Private equity (PE) companies are one of the hidden drivers of capitalism globally. They are a means to extract even higher rates of profit from across the manufacturing, distribution and service sectors to the detriment of workers, society and the environment.
Their business model is built on pooling money from wealthy investors and pension funds to buy other companies. Using massive amounts of borrowings and debt, the PE companies take control, aggressively cutting ‘costs’ and unprofitable activities to boost short-term profits before selling off the ‘leaner-meaner’ end product. The immediate cost of the operation is born by workers who lose jobs or suffer reductions to pay but often the victim companies end up lumbered with unsustainable debt and reduced assets (e.g. pension funds) meaning they are at greater risk of collapse or a destructive takeover by competitors.
Global dominance
Private equity giants such as Blackstone, KKR and the Carlisle group control a staggering $13 trillion in assets globally—a sum that has quadrupled in a decade. Their immense scale means the fate of thousands of companies and millions of jobs rests in the hands of a few powerful firms focused solely on financial returns.
Private equity (PE) is promoted by capitalist apologists as a means of financial innovation but in reality it is the purest embodiment of capital’s vampiric nature. Its entire model is a perfected mechanism for hyper-exploitation, systematically ratcheting up the exploitation of labour for the benefit of a financial elite.
The PE business model
The process begins with a leveraged buyout, where a PE fund uses minimal capital and massive debt – loaded onto the target company itself – to execute a takeover. This immediate debt-shackling forces the firm to generate relentless revenue not for reinvestment but to service the loans taken out to buy it in the first place. This is the first squeeze, forcing the maximization of profit extraction.
To generate the short-term profits demanded by the PE investment model, costs at the victim company are then slashed through direct attacks on the workers, layoffs and pay freezes, and through undermining the business’ long-term sustainability. For example, after private equity acquires a retail chain, it often liquidates real estate assets, selling off store properties and leasing them back. This creates a cash payout for the fund but saddles the company with permanent, costly rent, inevitably leading to further store closures and job losses over time.
Devastating consequences
This model has devastating consequences in essential services. The takeover of nursing homes by a number of PE companies in the US in recent years provides a stark case study. After acquisition the land and buildings owned by the nursing homes were sold off, forcing the now-rent-burdened businesses to further cut labour costs to survive. The result is a catastrophic decline in care quality, as understaffed and underpaid workers struggle to meet patient needs, all while the PE firm pockets the proceeds from the asset sale.
The ultimate beneficiaries are the private equity partners themselves. Through the special tax loophole of ‘carried interest’, their share of profits is often taxed at a lower rate than a worker’s income.
Apologists for capitalism claim that PE companies drive efficiency gains in the economy which result in improved returns for pension funder investors and shareholders. However the huge returns for pension funds are often just a mirage with the rate of return undercut by the enormous fees charged by general partners in a PE company.
Private equity operates a predatory circuit: it leverages debt to acquire companies; intensifies the exploitation of labour to service that debt; and appropriates the extracted surplus for itself before selling on the victim to move onto the next opportunity. This is not investment but legalised asset-stripping, enriching a few by impoverishing many and destabilising entire industries and the lives of millions of workers.
Expropriation and workers control
Tinkering with regulations is futile. The PE model itself is the most parasitic of the innately exploitative capitalist economy. But like any multi-trillion dollar sector, it holds bourgeois governments in thrall and its impact is not just confined to slicing and dicing the manufacturing sector. PE is playing an increasing role in the provision of long-term healthcare, such as nursing homes, a recipe for disaster with a threat of a catastrophic decline in care standards.
These firms add no productive value; they are simply mechanisms to sharply leverage exploitation. Like the rest of the capitalist economy, their vast wealth – built entirely on the exploitation of the labour of workers – must be expropriated into social ownership. The crippling debt imposed on victim companies should be written off as they are handed over to workers’ management and control. Socialists demand social need and not the insatiable thirst of vampire capital is served by the economy.
