If you'd like an essay-formatted version of this thread 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

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On top of this, private equity bosses get to use the #CarriedInterest 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.

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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

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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 "#BustOut":

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

Private equity destroyed #ToysRUs, #Sears, #BedBathAndBeyond, 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/

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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

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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 #OntarioTeachersFund, are every grifter's favorite patsy, losing $90m to #SamBankmanFried's cryptocurrency scam:

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

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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 "#ContinuationFund."

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Writing in his latest newsletter, the great #MattLevine 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.

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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 *#FinancialTimes* calls this "a controversial type of transaction":

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

These deals "look like a #PyramidScheme" - one fund flips its assets to another fund, with the same manager running both funds.

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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?

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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?

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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.

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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 #AntitrustDivision 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

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