Buy out boom points to slump

Submitted by Matthew on 31 January, 2018 - 12:16

Editorial from Solidarity 460

“Private equity” — the industry that raises funds from wealthy people to buy out wobbly companies, take them off the stock markets, ruthlessly chop costs and sell off assets, get them profitable, and then sell them off again at a premium — is booming.

According to the Financial Times (24 January), “buy-out groups are setting new records for fund-raising”. They’re even turning away cash from rich people keen to get in on their operations. And the volume of buy-outs they do rose 27% from 2016 to 2017.

This boom is likely to lead to a crash. “Private equity” essentially depends on the pass-the-parcel going round faster and faster, and plutocrats taking on even bigger debts in the hope of quick profits from quick slash-and-burn operations, until the whirl gets so giddy that the parcel drops and there is a cascade of collapse.

As in 2008. A “private equity” crash may or may not sync into a wider financial crash as it did then.

The Financial Times quotes Ludovic Phalippou, a finance professor at Oxford University:

“A cataclysm is bound to happen. The combination of overpricing and high leverage [debt] cannot lead to anything other than a lot of defaults... It is quite amazing that there is no collective memory that goes beyond five years, or that the world is organised in such a way that history keeps on repeating”.

The lack of “collective memory” is a product of capitalism. Capitalists, including private-equity capitalists, have records and accounts. In that sense, they have a better memory than previous ruling classes in history.

But each individual private-equity capitalist, even if she or he knows the history as well as the professor, has a strong incentive to drive for maximum gain, now, as quick as possible.

Rush, and they may coin ample profits before the crash. Hold back, and their competitors outstrip them.

And the private-equity capitalist can safely calculate that even if they get caught in the crash, they will come out not too harmed. Look at the bank bosses from 2008, or the Carillion bosses — even the worst-hit come out with a comfortable pay-off or pension, and some well-paying jobs as advisers or consultants.