Private Equity Can Ruin Firms —and Still Profit

Mitt Romney's opponents have slapped Bain Capital over layoffs, but private equity actually has little overall effect on job numbers. Instead, the crimes of such companies are centered on the way they make money, writes James Surowiecki in the New Yorker. What we should be concerned about is the companies' "financial gimmicks" that score profits "not from management or investing skills but, rather, from the way the US tax system works." At the heart of the problem are the "special dividends" that such firms have taken on in recent years.

The firms have recently-purchased companies borrow extra money; that money is used to pay the private-equity fund. "These dividends created no economic value—they just redistributed money from the company to the private-equity investors," Surowiecki notes. Then, if the company goes under, the fund has still made money. What's more, "taxpayers are left on the hook": Government cash can help protect the private-equity funds if their companies struggle, and money that flows to the fund is taxed as capital gains, not income. Click through for the full piece. (More private equity stories.)