scavenged by vulture capitalist PE firms stems from the "belief systems" adopted by executives leading companies. The details of these beliefs can be drawn out by thinking about some key lessons taught in business school since the 1970s. Consider this list of questions and answers:

• QUESTION: What is the primary responsibility of the leadership and management of a corporation?
• ANSWER: The sole responsibility of executives and managers towards shareholders is to maximize shareholder value, meaning the total return on investment of those shareholders. (Hmmm, I asked "primary," you responded "sole"...)


• QUESTION: What does "maximizing total return" mean?
• ANSWER: The total return for a shareholder is reflected in the stock price so anything that raises the stock price is increasing value returned to shareholders.


• QUESTION: So what causes the price of the stock to go up?
• ANSWER: Any tactic management adopts that increases net cash flows into the company will raise the stock price either by growing retained earnings or by paying dividends out to shareholders which also reflects net cash flow created by the company.


• QUESTION: If management appears to be under-performing, what options exist for shareholders to correct the situation?
• ANSWER: In increasing order of difficulty, shareholders can simply sell their shares and invest in something else, shareholders with influence over the board can lobby for altered pay incentives to leaders to better align leadership incentives with shareholder goals or shareholders can more aggressively pursue control of the firm to alter the management and impose new strategy.


• QUESTION: What are private equity firms and why do they exist?
• ANSWER: Private equity firms specialize in the third alternative above – aggressively pursuing control of an "under-performing" firm and using a variety of tactics to restructure its assets and liabilities, redirect existing retained earnings and cash flow and "optimize" its performance. That's the story. The reality is PE firms nearly exclusively loot a firm's existing cash flows, saddle it with new debt and accelerate its demise as a viable going concern.

The answers about responsibility and maximizing shareholder value in particular are simplistic and seriously flawed, as will be discussed later. These attitudes result in nearly daily conflict with a different set of truths about the world of business that are seldom addressed in the stark terms below in business schools and virtually never discussed in actual businesses. These are partly a reflection of the "physics" of business and partly a reflection of human psychology.

• No business grows forever. Exponential growth above ten to fifteen percent per year for more than a few years is impossible to sustain.
• No business lasts forever, even without exponential growth. Every business is somewhere on a line between birth and death.
• Few business strategies can continue functioning effectively for more than about five years without material re-engineering of products or processes.
• Few executives have the technical, managerial and people skills required to effectively lead a company across more than one or two life phases. The skills required to lead and direct a startup with fifty employees are VASTLY different than those required to lead 50,000 employees and are often orthogonal to each other.

Visually, that business circle of life might look like this to the CEO or CFO looking at their bottom line at different stages:

In a real sense, private equity firms exist because business leaders fail to grasp these concepts and incorporate them into operational decisions of a business as it progresses from inception to growth play to cash cow to problem child (paraphrasing somewhat the classic Boston Consulting Group terminology). However, private equity firms fail to solve these problems not necessarily because they don't recognize them but because PE firms devised a more profitable strategy FOR THEMSELVES to exploit these problems rather than correct them. What exactly do PE firms exploit in their operation?

• a fixation on perpetual growth driven by the corporate form itself
• flawed treasury operations strategy that fails to adapt over time to a corporation's evolutionary state
• a lack of transparency during reorganization accentuated by going private

Corporations as a Form of Business Organization

The legal concept of a corporation is intended to solve key problems that crop up with older, simpler forms of business entities that are more intricately tied to individual, named humans – namely sole proprietorships and partnerships. These forms of business pose two core issues to owners, one issue being an explicit tie to the named owners regarding taxes and operational control, the other being unlimited liability and difficulty in raising capital for growth.

The explicit tie to named owners can constrain the value of the company due to the difficulty in ensuring a smooth transfer of control if a named owner dies or simply wishes to exit the business while still extracting the value they injected into the operating entity through their labor. For very small businesses with few employees, this is typically a known and accepted trade-off for the relatively simplicity of using a simpler business structure. For firms employing dozens or hundreds of people, the operations of those businesses affect many more employees and customers who all want and expect continuity regardless of what happens to any single owner. As a consequence, these simple forms quickly reach legal and operational limits that can severely constrain their economic value to their owners.

