The theory underlying the private equity industry is “firms and their executives have a greater incentive to improve a company’s performance than salaried managers at a public company do, because the firm has skin in the game.” So writes Megan Greenwell in Bad Company, her unsettling 2025 exposé. The question she raises is one of how much skin, really? On average, as general partner a private equity group (PEG) itself will fund a mere 3% of a transaction with the balance coming mostly from loans – tethered to the acquired company – and limited partners like pension funds, university endowments, and other external investors. With the typical “2-and-20” structure, whereby a PEG keeps 2% of a participant’s contribution plus 20% of profits beyond a set threshold, making money is all but guaranteed. Roughly two-thirds of a typical firm’s total revenues are from fixed fees, so let the reckless gambling games begin.
This could’ve been a brutal read if not for a key wrinkle: it’s neatly organized into three sections built around the before/during/after stories of four real folks whose lives have been upended in recent years. Starring Liz (retail floor manager), Roger (rural doctor), Natalia (beat reporter), and Loren (activist & renter), we learn the history of private equity but with these sympathetic faces peppered throughout. Liz may have been the most loyal employee Toys Я Us ever had, but she was summarily dismissed as the chain was gutted, starting with selling the real estate out from under Geoffrey’s hooves. Octogenarian Roger dedicated his life to caring for Wyoming’s residents only to be screwed over by a consortium focused on eliminating competition to drive up billings. Natalia was so determined to have a career in journalism that she nimbly leapt from paper to paper as newsrooms were being dismantled to wring out profits. And Loren’s family suffered the indignity of crumbling, moldy housing while the fat cat building owners sunned themselves 3,000 miles away. Even still, Greenwell shares positive outcomes in all cases, as each of her subjects has too much fight in them take any guff lying down.
To perhaps no one’s surprise, Milton Friedman’s long shadow is cast all over the 240+ pages. According to his thesis, writes Greenwell, owners prioritize a company’s interests while staffers freely choose for whom to work, granting the parties equal power. But of course, over the past half-century that precondition has eroded, and “workers often don’t know who their bosses are, much less what their business strategy is or whether they plan to drive the company into bankruptcy and profit off the scraps.” When you combine the mission to maximize shareholder value with, for example, municipalities that almost certainly face major funding shortfalls, you get outcomes that blight society. The author forces her reader to wrestle with the reality that PEGs are propped up by pensions and endowments that fall under the spell of the promise of double-digit returns. Those PEGs thrive by cutting costs and raising prices, taking the heaviest toll on the working class. Yes, teachers and firefighters deserve a nice retirement but know that it comes at the expense of their neighbors. This zero-sum game has been called capitalism’s washing machine and it seems we’re all being spun. Credit to Greenwell for shining such a bright light on it all.
If you have anything to say about this – or book recommendations – kindly post below (rather than emailing me) to spark conversation. Thank you!
Private equity is bad business. Steward Healthcare screwed up hospitals in Boston. And I think private equity has done the same for the real estate market! I will pick up this book and learn more. Greed never works! Thanks, Chris!
Great points, Janet. I always appreciate your moral compass and perspective! Something’s gotta change and I thank you for weighing in on this crucial topic.
I have to wonder if the bloom isn’t off the rose for private equity (or if not now, whether it may be soon). In the investment world, once something becomes pervasive and a can’t lose proposition, it’s often wise to be skeptical.
Estimates say PE owns about 7% of the US economy (and it’s no doubt a higher percentage when you factor in businesses owned in the last decade and sold). Given that PE looks for specific characteristic in its targets, such as opportunities to strip assets, quickly hack costs, reengineer the balance sheet, or roll up an industry, one wonders how much unplowed ground there is in the US at this point.
I have heard wise observers (e.g., Ray Dalio) recently express skepticism about the true value of some PE portfolios vis a vis the appraised values they report to their LPs.
It would be a good thing if fewer bright young people went into the field and instead chose careers in operating companies or entrepreneurial startups.
What terrific insights, Chris. When I ask people to post rather than emailing me their thoughts, this is exactly why I do so: because your thoughtful commentary will help others in addition to me. So, thank you very much!