Jun 16, 2023 07:00:00

What are the problems of a ``private equity fund'' that sells after acquiring a company and increasing its corporate value?

An investment fund that aims to acquire unlisted stocks of business companies and financial institutions based on funds collected from multiple investors, and at the same time, to sell them after being deeply involved in the management of those companies and increasing their corporate value. '

Private Equity Fund '. About such a private equity fund, Mr. Brendan Ballou, a writer and a federal police officer, explains ``Why do you make an acquisition?'' and ``What is the problem?''

Private equity bought out your doctor and bankrupted Toys“R”Us — here's why that matters - The Verge
https://www.theverge.com/23758492/private-equity-brendan-ballou-plunder-finance-doj

According to Ballou, a typical private equity (PE) firm collects investments based on capital such as sovereign wealth funds and pension funds and manages multiple funds. In addition, funds managed by PE companies acquire companies in various industries, such as nursing home chains, veterinary hospitals, and medical facilities, based on the funds raised from investors.

In general, PE funds do not name the companies they acquire, so they are not well known as companies. In addition, although PE funds have control of the acquired company, they often bear minimal responsibility for illegal acts committed by the company in the past.

It was pointed out that PE funds in the 1980s took aggressive acquisitions and strict cost-cutting measures. However, in modern times, they are solidifying their position as a new provider of risk funds for the social economy, second only to banks. The reason for this is that investment funds such as

the Carlyle Group and the Blackstone Group have expanded into fields such as insurance and real estate, in addition to the conventional business of acquiring companies. It is said that it is because we are doing

In addition, PE funds are working to improve their social reputation. The PE fund, which was once regarded as an aggressive aggressor company, has succeeded in changing its image to a more strategic and corporate value-oriented investor by taking an effective rebranding policy.

While being acquired by a PE fund allows companies to engage in activities such as establishing new factories and hiring new employees, Mr. Baru points out the problems of acquisition by PE funds. One is that PE funds tend to be short-term rather than long-term. It has been pointed out that PE funds, which are based on short-term investments, find it difficult to prioritize long-term investments such as research and development periods, employee training, and the announcement of new results.

In addition, the ideal form of a PE fund, which prioritizes securing short-term profits and actively implements cost reduction measures and employee reductions, is the toy mass retailer '

Toys R Us ', which was acquired by Kohlberg Kravis Roberts but went bankrupt. As in, it is regarded as a problem in cases where the same amount of funds as the income obtained from the business is used to repay the debt underwritten by the PE fund.

In addition, the nursing care facility chain acquired by the Carlyle Group adopted a '

sale and leaseback method' in which assets in nursing homes are sold anyway and returned to the company for operating funds. However, as a result, this nursing care facility chain faced a series of problems such as a reduction in staff numbers, an increase in complaints, and violations of hygiene standards. On the other hand, the Carlyle Group has succeeded in dismissing claims from bereaved families who claim responsibility, claiming that they do not own this nursing home chain.

In certain industries, such as the healthcare industry, the negative impact of acquisitions by PE funds has become apparent. There is a growing awareness of the possibility of running a business.”

In this way, it has been pointed out that PE funds can effectively control the management of the company and influence the company without being accountable for the business results of the acquired company.

It is also a problem that PE funds overestimate their own management skills and carry out significant management reforms without the necessary industry knowledge and experience. When the shoe manufacturer Payless was acquired, it is said that due to management reforms, there were a series of operational errors in conducting business, such as purchasing inappropriate products and deteriorating quality control processes, resulting in inventory. I'm here.

Of course, there are examples of companies that have successfully improved their operations through the acquisition of PE funds, but many PE funds focus more on their financial condition than on the day-to-day operations and optimization of their operations, effectively managing the companies they acquire. It is feared that the ability to operate is declining.

On the other hand, in response to the question whether acquisitions by PE funds violate antitrust laws, Mr. Ballou said, ``There is a complex analysis required to assess the potential impact on prices and competition of acquisitions by PE funds. In addition, it is necessary to evaluate not only the impact on prices but also various factors such as the impact on the market, the entry barrier for new companies, and the impact on consumer welfare. I can't,' he said.

Strategies such as the 'sale and leaseback method' and ' dividend reinvestment system ' conducted by PE funds are general methods that can generate short-term profits from acquired companies and create corporate value. These techniques are legal, but the process has a long history of well-funded PE funds making large political contributions to politicians. It is said that PE funds will be able to have preferential tax treatment for companies by connecting with politicians.

In addition, it has become customary for former government officials to make amakudari to PE funds, and the excessive political superiority of PE funds is being viewed as a problem. Furthermore, it is said that it is difficult to hold a PE fund accountable for its actions, which have very good lawyers. says.

It is sometimes pointed out that PE funds are making their own profits by bankruptcy of acquired companies. Sun Capital , which acquired the restaurant chain Friendly's , strives to thoroughly reduce personnel and cut costs, and as a result, Friendly's goes bankrupt. At that time, Sun Capital, being the owner and creditor of Friendlys, pushed the pension funds off their books to the Pension Profit Guarantee Company to avoid pension obligations and push aside other unsecured creditors. It is said that it was possible to proceed with the asset division after bankruptcy in an advantageous manner.

Mr. Ballou also said that the technology industry, which has been gaining strength in recent years, will grow into a PE fund in the future. may adopt the management strategy of “By doing things like PE funds, these tech giants may be able to expand their influence in different industries, but the negative impact PE funds have on the economy, workers and competition is huge,” Ballou said. We should also consider that it is being criticized.'

There are various efforts by the Federal Trade Commission and others to regulate excessive mergers and acquisitions between companies and encourage a more competitive marketplace.

On the other hand, regarding the lack of progress in regulation of PE funds, Mr. Ballou said, ``The problem is the psychological challenges that judges face when they rule against powerful companies. We may threaten judges who express negative opinions about the judge's resignation and the subsequent economic consequences.' But Ballou says, 'The judicial system is going to be extremely important as a solution to the PE fund problem.'

Through the publication of books and the distribution of podcasts, Mr. Ballu is engaged in activities to raise public awareness and understanding of what PE funds should be. We invite you to participate in the discussion. As a message to future generations who will face the harmful effects of PE funds, Mr. Ballou said, 'Gen Z judges and policy makers who have received detailed education on PE funds will promote effective regulation. I look forward to going,' he said.