The Coming Private Equity Default Crisis

private equity

There’s a book out called “The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis” and before you derisively sneer at what at first sounds like hysterical hyperbole in the subtitle, consider this bit of logic from Josh Kosman writing in today’s New York Post:

“You better sit down,” the secretary says. “I’ve got bad news…”

The Treasury Secretary is talking about private equity. It’s not the private equity firms themselves but the companies they own that are defaulting. During the boom years of 2001-07, private investors bought thousands of US companies. They did it by having the acquired companies take on enormous loans using the same cheap credit that fueled the housing boom. That debt is now starting to come due.

“Considering what we have already been through, how bad can it be?” Obama asks.

Now here’s where things get interesting.  In the hypothetical scenario, the writer does not for a minute think that the private equity firms themselves are in trouble (or perhaps he is simply dismissing the importance of them in the equation).  Rather, the crisis he is about to allude to concerns the underlying companies owned by these funds, and there are thousands of them:

“Well,” says the Treasury Secretary, “PE firms own companies that employ 7.5 million Americans. Half of those companies, with 3.75 million workers, will collapse, between 2012 and 2015. Assuming that those businesses file for bankruptcy and fire only 50 percent of their workers, that leaves 1.875 million out of jobs.

“To put that in perspective, Mr. President, NAFTA caused the displacement of fewer than 1 million workers, and only a slightly higher 2.6 million people lost jobs in 2008 when the recession took hold.

“A spike in unemployment will mean more people will lose their homes in foreclosure, and the resulting nosedive in consumer spending will threaten other businesses. The bankruptcies will also hit the banks that have financed LBOs and the hedge funds, pensions and insurers who have bought many of those loans from them.”

“Is this bigger than the sub-prime crisis?”

“It is similar in size to the sub-prime meltdown. In 2007, there were $1.3 trillion of outstanding sub-prime mortgages. As a result of leveraged buyouts, US companies owe about $1 trillion.

You’re probably not laughing now.  I personally did not have a handle on just how big the world of private equity had gotten but now I’ve got about trillion reasons to look into this stuff.

Do yourself a favor and head over to the Post to read the rest:

The Next Bubble  (NYP)

Tags: , ,

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here:

Please see disclosures here.

What's been said:

Discussions found on the web
  1. | Money Supply | FT economic news digest commented on Nov 17

    […] commercial real estate, the next shoe to drop is private equity. Apparently, private equity firms themselves are not the problem, it’s the companies they own, […]

  2. sex commented on Sep 18

    … [Trackback]

    […] Find More here to that Topic: […]

  3. thenaturalpenguin commented on Sep 24

    … [Trackback]

    […] Information on that Topic: […]

  4. Bitcoin Era Review commented on Sep 28

    … [Trackback]

    […] Find More on to that Topic: […]

  5. bitcoin evolution reviews 2020 commented on Sep 30

    … [Trackback]

    […] Find More on on that Topic: […]

  6. Cannabis Oil for Sale commented on Oct 13

    … [Trackback]

    […] Information to that Topic: […]

  7. 메이저놀이터 commented on Oct 16

    … [Trackback]

    […] Find More Information here to that Topic: […]

  8. 먹튀검증하는법 commented on Nov 07

    … [Trackback]

    […] Info to that Topic: […]

  9. track with pin commented on Nov 20

    … [Trackback]

    […] Read More Information here to that Topic: […]

  10. digital transformation consultants commented on Nov 27

    … [Trackback]

    […] Information to that Topic: […]

  11. scotia online commented on Nov 27

    … [Trackback]

    […] Here you will find 42640 additional Information to that Topic: […]

  12. 사설토토 commented on Dec 13

    … [Trackback]

    […] Read More Info here on that Topic: […]

  13. smush pro commented on Dec 19

    … [Trackback]

    […] Read More on on that Topic: […]

  14. DevOps Company commented on Feb 04

    … [Trackback]

    […] Read More on to that Topic: […]

  15. codeless e2e testing commented on Feb 07

    … [Trackback]

    […] Info on that Topic: […]