Unlimited liability and complexities with raising capital impose different forms of limitations on proprietorships and partnerships. Without incorporation, all debts and liabilities incurred by the business by its operations (loans for equipment, etc.) or because of its operations (lawsuits for injuries to employees or customers) are the direct legal responsibility of the owners and are unlimited. Two partners each worth $1 million individually and owning a business worth $2 million can lose a lawsuit for an action of the business, have a judgment imposed for $4 million and both wind up penniless. Again, for very small businesses, these risks can be quantified and insurance obtained to provide protection against them. For larger businesses pursuing larger goals, the cost of such surprise expenses quickly grows beyond what owners can afford to cover via business insurance. More importantly, they quickly grow beyond a level that any lender wants to see who might lend that business money directly. Lenders want to see a larger pool of parties who have an interest in ensuring the proper operation of the business before lending amounts beyond, say, five digits ($x00,000).

The limited liability protection provided by the corporate structure limits loss exposure for individual shareholders to the amount they invested in the corporation. Imagine the following circumstances:

• company XYZ sold 100,000 shares at $10 each for an initial company valuation of $1 million dollars
• investor A purchased 100 of those shares at $10 for a one-one-thousandth share of ownership worth $1000
• after months or years, company XYZ is now worth $30/share or $3 million total
• company XYZ loses a lawsuit and faces a judgment of $4,000,0000 dollars and goes bankrupt

In this scenario, investor A can only lose up to the $1,000 originally invested. Investor A cannot be individually held liable for the $4 million dollar judgment or any other debts of XYZ. Even the employees of XYZ are protected from the collective liabilities of the company as a whole. Employees only face liability in the context of negligent actions they take in their employed duties or if they had particular fiduciary responsibilities of their role they failed to meet.

The governments of virtually every industrialized economy quickly concluded this form of limited liability for owners of corporations provided incentives to invest in new technologies whose benefits were thought to outweigh any downsides. It took a few decades for some of those downsides to become evident, such as monopolies, restraints of trade, etc. The key takeaway here is this: The sole purpose of the corporate structure as a legal construct is to encourage the sustained, unbounded economic growth of a business. A second takeaway from the first is this: Nearly every aspect of regulation favors larger companies over smaller companies, as more companies get large, it becomes more difficult for vendors of those companies to remain small and the entire cycle becomes self-reinforcing towards larger companies. The net result is that every aspect of daily business is geared towards producing very large firms that become very sclerotic and resistant to change, making them vulnerable to technological shifts that can arrive overnight.

Treasury Operations – Theory and Practice

Every undergraduate business degree curriculum and every MBA curriculum includes a mandatory class named "Finance" that covers a blizzard of topics. Cash flows, interest rates, discount rates, present values, future values, the mathematics of bonds and annuity payment streams, return on equity, internal rates of return and even extremely complex concepts about "beta" measures of the correlation of value between different types of assets. As a "core" course, the material serves as a vocabulary introduction to any business student regardless of their primary focus (marketing, operations, organizational design, accounting or finance) and just an intro class for any students actually focusing on finance who go on to more advanced material. One topic that went uncovered in the "finance" class in my MBA curriculum back in 1989 and 1990 involved what I will term treasury operations strategy. What might be included in treasury operations strategy?

• setting minimum rainy day reserve balances based on payroll, emergency exposure, current state of the company's working capital, etc.
• establishing set-asides to build up accounts for capital replacement in conjunction with operations
• ongoing validation of geographic diversity in banks serving corporate accounts (not putting all of the company's cash in one bank account like Silicon Valley Bank)
• mileposts as measured by free cash flow for switching from retaining earnings to paying dividends
• mileposts as measured by free cash flow for adjusting dividend amounts

None of these topics ever came up in my finance class. They didn't come up in my operations management class. They didn't come up in my financial or managerial accounting classes. And my curriculum did not include a class devoted to the "business life cycle" as I have termed it previously. The only class taught that addressed any phase of the business life cycle addressed entrepreneurial strategies from ideation through the angel investor round.

