I added a new, longer-than-normal entry to the glossary that I publish in association with this blog yesterday. The entry is on private equity, which is such a deeply inequitable and dangerous feature of the modern neoliberal economy, as I explain as follows:

Private equity is a form of investment in which funds, typically controlled by specialist financial firms, buy ownership stakes in companies that are not publicly traded, or take publicly listed companies private.

It is often presented as a source of entrepreneurial dynamism, managerial expertise and long-term investment. In reality, much private equity activity is better understood as a mechanism for financial extraction.

That does not mean every private equity investment is harmful. Some firms do provide patient capital to growing businesses. But the dominant model in many markets, particularly in the UK and US, has become closely associated with financial engineering, debt loading and short-term extraction.

Private equity is therefore best understood as a product of financialised capitalism.

Its key features include the following.

First, leveraged buyouts.

The classic private equity model involves borrowing heavily to buy a company. The acquired company is then often required to carry the debt used to purchase it. The debt-to-equity ratio is often at least 4:1.

This is the defining absurdity of much private equity activity: a company can be bought using borrowed money, and then be left responsible for repaying debt it did not choose to incur.

The result is often:

• Reduced resilience

• Pressure for rapid cash extraction

• Lower investment

• Increased bankruptcy risk

The company becomes a financial instrument rather than a productive enterprise.

The collapse of Toys “R” Us is often cited as an example of this model in practice.

Second, asset stripping.

Private equity firms frequently extract value by selling property, intellectual property, subsidiaries or pension assets owned by acquired companies.

A common strategy is a sale-and-leaseback arrangement, in which a company sells its property assets and rents them back, generating short-term cash but imposing long-term costs.

This often weakens the productive core of businesses.

Third, fee extraction.

Private equity firms frequently charge substantial fees for matters such as:

• Acquisition fees

• Advisory fees

• Management fees

• Refinancing fees

• Exit fees

These fees are often paid regardless of whether the acquired company performs well.

The investors win first.

Others bear the risk later.

Fourth, short-term exit strategies.

Private equity funds typically aim to sell companies within a relatively short period, typically 3 to 7 years.

This encourages behaviour designed to maximise resale value rather than long-term productivity, meaning the following are prioritised:

• Workforce reductions

• Underinvestment

• Financial engineering within accounting

• Aggressive cost-cutting

Long-term stewardship is rarely the priority.

Fifth, tax advantages.

Private equity frequently benefits from highly favourable tax treatment.

Interest on debt incurred to buy a company is often tax-deductible.

Carried interest income of private equity partners who arrange these deals has often been taxed more favourably than employment income.

Complex international structures can reduce effective tax rates.

This is state-enabled financial extraction.

Sixth, opacity.

Private equity operates with far less transparency than public companies.

Disclosure requirements are weaker.

Ownership structures are often complex.

Workers, suppliers, pensioners and even regulators may struggle to understand who controls a business and why decisions are being made.

Seventh, expansion into essential services.

This is where private equity becomes especially dangerous. Private equity has increasingly moved into:

• Care homes

• Health care

• Veterinary services

• Housing

• Essential infrastructure

• Education

These sectors depend on long-term trust, stable staffing and patient investment.

Private equity frequently imposes the opposite incentives.

The collapse of Southern Cross Healthcare remains a warning of what happens when financial engineering is applied to care.

From a Funding the Future perspective

Private equity represents the triumph of extraction over production. It often creates the illusion of wealth creation because transactions generate fees, asset price gains and accounting profits, but much of this “value” reflects:

• Increased debt

• Reduced resilience

• Weakened labour conditions

• Lower long-term investment

• Higher systemic risk

In accounting terms, private equity often resembles the failure to maintain capital whilst pretending profits have been earned.

It consumes future resilience for present gain.

That is not an investment. It might properly be called liquidation by instalment, or, as the process was once called, asset stripping.

There is a role for genuine long-term private investment in productive enterprise, but that requires:

• Stronger tax reform

• Tighter regulation

• Limits on excessive leverage

• Worker protections

• Pension protection

• Much greater transparency

And in essential services, there is a strong case for private equity to be absent altogether. Care, housing, health and critical infrastructure should not be treated as chips in a casino.

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