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Too Big to Fail, COVID-19 Edition: How Private Equity Is Winning the Coronavirus Crisis

GRAPHIC: Vanity Fair/Getty

Private equity has made multibillionaires of executives like Blackstone’s Steve Schwarzman (net worth: $17.5 billion) and Apollo’s Leon Black ($7.5 billion). Thanks to the $2 trillion bipartisan bailout bill, the industry’s coronavirus losses will belong to all of us.

By Bethany McLean | 9 April 2020

VANITY FAIR — Ever since Congress voted to hand out $2 trillion in taxpayer money to those hardest hit by the coronavirus pandemic, American businesses have been scrambling for a piece of the action. Airlines, hotels, and restaurants—all of whose revenues have cratered in the wake of sweeping stay-home orders—have engaged in Hunger Games–like lobbying to cash in on the CARES Act, making their case for a share of the disaster relief. But among those angling for a federal handout is one of the wealthiest sectors of the American economy: private equity. These firms not only have a record $1.5 trillion in cash on the sidelines, waiting to be invested, but their CEOs are among America’s richest executives. So why should they be permitted to raid the federal Treasury in a time of crisis?

The reason is as simple as it is galling: while great private fortunes, such as that of Blackstone’s Stephen Schwarzman (net worth: $17.5 billion and Apollo’s Leon Black ($7.5 billion), have been made from private equity’s march through the world, its losses, to a remarkable degree, will belong to all of us. That’s because some of the major investors in private-equity funds are public pension plans; at Blackstone, roughly one-third of the firm’s money comes from retirement plans set up to provide for over 30 million working-class Americans, according to someone with knowledge of its portfolio. So if Blackstone’s investments crater, the teachers, firefighters, and health care workers who are counting on those investments to generate the returns necessary to pay their pensions will suffer. Think of private-equity firms as the banks of the corona crisis: They are, for better or worse, too big to fail.

Private equity, of course, came of age in the 1980s, when greed was good and private-equity titans like KKR’s Henry Kravis first burst into the limelight by taking over famed American manufacturers like RJR Nabisco. Unlike venture capitalists, who provide start-up funds to new companies, private-equity firms generally take over existing businesses, usually by borrowing large sums of money. According to Dan Rasmussen, the founder of Verdad Advisers, private-equity firms typically double the amount of debt relative to profits on a company’s balance sheet. One of the key principles behind private equity is that increased leverage—aka more debt—can make a business function more efficiently.

So the era of low interest rates, which began with former Federal Reserve chairman Alan Greenspan and continues to this day, has been a huge boon to private-equity firms. Infuriatingly enough, the financial crisis in 2008 might even have saved private-equity firms from their sins. Never mind that they often overpaid for the companies they acquired, and loaded them up with so much debt that “even a mild economic downturn could make it nearly impossible for those companies to repay their loans,” as Fortune put it. Thanks to all the cheap money made available by the Fed, companies owned by private-equity firms could simply refinance their debts at lower rates, thereby getting a fresh lease on life. […]

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