Part of the reason for this gap might have been that my business school clearly understood no graduate of theirs would ever need to lead an organization making $30 million yearly selling diapers, breakfast cereal or candy bars. We would all be working at Goldman Sachs, GE or founding the next Microsoft. Part of it might have reflected the biases of the students as well. Who wants to spend two years and (back then) $26,000 learning strategies for running a business that makes Milky Way candy bars? But part of the gap might reflect an assumption that these decisions aren't "financial" per se, they are CEO-level strategic decisions and it's the CFO's job to simply find the money when the CEO says jump and no one seems to teach those CEO strategies. And THAT is the problem. No future CEO ever hears those truisms listed earlier – that no company grows forever, no company lives forever, no company can remain inert longer than five years and survive and that few CEOs are good for all seasons. This blind spot is reinforced in every business curriculum.

Any answer to the question of what a company "should" do (a normative question, not a legal question) with its cash flow is directly tied to the other controversial questions regarding the primary fiduciary responsibility of a corporation's leadership to its shareholders and the best strategies for meeting that responsibility. Since the 1980s, American corporations have been overtaken by a mindset that answers the first question with The SOLE fiduciary responsibility of executives is maximizing shareholder value and answers the second question with by maximizing share price. These answers are profoundly simplistic and therefore, in an era where the economic power of many corporations exceeds that of MOST countries in the world, profoundly WRONG. Why?

First, fixating on share price assumes every other variable a manager should also be optimizing is perfectly reflected in the company's books that ultimately drive that share price. This is ABSOLUTELY not the case, even if the entire executive suite was staffed with Mother Teresas. No firm's books accurately reflect often ENORMOUS costs the firm has managed to externalize. Energy firms aren't carrying liabilities for physical environmental damage done by decades of greenhouse gas emissions. Social media firms aren't carrying liabilities reflecting the costs of psychological harm from cyber-bullying and ADHD productivity losses stemming from purposely addictive content filtering. If such costs were carried on their books, stock prices would be far lower.

Second, fixation on share price assumes that managing a firm's operations to drive up share price is the most effective way of "transmitting" the increasing value to shareholders who are then free to cash out as few or as many shares as they want with whatever timing they choose to enjoy the firm's growth. In reality, executives have focused on stock prices as the SOLE yardstick for a variety of selfish reasons. Even for very large firms, it IS possible for a CEO and CFO to directly drive up the firm's stock price by simply buying up shares on the open market. A single purchase of a few thousand shares worth a few million won't even cause a blip but if the firm announces a plan over X months over the next Y quarters to buy up (say) $30,000,000 worth of shares, that consistent pressure CAN drive daily volumes up which can raise the stock price substantially.

Executives also focus on share price because many incentive schemes are driven by an increasing stock price ("hit $100 in two years from the present $65 and here's $10,000,000 in cash") or options are granted directly that only become valuable if the price goes up. But those option grants can involve MILLIONS of shares and thus provide massive leverage and incentive for juicing the price.

So what's the alternative for conveying cash and value from a corporation to its shareholders? DIVIDENDS.

A dividend is a cash payment made from a corporation to holders of shares in the company as of a given calendar date. Although commonly referenced as a dividend yield as a percentage point of the going share price, the actual dividend amount is specified by the corporation as an exact dollars/pennies amount. For example, as of 10/28/2025, Microsoft pays a dividend of $0.91 per share every quarter so that dividend is also shown as a 0.67% annual yield because dividends for the year will be $3.64 against a share price of $542.07 amounting to $3.64/$542.07 or 0.671% or 0.67 percent.

