Private equity continues to back entrepreneurs, fuel economic growth, and drive innovation across the U.S. economy
- Public to private deals are a miniscule fraction of private equity transactions, comprising just 1.5% of all private equity transactions from 2012 to 2022, per PitchBook data.
- Private equity is a regulated industry that injects vital capital into the U.S. economy ($1.7 trillion in U.S. GDP in 2022) to support commercial enterprise and American workers alike through booms and busts.
- Spreading myths about private equity’s investments and performance won’t change the truth: across the U.S. economy, private equity is improving outcomes and securing futures for American workers, retirees, and seniors.
A recent Atlantic opinion piece lobs quick-hit, unsubstantiated criticisms at private equity – ignoring its proven track record in creating opportunity and delivering positive outcomes for businesses and citizens across the country. Adding insult to injury, the piece was paid for by a progressive foundation that has ironically devoted considerable resources towards “mitigat[ing] misinformation” in media in recent years.
Let’s debunk a few of the piece’s tired, bought-and-paid-for myths:
MYTH #1: Public companies are “disappearing,” and private equity is to blame.
FACT: Public to private deals comprise a miniscule fraction of all private equity transactions, and number of market factors are driving a decline in U.S. public listings.
For starters, attempting to pin a market-wide trend of declining public listings on private equity greatly overemphasizes private equity’s buyouts of public companies. According to PitchBook data, public to private deals (933) accounted for just 1.5% of all private equity transactions (62,451) from 2012 to 2022.
The piece also ignores very real market trends researchers have indicated are driving a decline U.S. public listings. The average age and size of listed firms has grown “substantially” since the 1990s; in the technology sector, for example, average company age at IPO grew by 175% from 1999 to 2014.
Further, publicly traded companies’ value still dramatically exceeds that of U.S. private equity – demonstrating the assertion that the United States is on a path towards a “completely opaque economy” dominated by private equity is simply unsubstantiated scaremongering. According to Morgan Stanley, for example, the U.S. stock market’s equity capitalization is nearly 30 times the size of buyout funds’ assets under management (AUM). As another illustrative comparison, Federal Reserve estimates indicate U.S. public firms’ aggregate dollar value exceeds that of private equity-owned firms by nearly 500%.
Other findings flat-out disprove the claim that private equity is “devouring” public companies: research into the decline in U.S. public companies indicates an additional 100 mergers are associated with more “missing” listings than the same amount of private equity deals – not to mention regulatory changes also leading to fewer public listings.
MYTH #2: Private markets spurn wrongdoing and threaten economic stability.
FACT: Private markets give companies the freedom to develop tailored growth strategies.
Beyond deploying agenda-driven oversimplification, the piece adopts an unnecessarily alarmist – and unjustified – stance against private markets. There are plenty of valid reasons that companies are waiting longer to go public or choosing to avoid public markets entirely. Going public can bring substantial costs – as much as 40% of gross proceeds for small firms. Partnering with private equity is a path to alleviate these cost burdens, leading some firms to reduce IPO costs with special purpose acquisition companies (SPACs) or direct listings.
In cases where companies do choose to become or stay private, studies show that they have good reason to do so. Private equity firms have a proven track record of providing competitive financing opportunities to companies of all sizes, and studies show that private ownership tends to be better for business efficiency, particularly from a governance perspective. While public companies are vulnerable to “agency costs” – or misalignment between management and shareholders that can hurt company value – private ownership reduces informational barriers and improves alignment between “owners and managers” – allowing companies to clear short-term hurdles to pursue “long-term value creation.”
MYTH #3: Private equity’s burgeoning nursing home investments prioritize profits over patient care.
FACT: Private equity has a limited but impactful role in expanding quality care access for American seniors, particularly in rural communities.
While the piece’s author cites a study supposedly finding that private equity’s nursing home investments have grown from around $5 billion in 2000 to over $100 billion today, actually reading the study shows these numbers are meant to capture private equity’s investments in health care overall during this period. A material difference given that U.S. nursing home spending in 2021 reached $181.3 billion, a small fraction of the country’s total health care spend – $4.3 trillion.
