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Private equity ghouls have a new way to steal from their investors

Private equity is quite a racket. PE managers pile up other peoples’ money — pension funds, plutes, other pools of money — and then “invest” it (buying businesses, loading them with debt, cutting wages, lowering quality and setting traps for customers). For this, they get an annual fee — 2% — of the money they manage, and a bonus for any profits they make.

On top of this, private equity bosses get to use the carried interest tax loophole, a scam that lets them treat this ordinary income as a capital gain, so they can pay half the taxes that a working stiff would pay on a regular salary. If you don’t know much about carried interest, you might think it has to do with “interest” on a loan or a deposit, but it’s way weirder. “Carried interest” is a tax regime designed for 16th century sea captains and their “interest” in the cargo they “carried”:

https://pluralistic.net/2021/04/29/writers-must-be-paid/#carried-interest

Private equity is a cancer. Its profits come from buying productive firms, loading them with debt, abusing their suppliers, workers and customers, and driving them into ground, stiffing all of them — and the company’s creditors. The mafia have a name for this. They call it a “bust out”:

https://pluralistic.net/2023/06/02/plunderers/#farben

Private equity destroyed Toys R Us, Sears, Bed, Bath and Beyond, and many more companies beloved of Main Street, bled dry for Wall Street:

https://prospect.org/culture/books/2023-06-02-days-of-plunder-morgenson-rosner-ballou-review/

And they’re coming for more. PE funds are “rolling up” thousands of Boomer-owned business as their owners retire. There’s a good chance that every funeral home, pet groomer and urgent care clinic within an hour’s drive of you is owned by a single PE firm. There’s 2.9m more Boomer-owned businesses going up for sale in the coming years, with 32m employees, and PE is set to buy ’em all:

https://pluralistic.net/2022/12/16/schumpeterian-terrorism/#deliberately-broken

PE funds get their money from “institutional investors.” It shouldn’t surprise you to learn they treat their investors no better than their creditors, nor the customers, employees or suppliers of the businesses they buy.

Pension funds, in particular, are the perennial suckers at the poker table. My parent’s pension fund, the Ontario Teachers’ Fund, are every grifter’s favorite patsy, losing $90m to Sam Bankman-Fried’s cryptocurrency scam:

https://www.otpp.com/en-ca/about-us/news-and-insights/2022/ontario-teachers--statement-on-ftx/

Pension funds are neck-deep in private equity, paying steep fees for shitty returns. Imagine knowing that the reason you can’t afford your apartment anymore is your pension fund gambled with the private equity firm that bought your building and jacked up the rent — and still lost money:

https://pluralistic.net/2020/02/25/pluralistic-your-daily-link-dose-25-feb-2020/

But there’s no depth too low for PE looters to sink to. They’ve found an exciting new way to steal from their investors, a scam called a “continuation fund.” Writing in his latest newsletter, the great Matt Levine breaks it down:

https://news.bloomberglaw.com/mergers-and-acquisitions/matt-levines-money-stuff-buyout-funds-buy-from-themselves

Here’s the deal: say you’re a PE guy who’s raised a $1b fund. That entitles you to a 2% annual “carry” on the fund: $20,000,000/year. But you’ve managed to buy and asset strip so many productive businesses that it’s now worth $5b. Your carry doesn’t go up fivefold. You could sell the company and collect your 20% commission — $800m — but you stop collecting that annual carry.

But what if you do both? Here’s how: you create a “continuation fund” — a fund that buys your old fund’s portfolio. Now you’ve got $5b under management and your carry quintuples, to $100m/year. Levine dryly notes that the FT calls this “a controversial type of transaction”:

https://www.ft.com/content/11549c33-b97d-468b-8990-e6fd64294f85

These deals “look like a pyramid scheme” — one fund flips its assets to another fund, with the same manager running both funds. It’s a way to make the pie bigger, but to decrease the share (in both real and proportional terms) going to the pension funds and other institutional investors who backed the fund.

A PE boss is supposed to be a fiduciary, with a legal requirement to do what’s best for their investors. But when the same PE manager is the buyer and the seller, and when the sale takes place without inviting any outside bidders, how can they possibly resolve their conflict of interest?

They can’t: 42% of continuation fund deals involve a sale at a value lower than the one that the PE fund told their investors the assets were worth. Now, this may sound weird — if a PE boss wants to set a high initial value for their fund in order to maximize their carry, why would they sell its assets to the new fund at a discount?

Here’s Levine’s theory: if you’re a PE guy going back to your investors for money to put in a new fund, you’re more likely to succeed if you can show that their getting a bargain. So you raise $1b, build it up to $5b, and then tell your investors they can buy the new fund for only $3b. Sure, they can get out — and lose big. Or they can take the deal, get the new fund at a 40% discount — and the PE boss gets $60m/year for the next ten years, instead of the $20m they were getting before the continuation fund deal.

PE is devouring the productive economy and making the world’s richest people even richer. The one bright light? The FTC and DoJ Antitrust Division just published new merger guidelines that would make the PE acquire/debt-load/asset-strip model illegal:

https://www.ftc.gov/news-events/news/press-releases/2023/07/ftc-doj-seek-comment-draft-merger-guidelines

The bad news is that some sneaky fuck just slipped a 20% FTC budget cut — $50m/year — into the new appropriations bill:

https://twitter.com/matthewstoller/status/1681830706488438785

They’re scared, and they’re fighting dirty.

I’m at San Diego Comic-Con!

Today (Jul 20) 16h: Signing, Tor Books booth #2802 (free advance copies of The Lost Cause — Nov 2023 — to the first 50 people!)