So what are the lessons about dividends versus capital gains taught in business school? They probably come down to this shorthand:

• No firm should pay dividends until they are profitable. Keep earnings internally to fund efforts that cement your position or keep you poised for growth.
• Firms still growing sales or growing market share should avoid paying dividends. Keep earnings internally to fund internal growth as long as you're growing.
• Large corporations still growing in SOME operations sectors but not in others should still avoid paying dividends – as long as you have an internal opportunity somewhere in the business for growth, fund it from internal operations.
• Large corporations with highly profitable business generating large amounts of cash flow but are not growing in absolute size or market share should pay dividends. If you cannot find internal means of providing a competitive return on your shareholder's cash, give it back to the shareholders.
• Once a firm STARTS paying dividends, it should virtually never LOWER or HALT a dividend. Investors who like dividend-paying stocks value consistency for managing their income and firms that vary their dividend typically find investors dump the stock since any reduction in dividend is a warning flag to investors that cash flows are dwindling.

That doesn't sound complicated. It sounds reasonable. Why don't more corporations follow this?

Two things are happening when a CEO agrees to pay a dividend or raise an existing dividend. First, they are not-so-subliminally communicating to shareholders "I have no better idea on how to make money with this current business so I'm giving cash back to you." In the mind of that executive, that's two strikes against them in one. One, the CEO telling his board and investors he / she has no idea how to make more money – a failure of management skill and daring. Two, the CEO is telling the board and investors that the business itself has plateaued or is actually in decline which many will blame on the CEO. Most shareholders -- conditioned to expect every stock to grow perpetually -- flinch at hearing EITHER of those scenarios even hinted at. Therefore, no CEO ever wants to convey such a message. They know their tenure will be very short afterwards. Possibly days or weeks.

This is why the psychology of CEOs is so crucial to private equity.

This thinking defies reality. Not every firm can be an Nvidia or Anthropic or OpenAI (nor should they be). Any firm continuing to retain earnings beyond the point the business can use them to fund legitimate growth is magnifying the size of the target on its back. First, retaining earnings tempts managers to take larger gambles on other strategies for growth which likely lie beyond the firm's strengths. These often result in outright failures or slow financial leaks which harm the company's margins. Retaining earnings and doing NOTHING with them penalizes shareholders who, if paid out their share of that money, might find other investments paying a higher return than Treasuries or (gulp…) no return at all. Finally, retaining a pile of cash indefinitely actually attracts the attention of private equity investors. It's one of the first indicators that attracts the eye of the vultures circling above.

Isn't the CEO paid to know better and "do the right thing?" It's easy to argue that in fact, boards are paying CEOs so much money hinged on growth they are essentially encouraging the CEO to deny reality, at the expense of shareholders. CEOs tend to be optimistic and confident to the point of arrogance. The incentives created by obscene compensation packages based primarily on stock price appreciation virtually guarantee any CEO who recognizes the reality ignores it. From their perspective, there is little downside. Whaddaya gonna do? Fire me? I already have tens of millions of dollars. I'm already set for life. This is just gravy.

Private Versus Public Companies

The final market distinction requiring consideration involves the pros and cons of operating as a private versus public corporation. A great deal of grumbling has been expressed by executives and investors alike over the last fifteen two twenty years about the regulatory hassles of operating as a publicly traded company and the relative dearth of famously profitable initial public offerings as were common in the old days like Microsoft or Dell or Cisco or Google or Netflix. Certainly, the question about "why go public at all?" seems legitimate:

• Why hassle with the cost of an external quarterly audit and quarterly income statement and 10K filing on insider trading activity?
• Why waste your CEO and CFO's time answering mindless questions from reporters and analysis on a quarterly earnings call?
• Why subject your shareholders to the vicissitudes of fluctuating stock prices brought about by short-sighted, greedy outsiders who don't care about the company like you do?

A single word answers all of these questions: DISCIPLINE.

As a company gets larger and more complex, it certainly becomes more expensive and time consuming to audit and thoroughly certify the accuracy of its books but that problem isn't eliminated by operating privately. The only thing different is a private company with identically complex books can drift longer with looming errors or outright corruption in its leadership cascading without going detected. Cases like Worldcom, Enron and Lehman prove that operating as a publicly traded firm doesn't guarantee clean books either but it is far easier to hide danger when management can hide its work for longer periods of time.

