Is private equity really magic, or is it just a con? The industry has its critics, and some of their points deserve honest consideration. Let’s examine the anti-PE arguments and separate the legitimate concerns from the misconceptions.
The Criticism: Asset Stripping
The most common charge against private equity is that it strips assets, loads companies with debt, and leaves them to fail. There are cases where this has happened—no doubt about it.
But the full picture is more nuanced:
- Most PE-backed businesses survive and thrive
- Bankruptcy rates for PE-backed companies are lower than commonly believed
- Successful outcomes far outnumber failures
- Asset stripping is a feature of bad actors, not the industry as a whole
The reality: responsible private equity builds businesses. Irresponsible private equity destroys them. The distinction matters.
The Criticism: Job Cuts
Yes, private equity deals often involve layoffs. This is uncomfortable but sometimes necessary. The question is whether the cuts create a stronger, more sustainable business—or just extract short-term value at the expense of long-term viability.
Good private equity:
- Invests in growth, not just cuts
- Builds sustainable cost structures
- Often creates more jobs in the long run through expansion
Bad private equity cuts to the bone and exits before the damage becomes visible.
The Criticism: Debt Loading
Private equity uses debt—that’s the “leveraged” part of LBO. Critics say this puts companies at risk.
The counter: debt imposes discipline. Companies with debt must generate cash flow, control costs, and focus on value creation. The debt creates accountability that absentee owners often lack.
Of course, excessive leverage is dangerous. The art is in finding the right balance.
The Criticism: Short-Termism
Some argue that private equity’s 3-7 year horizon encourages short-term thinking. But compare this to:
- Public company CEOs managing to quarterly earnings
- Activist investors demanding immediate returns
- Day traders and short sellers
Private equity’s multi-year horizon looks positively patient by comparison. The best firms make decisions that pay off over years, not months.
The Reality Check
Private equity isn’t magic. It’s not alchemy. It’s a business model that works when executed well and fails when executed poorly.
The industry creates real value:
- Turning around underperforming businesses
- Providing capital for growth and expansion
- Professionalizing management and operations
- Enabling entrepreneurship through exits
It also has real failures. Companies go bankrupt. Jobs are lost. Returns disappoint.
The Verdict
Private equity isn’t inherently good or evil—it’s a tool. In skilled hands, it builds great businesses. In unskilled or greedy hands, it destroys them.
The key is alignment: when the PE firm’s incentives align with the company’s long-term success, everyone wins. When incentives are misaligned—when quick exits matter more than sustainable value—problems arise.
So is it magic or a con? Neither. It’s business—active, involved, ownership-based business. Done right, it creates value that passive investment can’t match. Done wrong, it deserves the criticism it receives.
The difference isn’t in the model. It’s in the execution.
Related
Explore more: PE Returns Are Misleading for a deeper look at how returns are calculated and sometimes misunderstood.