Tomorrow (Jul 21):

1030h: Wish They All Could be CA MCs, room 24ABC (panel)

12h: Signing, AA09

Sat, Jul 22 15h: The Worlds We Return To, room 23ABC (panel)

If you’d like an essay-formatted version of this post to read or share, here’s a link to it on pluralistic.net, my surveillance-free, ad-free, tracker-free blog:

https://pluralistic.net/2023/07/20/continuation-fraud/#buyout-groups

[Image ID: An old Punch editorial cartoon depicting a bank-robber sticking up a group of businesspeople and workers. He wears a bandanna emblazoned with dollar-signs and a top-hat.]

[threebooksoneplot]

Episode 26 - "Not Sponsored by BetterHelp" (Show Notes)

listen along here

General content warning for this entire season: there will be discussion of suicide! It's a major theme/allusion/plot point in New Moon. There will also be dark humor about suicide.

[00:06:19] Stephenie Meyer's “the story behind the writing of New Moon” blog post

[00:08:51] A Reddit AMA from the person who read Forever Dawn, plus a recent article about the overturning of the law that requires 2 copies of a work to be deposited at the Library of Congress

[00:14:20] Listen to Episode 0 here!

[00:14:45] The BYU symposium Q&A where Stephenie Meyer discusses her "method-writing" Bella's grief by imagining she had lost a child (a fascinating read. There's other buckwild stuff in here)

[00:19:01] Listen to Episode 6 here!

[00:19:16] A video from last fall of the new Quileute tribal school!! Consider donating to the next phase of the Move to Higher Ground project if you're able

[00:24:19]

[00:25:02] The New Moon movie tie-in covers:

[00:25:07] Winni (our Episode 6 guest) having a Moment on a trip to 2nd & Charles with G

[00:26:10] The original (left) and horrid new (right) versions of the actual New Moon cover. Bonus: it's an Estella Rijnveld Tulip!

[00:26:15] Stephenie Meyer's New Moon FAQ discussing the tulip cover

[00:36:10] Vote for your favorite Euphoria and Something title variation in this poll (through 9/20/23!)

[00:37:50] Cousin Oskaar from Iceland

[00:40:58] G’s and Shannon’s “sad green plant” cover image ideas for Euphoria and Something

[00:41:06] Some “same tulip but green” cover image ideas

[00:41:36] Shannon’s "colorblind-filtered tulip" cover

[00:43:06] Some “head of cabbage” cover image ideas

[00:43:31] Some “overripe banana” cover image ideas

[00:44:05] Shannon's "little red vial of poison" cover image idea

[00:44:45] G’s “frosted autumn leaf/frozen branch” cover image ideas

[00:46:22] Shannon's "cows" quote comes from Nona the Ninth, the third book in one of hers and G's favorite series, the Locked Tomb books by Tamsyn Muir

[00:46:45] G is thinking of this Beau Swan moodboard/edit

[00:47:00] The Count of Monte Cristo by Alexandre Dumas

[00:47:59] Vote in the Euphoria and Something epigraph poll (through 9/20/23)

[00:49:57] Manfred by Lord Byron (the phrase G is looking for is “closet drama” lol)

[00:50:36] Vote in the Dark Noon epigraph poll (through 9/20/23)

[00:54:22] Guest of the week Nicole is called!

[00:56:40] “Tumblarity”

[00:59:19] The Fanlore entry for Superwholock

[00:59:59] Nicole’s viral Lilo and Stitch/Destiel post

[01:05:16] Shannon (left) and G (right) on their cannibalism-themed girls’ trip

[01:05:42] One of Shannon’s many, many tiktoks asking Smeyer for the Cullens' birthdays (feat. G and Rae [Episode 12])

[1:06:39] Olivia Rodrigo's music video for "Vampire" vs this 2008 RPattz & KStew photoshoot by Jeff Riedel for Entertainment Weekly

[01:12:55] Shannon’s Euphoria and Something summary

What do you mean Beau became a vampire and Life and Death ended differently? No it didn’t. Right now he’s unfortunately able to relate to trash song Seventeen Forever by Metro Station, because he too is constantly trying to fuck this seventeen year old girl. Fuck you Trace Cyrus! Anyways, Not Like Other Boys Beau doesn’t want to be 18, doesn’t want a birthday party, and super doesn’t want to hear about how his vampire girlfriend, Edythe, wishes she could kill herself! Too bad, so sad Beau. Welcome to the start of book two, where we finally give you a REAL reason for being scared shitless of Jessamine, and all the foreshadowing in this chapter will surely come back to bite you in the ass; one thing you WISH one of these vampires would do already. Hold on tight, king, things are about to get Worse.

[01:23:34] Livejournal user @ twilight-sucks' rant on “liquid topaz eyes”

[01:28:51] With a birthday gift on my birthday

[01:29:36] Wanna watch Romeo + Juliet with us this weekend? Info (and Discord link) here!

[01:31:57] Wack vs tight as fuck

[01:33:10] Yzma

[01:33:35]

actually kind of slaps I would totally wear this

[01:35:31] Alice, probably

[01:50:05]

[02:02:21] Rabid Birthday Jasper as depicted in the first New Moon graphic novel by Young Kim

[02:02:45] Some Snickers commercials

[02:22:30] Our alternate cover contest is open through 10/09/23! Check out the details and how to enter here.

[02:23:27] That Euphoria and Something title poll once again

Welcome back to show notes, gang!! We'll be keeping up with this season's notes even as we work our way through posting the backlog of unfinished ones for last season.

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