So what's up with the noticeable reduction in the number of IPOs in general, much less the lucrative IPOs that produce a nice 20-30 percent premium for insiders of the company? If you are asking the question "Where are the Microsofts, Googles, Facebooks, etc of today's startup world?" then the answer very likely is "Look inside Microsoft, Google, Facebook and the other tech giants." Small businesses that launch to develop innovative products leapfrogging incumbent giants are often bought up by those giants before the upstart product ever launches. What's driving this behavior?

The actual economic payoff in software tech, hardware tech, biotech, etc. has actually NEVER been very good on average. For every 10x firm, there are many others that failed before reaching IPO (payout $0), reached IPO but failed shortly after (typically $0 payout) or limped along after a short bubble on IPO then failed (typically a small payout in light of hours worked during the startup phase). This pattern is well understood by entrepreneurs who have become far less idealistic and far more pragmatic. At the same time, the most dominant corporations have become EXTREMELY inefficient and EXTREMELY averse to developing new products that cannibalize their existing monopolies. As a result, they have become EXTREMELY aggressive at identifying competitive threats and buying them up before they ever go public. Essentially, they all pursue a proactive capture and kill program.

From the existing monopolists' perspective, they have captured some competitive talent for at least one or two years, avoided the release of a potentially competitive product and theoretically infused their own company with some new talent and DNA. From the perspective of those entrepreneurs gobbled up, they pocket a huge one time payoff that might be $2 to $5 million that never have actually materialized had they stayed independent and tried the IPO route, they got a guaranteed cushy job for maybe a year or two and a notch on their resume. ("Startup – been there, done that").

But what is the impact of capture and kill on the larger market? The business segment involved saw a reduction in innovation. A possibly valuable product development effort was immediately surrounded by a stifling, unimaginative bureaucracy that will likely bring its development to a halt or grind it into mediocrity. And investors lost the chance to participate in the game and maybe score that ten-bagger gain on one of those five companies that was absorbed into an existing monopolistic borg that might have been a winner had it stayed independent and tried the IPO route.

In short, the dearth of IPO opportunities is NOT primarily due to a fear of small companies incurring the headaches of "burdensome" accounting regulations and reporting costs. It is primarily due to existing, anti-competitive tech giants gobbling up micro-scale threats to their positions before those businesses can grow through a few cycles of exponential growth and demonstrate how much better new products might be compared to those of the current monopolies. The lack of money-making opportunities for IPO gamblers is the smallest concern with this pattern. The real damage is reflected in the lack of choice and lack of innovation evident in nearly every industry which is affecting economies across the globe.

So now we arrive at the point of this entire analysis...

Private Equity on Steroids, Everywhere

All of the problems associated with private equity stem from conflicts between these false principals about fiduciary responsibility and maximizing shareholder value versus the natural cycle of the business world. Stated more directly, virtually everything in the model for operating a corporation in a "modern" industrialized country is optimized for promoting GROWTH. Executive compensation promotes growth. Tax policies promote investment in equipment to produce MORE. Personnel policies reward employees associated with projects tied to products and business segments that are growing. In contrast, NOTHING in any realm of tactics or policy is optimized towards sustained but FLAT profitability. As a consequence, leaders actively AVOID adjusting operations for flat profitability because adjusting requires recognition and acceptance of stagnation and markets do not reward stagnation, even at obscenely profitable scale. This creates an artificially large universe of zombie companies with significant cash flow but poor future prospects that are ripe for capture and pillage.

How do these factors interact to cause the problems seen with private equity? They reinforce each other and magnify the vulnerability to private equity abuses through the nature of the corporate structure itself and its intended purposes, through a lack of strategic thinking about corporate cash flow on the part of CEOs and CFOs and perceptions about the pros and cons of operation as a publicly traded corporation versus a privately held corporation.

