Do Your Own Research: How Private Equity Bought the World w/ Hettie O’Brien

**Richard Hames** (0:08)
There's a class of people out there who own lots of the things in your life. You'll probably never know their names.
You might not even be able to find out their names. They might own the house that you rent. They might own the care home where your parents spend their final days. They might own the nursery that you drop your kids off. They might even own the YouTube channels that you subscribe to. Not this one, though. This group is called Private Equity, and the name is itself a kind of camouflage. It doesn't really tell you anything about what these people do, which in many cases is simply to buy a company, load it up with debt, and then walk away with the money as the thing collapses. Some private equity groups are involved in the water companies in the UK that are pumping sewage into our rivers. The whole thing is essentially secret.
Unless someone happens to tell you that they've been bought by a private equity firm, it's not often easy to tell. The justification for all this is that this is just capitalism being capitalism doing what it does best. It's creative destruction. It's the healthy churn of the market. It is the culling of the weakest of the herd. And that's the strange thing about private equity.
Although its proponents like to present themselves as superior managers of capitalism, they are at the same time possibly undermining some of its basic conditions.
Hettie O'Brien is the author of The Asset Class, How Private Equity Turned Capitalism Against Itself. And it's that contradiction that I want to get to in this conversation. Because it's currently structuring much of our world, from the Gulf state sovereign wealth funds to the private hospitals, where people are chained to their beds unless they can pay their debts to the degradations of the Great British High Street. This conversation connects to my other episodes with Queen Slebodion and Ben Tarnoff on the Elon Musk Empire and the strange anti-gravity of the private markets, and to that one with Luke Kemp about how societies fall apart, often hollowed out from the inside. If you want to explore those connections in detail, the map is freely available on the Novara Media website. Link in the show notes. Hettie O'Brien, welcome to Do Your Own Research.

**Hettie O'Brien** (2:35)
Thank you for having me.

**Richard Hames** (2:36)
Let's talk about what private equity is.
There's one particular kind of mechanism that defines or like dominates private equity as a business model. That mechanism is the leveraged buyout. What's a leveraged buyout?

**Hettie O'Brien** (2:53)
So a leveraged buyout is something that involves a colossal amount of debt. When a private equity firm or fund buys something, it will effectively take that thing or historically has taken that thing, whether it be a company or an asset private. So it means delisting its shares from the stock market. So normally when you buy something, you need to get enough shares to gain control of it, which would involve an awful lot of money.
Unlike a kind of typical takeover, a private equity fund will borrow maybe 80% of that money and then use the remaining 20% as its equity stake. So it will inject the money of its investors.
The thing that makes it different, and this is where I think the kind of scandalous part of private equity really comes into play, and this is always the thing that people can't really get their heads around when I explain it to them, is that if you or I were to borrow money, we would expect to pay that money off eventually. But a private equity fund pushes the money it has borrowed to buy a company down onto the company itself through something called a debt push down. So in effect, the company goes into debt in order to pay for itself, and the benefits of that debt, they effectively juice the returns of the private equity fund, so they make fund managers very rich, but they don't actually necessarily have a particularly beneficial effect on the company that those debts have been loaded onto. So when you think about what that means across the entire economy, rather than just at the level of individual firms, you can see how that buildup of leverage can actually lead to a weakening of companies, because companies that are massively indebted have less cash flow to spend on the other things that they arguably should be doing, investing in productive activities, providing good services to their customers, paying good wages, this type of thing, because more and more of their cash flow is being spent on paying down debt. So that's what a leverage buyout is. And I think the other part of private equity, to understand what it is, you've really got to understand the private part. I think that's really significant. You've mentioned obviously publicly listed corporations, or at least the stock market, and that historically has, although far from perfect, as a form of accountability, has kind of ensued particular forms, or there have been particular forms of accountability that have gone along with that. So when you are a publicly listed firm, you have to provide a certain amount of information about what you're doing, about your accounts, about certain risks that your business faces. And all of that information trickles down eventually to the public realm, to society. And that's designed to help both investors and the public at large figure out what's going on within the economy and ideally hold to account large corporations and corporate power. And so when all of that information disappears from view, it means that process of holding to account power becomes much more tricky.