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Can Writers Guild Members Rewrite Private Equity’s Greedy Script?

Summary:
It’s widely understood that private equity firms make money for themselves and their investors by loading the companies they buy with debt, selling off assets, and gaming the tax system. But, there is another, less well-known way that private equity enriches itself when it takes over a traditional company. While relations between management and labor ...

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It’s widely understood that private equity firms make money for themselves and their investors by loading the companies they buy with debt, selling off assets, and gaming the tax system. But, there is another, less well-known way that private equity enriches itself when it takes over a traditional company.

While relations between management and labor in traditionally managed companies are generally built on low-trust and an acknowledged divergence of interests, managers have needed to build minimum levels of trust and reciprocity to ensure the ongoing commitment of those who actually produce the company’s products to the survival and success of the business. Managers have used earnings generated by company operations to pursue strategies aimed at inducing a diverse group of stakeholders to contribute to the enterprise.

Private equity owners have no such commitment to the long-term success of the companies they acquire. Their commitment is to making returns for themselves and their investors that exceed normal market returns by 15 to 20 percent. Managerial strategies to enhance performance and assure the company’s future are viewed as reducing profits. They see defaulting on these implicit contracts that govern relationships between management and other stakeholders as a quick way to increase the returns to the company’s owners.

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