So far, the use of the term "private equity" in this analysis has focused on the familiar "vulture capital" tactics in common use since the 1980s. That mode of operation primarily involved companies closer to the end of their evolutionary cycle who have reached a no-growth stage that begins driving down their stock price. Private equity investors become involved, buy up sufficient operational control, then rearrange the company's operations to redirect most of its free cash back to the PE investors (and NOT the company's original or remaining shareholders) and hasten the decline of what's left into market failure and bankruptcy. The damage done by this strategy has been apparent for decades and will likely get worse.

But if this failure pattern is so obvious in the existing vulture capital model, how do PE firms continue attracting additional OPM (Other People's Money) into similar schemes targeting more victims?

It isn't because these PE firms still believe in the story of PE and want to try it again despite decades of failure. They know it doesn't work. They likely always knew it never worked.

The PE firms continue to play this strategy because they have devised a hack which perfectly exploits the flawed belief system of most corporate leaders, the legal favoritism of corporate growth at the expense of smaller businesses, and pay incentives for executives that reward growth at the expense of recognizing reality. The scam of private equity works perfectly…. For the scammers.

Knowing that most CEOs cannot accept this and knowing there are ALWAYS firms closer to the grave than their heyday, there will always be a percentage of all operating businesses who are in a zombie phase where their leadership skill set is not synced with their lifecycle state. Many of these businesses WILL and SHOULD go out of business. But if you're the CEO of that firm pulling down $800,000 in salary and $2 million in incentive pay each year, you have ZERO incentive to act on that reality and disturb the status quo.

Private equity firms have essentially perfected a process that replaces a slow death (that puts most of the "lost" money into existing management, existing employees, existing customers and existing creditors while likely leaving shareholders flat) with an accelerated death with a significantly different cash impact.

The difference in outcomes and timing is illustrated below.

An existing or new CEO gets more money, a lot of employees get laid off, products are dropped or cheapened, creditors get shorted and more of the cash routes through entities lining the pockets of the PE owners. The shareholders still gain little if anything. And when the firm is sucked dry, the PE teams move on.

But move on to where, you ask? Haven't PE firms pretty much destroyed the restaurant, retail and consumer goods industries across America? Well, yes they have but PE firms ARE moving on... New segments to pilfer have been identified and are already being targeted, most notably regional hospital chains, nursing homes and hospice care and Alzheimer's "memory care" facilities. Note the similarities? Widely needed services. Lots of real estate involved in delivery of services. Low-wage, high-churn jobs. If you thought the service sucked at Applebee's or Panera Bread after private equity gained control, you can imagine what will happen to wait times and quality of care in the Emergency Room at the local regional hospital over the next ten years.

But, as they say, it gets worse...

Private equity firms have begun seeking higher returns by branching into transactions providing financing for ongoing operations of firms presumably earlier in their evolutionary cycle. Deals in these areas have been growing for likely five to ten years but the dangers have become apparent as some of the firms have experienced acute operational failures, triggering bankruptcies and divulging the nature of these underlying financial deals. In several recent cases, private equity firms have been found holding worthless IOUs signed by suddenly bankrupt companies who borrowed tens of millions of dollars only days before being found insolvent.

The bankruptcy of First Brands is particularly instructional. First Brands owned firms making products ranging from Fram oil filters, ANCO wiper blades, Autolite spark plugs, Carter pumps and Reese towing hitches. In other words, AUTO PARTS. Not sexy stuff. Not businesses growing ten percent per year. Stodgy, boring AUTO PARTS. The company filed for bankruptcy out of the blue in September 2025 and court filings disclosed the company was carrying $6.1 billion in debt. It turns out the company was owned by a collection of small firms no one ever heard of which in turn were all controlled by a Malaysian firm whose ownership of those other shells amounted to 63% ownership of First Brands. But First Brands had obtained financing for its accounts payable to the tune of nearly $2 billion dollars from other major hedge funds and well known PE firms including BlackRock. After filing for bankruptcy, some of those late-stage lenders discovered that more than one of them had been promised the same collateral for loans, a massive failure of due diligence on their part.

