Do private equities constitute a risk for US economy?

With a focus on short-term profits from highly leveraged transactions with little regulatory or public scrutiny, private equity has grown to be a multitrillion dollar industry. Because of this secrecy, companies can behave carelessly and are harder to prosecute.

For example, the amount of private equity invested in nursing homes has increased from $5 billion to over $100 billion as a result of the industry’s realization that cutting staff and increasing the use of psychoactive medications can increase profit margins.

Private equity has made one-fifth of the US stock market’s publicly traded companies virtually invisible to investors, the media, and regulators.

When a private-equity fund buys a publicly traded company, it takes the company private, giving the fund total control and potentially boosting profits.

However, going private can have more troubling consequences, as public companies are required to disclose information about their finances, operations, business risks, and legal liabilities. In 2000, private-equity firms managed about 4% of total U.S. corporate equity. By 2021, that number was closer to 20%.

This has led to a private economy where companies can easily get away with wrongdoing and an economic crisis can surprise everyone.

The pandemic death count focused attention on the industry, leading to policy makers and regulators taking action. However, much of the damage had been done by then. If there had been some form of disclosure, policymakers and regulators would have taken action sooner.

The US economy faced challenges before the Great Depression, with corporations raising unlimited funds without considering IPOs, leading to a decline in public companies from 1980 to 2000 and 2001 to 2022.