Warren’s Private Equity Plan Has One Fatal Flaw

“I create nothing,” declared fictional financier Gordon Gekko in the 1987 movie "Wall Street." “I own.” In the movie, Gekko buys an airline, laying off workers who have put their whole lives into the company while stripping its assets. This sort of transaction, sometimes referred to pejoratively as looting, has become emblematic of the private-equity industry -- financiers win, workers lose and productive companies get rendered down for spare parts.

Fast forward to 2019, and private equity has become much more central to the U.S. economy than in the 1980s. As companies increasingly flee public stock markets, getting bought by a PE firm is a natural exit route. For investors, buyout firms are often seen as a way to earn outsized returns -- a 2014 paper by finance researchers Steven Kaplan and Berk Sensoy found that from 1990 through 2012, buyout funds tended to outperform the Standard & Poor's 500 by about 20% during the lifetime of a fund. In 2018, buyout funds raised more than $200 billion from investors.. So-called buyout megafunds, with assets of more than $5 billion, have become more common in recent years. Though PE deal value is still down from its pre-crisis peak, it is on the rise: