business
economics
Is Private Equity Destroying the Economy?
Fellow, Open Markets Institute
Partner, 8VC; Co-founder, Palantir
0
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Genesis
Response
Penultimate
Finale
January 24th, 2020
Thanks for inviting me to discuss the business model of private equity. I'll start by offering a basic assumption I hold about the economy, which is that we are in crisis. This crisis shows up in a number of ways, but I'll offer two. First, while there are a lot of cool technology ideas floating around, the underlying driver of wealth creation—productivity—isn't growing very quickly at all, and over the last few years it's not unusual to see productivity declines. Second, life spans are going down.
In some ways, we are experiencing a much less severe version of what the Soviet Union faced when it ended. As that system of production broke down without anything coherent to replace it, male life expectancy fell by eight years in a very short time.
What's happening in the U.S. is a variant of why Communism doesn't work. We have unaccountable and reckless central planners organizing too much human activity. We don't call these central planners government bureaucrats, we call them private equity executives and monopolists. Among big corporations, this is obvious; Mark Zuckerberg has set up a Supreme Court for content moderation and is seeking his own currency. He's also said that Facebook is "more like a government than a business."
But for mid-size markets, private equity fulfills this governing role. Robert Smith of Vista Equity Partners, for instance, buys up mid-level niche business software companies and runs a playbook on them that involves raising prices and degrading quality. All corporations that use this software—such as yoga studios—are now organized according to the policy framework Smith has set up. We call him a billionaire rather than a central planner, but that's semantics.
Like zombie central planners, PE firms now destroy across the economy. Sycamore Partners bought Staples, and then immediately took out a billion dollar special dividend for itself. This is looting. A whole host of corporations have been ruined by firms that do this, mirroring the wreckage of the post-Soviet era.
Another good example is Transdigm, which is a private equity-like corporation that buys up defense contractors who sell specialized sole source parts for old airplanes and jacks up their prices. This is a way of reordering how we use resources not just in one company but across the defense space, away from useful defense applications and towards Transdigm's CEO.
Now of course it's important to disaggregate what private equity does that is useful. Private equity can invest in corporations so they can expand plants and develop products. And some do that. But because of our policy framework that enables monopolization and looting, it's much easier to invest at scale in forms of theft than to build useful things.
Much of the industry came out of the management consulting world of the 1980s and 1990s. In other words, private equity today means taking the consultants from Office Space and making them powerful billionaires.
And that's why productivity is declining and lifespans are going down.
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