It’s a worn-out scare tactic: uninformed critics often seek to dramatically overstate private equity’s strategic nursing home investments (less than 10% of all nursing home ownership). And in this case, the author’s conclusion isn’t just wrong – it’s nonsensical.
While such reporting – at the very least – misleads, it also ignores the ways that private equity helps bring high-quality, patient-centered care to American seniors across the country – especially as the nursing home industry copes with system-wide challenges laid bare during the pandemic amidst declining federal support. Research has found that, compared to counterparts, private equity-owned nursing homes 1) have no statistically significant differences in staffing levels or long-term patient care quality and 2) are more likely to be located rural communities – helping ensure no seniors in need of long-term care get left behind, no matter where they live.
Read more: Private Equity’s Strategic Investments Bring American Seniors Quality Care
MYTH #4: Private equity is exempt from regulatory requirements.
FACT: Private equity is a regulated, essential form of capital for U.S. small business across the economy.
In the United States, private investment is thoroughly regulated, and existing rules and regulations provide important safeguards for investors and the broader economy alike. Private equity is regulated by the U.S. Securities and Exchange Commission’s (SEC) implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act – an Obama-era regulatory framework that worked to aid financial system recovery and increase resilience following the Great Recession. For example, Dodd-Frank created the Treasury Department’s Financial Stability Oversight Council (FSOC) – which relies on SEC measures like Form PF to collect extensive information about private funds, monitor systemic risk, and deploy regulatory tools if necessary.
During this recovery period, private equity helped the American economy get back on its feet by providing businesses – especially small ones – with critical capital to grow, scale, and create jobs. In 2022 alone, for example, private equity generated $1.7 trillion in U.S. gross domestic product (GDP) and directly employed 12 million Americans – while the overwhelming majority (85%) of companies it backed had fewer than 500 employees.
Unfortunately, recent SEC moves to overregulate private investment stand to threaten this reality and impose unnecessary barriers on access to capital – especially for entrepreneurs just starting out. As Congressional Black Caucus Chair and House Committee on Financial Services Member Steven Horsford (D-NV) recently noted:
“We cannot achieve economic mobility and wealth and legacy and close the wealth gap if we have policy or regulations that are quelching our ability to do that, and in my view, the regulation in this case is a quelching effect on access to capital…[The SEC] may be thinking they’re going after this level of an industry, but meanwhile, they’re impacting the mom and pop in my district, the business in rural Nevada that’s just trying to get $100,000 to meet payroll, and a new startup that has a dream and an idea and an opportunity but can’t do it without access to capital.”
Read more: Private Equity Investment: Helping America’s Small Businesses Weather Any Storm
MYTH #5: Private equity’s investment returns don’t outperform the stock market.
FACT: Private equity consistently provides reliable returns that continually outpace those of index funds and public equities and help diversify portfolio risk.
While critics cherry-pick data to fit their uninformed narrative, private equity’s returns – and the confidence of public pension managers around the country – tell the true story. 93% of public pensions plan to increase their private equity allocations in coming years, as they yield strong returns for American pensioners and help diversify portfolio risk. According to a recent study from Cliffwater, over a 22-year period, state pensions’ private equity allocations produced returns that outpaced public stock investments by nearly double – meaningful gains that help secure retirements for American workers.
Take it from a public pension manager himself:
“We are very confident in the prospects for private equity investments in our long-term investment mix. Private equity opportunities far exceed those available in stock market investing for the foreseeable future and are a welcome addition to our portfolio diversification effort.”
– Brett Besselman, Chairman of the Board of Trustees, Houston Firefighters’ Relief and Retirement Fund
The bottom line
Critics may opt for regurgitated, unsupported claims against private equity – in the meantime, the industry will continue backing American entrepreneurship, innovation, and enterprise.
