Monopolistic Power and Strategic Secrecy?: The Problem with Private Equity Law

By Kristina Madrazo

Private equity law thrives on pocketing huge sums and investing in private, non-publicly listed yet already-established companies in the stock market. These investments include limited partnership agreements, aggressive debt use, and due diligence. While venture capital firms invest in startups and early-stage businesses, private equity investors target more mature companies and acquire majority control. The problem, however, is that buying companies out to get a high percentage of ownership often means gaining monopolistic power through “strategic” tactics.

When undervalued businesses don’t seem to actualize their potential—due to neglect, unsuitable targets, or legal constraints—private equity firms apply the “buy-to-sell” strategy and seek a broader network of industry partners and potential clients (Felix Barber & Michael Goold, The Strategic Secret of Private Equity, Harvard Business Review, 2007). However, companies bought by private equity firms are more likely to end in bankruptcy, higher job losses, and bigger pay cuts.

Because investments are in non-publicly listed businesses, private equity firms are often shielded from liability. They are protected by favored tax benefits while accumulating disproportionate gains when their buy-to-sell strategies succeed (Brendan Ballou, Private Equity Is Gutting America—and Getting Away With It, The New York Times, 2023).

Despite the power of private equity firms, ordinary businesses can also start a call for action. Congress can mobilize and hold these firms responsible by stressing that firms can be taken against legal action for the wrongs committed by the companies they control and own. Building a fairer economy, after all, greatly involves holding firms that buy, own, and manage smaller companies liable.