The discovery of the extent of private equity involvement in this type of lending raises concerns about the larger financial system. First, most private equity firms have no particular background in day to day lending. Lending decisions are different than investing decisions and reflect much narrower criteria for variation in payback schedules, etc. Certainly PE firms have arguably ZERO experience in understanding the structure of a firm's unpaid invoices and the risk of non-payment for those invoices offered up as collateral. In this case, the borrower was a PE firm without public books so the PE lender had very little third-party verified public data to rely upon in making a lending decision. And they clearly made the wrong lending decision. So now a clear picture is emerging of the danger posed by PE owned companies borrowing from other PE owned companies looking for outsized returns.

And yet, the danger spreads…

Over the last decade or so, the influence of private equity investing has reached back further in the business entity life-cycle. For the reasons cited earlier, far fewer companies are choosing to go public at any point. This means that a growing number of investment opportunities in new businesses are NEVER exposed to a public investing community. Instead, news of these opportunities is being limited to those working for specific private equity firms who are handling the phase of investing that previously followed "angel investor" rounds and preceded IPO. That certainly presents an opportunity to eliminate some "froth" and hype out of the public market but there are certainly hidden costs:

• Essentially hiding IPOs makes it impossible for entrepreneurs and investors alike to confirm if fair evaluations are being assigned by private equity investors. Is it more advantageous to society for an out-sized financial reward to be paid to an investor with a great idea or a private equity investor acting as gatekeeper to money?
• Limiting participants and limiting information available virtually never increases transparency and fairness. Will a lack of transparency lead more entrepreneurs to accept lower payouts but reduce incentives for innovation in the process?
• Lack of transparency is likely to make PE investors themselves more likely to engage in pump and dump schemes and thus become victims of them as well.

Over the last ten years, PE firms have seen the same declining pattern in the volume of businesses going public through the traditional IPO process and have begun participating in early investment rounds of startup businesses. The business strategies and psychology that should come into play in that stage of a company's life cycle are VASTLY different from those that dominate during the end-stages of life. So what do PE firms claim to offer in these scenarios?

It isn't that PE firms have "infant-stage" expertise in business strategy or that anything they've learned from late-stage business applies to early stage firms. Their vulture capital track record proves they possess ZERO expertise in optimizing businesses that have been operating for decades, so there is zero chance they have any insight whatsoever into a business creating a brand new sector or technology. However, decades of vulture capital work has demonstrated the value that can be extracted from deals by adding parties to the terms, muddling or hiding entirely data normally required for informed decisions, and leveraging human psychology driven by greed and fear to extract a lucrative cut from every bag of money changing hands in any direction.

In short, "froth" and speculation won't be eliminated by a swing from a vibrant Initial PUBLIC Offering environment to a more active Initial PRIVATE Offering model, they will simply become more hidden and grow as if on steroids. This problem is bad enough but will create 100x problems if a recent proposal to RELAX limits on 401k and pension fund investments in private equity firms is approved.

Presently, 401ks and most pension funds are prohibited from investing in private corporations explicitly because of the lack of public reporting on the financial condition of such firms. The idea is that concentrations of assets tied to retirement funds need to avoid unnecessary risks to avoid a market shock from leading millions of retirees who HAD SAVED for retirement from needing to eat dry dog food to survive. Eliminating this restriction is being promoted under a false flag of "improving choice" for workers and retirees to pursue investment strategies that offer higher returns than those possible by sticking with public firms.

Why is this change so dangerous? It not only would redirect BILLIONS of dollars into existing private firms whose track records are already too opaque but it would also allow BILLIONS to flow into STARTUPS who are PRIVATE who are not only opaque but are not even making money yet. Such investments would be PURELY speculative, they would provide ZERO transparency for analysis by outside parties, would be highly susceptible to bubbles and fraud and are completely unsuited for any retirement plan.

This isn't a drill. It isn't a hypothetical exercise. The traditional vulture capital PE strategy has a perfect track record. One hundred percent of the time, the PE firm has profited handsomely and one hundred percent of the time, every other party to the deal lost and the firm involved tanked. Yet regulators and businesses alike are essentially removing any barrier keeping this toxic business strategy away from the most crucial investments individuals have – their retirement accounts. This will not end well.

WTH