Plunder: Private Equity's Plan to Pillage America
Book Author: Brendan Ballou
The term Private Equity is a staple in the world of finance, be it a fresh graduate trying to join the “buy side” or just reading the Financial Times that PE firms manage 12 trillion dollars in assets under management. But how well do we really know an industry that manages assets the size of nations?
Brendan Ballou's "Plunder" meticulously dissects the modern-day behemoth of Private Equity (PE), shedding light on the often obscure machinations that drive these mighty investors. Through a myriad of real-world case studies, Brendan unveils the stark reality of PE firms putting on the mask of business operators, a role they are scarcely equipped for. The book is a fascinating journey that builds on Brendan's background in law, corporate governance, economic policies and anti-trust. The book is a great reminder to what happens when objectives are misplaced, elucidating how PE firms, with their eyes fixated on immediate capital recoupment, often stray from the true goal of simple business growth.
As the narrative progresses, the readers are escorted through a real-world financial labyrinth of PE operations (heavily leaning into Brendan's legal acumen), where PE funds use a number of tactics, some creative (such as dividend recapitalizations), others more blunt (such as acquiring businesses with a real estate portfolio and selling them), and some rather grey (such as draining and risking pensions); all to for the the quest of capital return. It's actually remarkable (and terrifying) how resourceful the PE firms get when it comes to finance as a subject matter and capital return.
The above starts to unwind a more obvious issue (there are quite a few to be fair...) with PE funds taking over businesses: good investors are rarely good operators. The idea that a Manhattan based (half of the world's top 15 PE funds are based in NYC or Boston) investor can credibly operate an Ohio HQ-ed nursing home is unreasonable, yet this takes place all the time in PE. This is not an indictment on all investors, but a reality check that even well equipped individuals with strong pedigree can't just be popped into a situation and become an overnight expert (unless you are Tony Stark).
Brednan's "Plunder" reads as a scything critique of the industry, but I believe it should be viewed as more than simply that; it's a global call to the institutional investment community to introspect and realign. The narrative should urge PE firms to transcend the narrow confines of immediate returns and evolve into catalysts for sustainable business growth, and one of the starting points should come from their investors - the "LPs".
Disintermediation from the subject matter usually makes it harder to align everyone's interest.
PE firm's historical Limited Partner (LP) base has been pension funds, endowments and sovereign wealth funds - these are institutionally run funds with professionals at the helm and in some cases, literally millions of small "investors" (a sovereign wealth fund is literally a nation’s wealth) making up the capital. These professionals are tasked with a challenging task of making returns, this narrow mandate (in some instances outside of their home region) disintermediates them from the "action" that the PE funds invest into. Bringing this alignment back might just start tilting things in the right direction.
Given the in-depth knowledge of the author at the subject matter, I deep dove into their background to get a better perspective. Brendan's background actually gives us quite a bit of insight: before penning down "Plunder," he had what looks like a strong morally aligned career as a federal prosecutor (specializing in PE anti-trust), a stint in the White House's Justice department and also private practice. One can understand his came-in-like-a-wrecking-ball approach to PE funds and their investment style. Given his background, it’s unsurprising the book’s rather grim picture for Private Equity. But not everything is as dark (relatively speaking): only 1 in 5 large PE fund investments turn out like a Toys“R”Us or HCR ManorCare. He also does end the book on a number of potential solutions.
All in all, it's a strong read to remind everyone on alignment of objectives and that anything (capitalism included) taken to the extreme can be toxic. Let's make nuance great again!
Why I recommend this book
It’s a strong worded reminder that there are some extremely powerful institutions investing billions of dollars and sometimes overlooking the simple fact that sometimes a drive to efficiency and shareholder return isn’t everything, a Christmas toy or a well taken family member is just as priceless. And the author does this in an intricate, well-explained and financial journey of Plunder.
