Termite Capitalism

Why does this matter? The problem is that the private equity model of takeover and ownership is akin to inviting termites into your house. The basic model is as follows: private equity acquires a company using loans, usually from banks but also increasingly from pension funds, insurance companies, sovereign wealth funds etc. The old management is replaced, the workforce cut, and assets such as land and buildings are sold, often to an entity registered in an offshore tax haven. The new company must pay interest on the debt, repay the debt over time, pay rent for the premises, management fees to the private equity owners.

Costs will also include payment to linked third-party suppliers, at prices which are not arm’s length. The taxable capacity of the new company is thereby reduced, and tax liabilities are shifted towards capital gains tax away from corporation tax. The company can only be financially viable in a booming market or where revenue streams continue to rise.

In general, private equity does not actually create anything – it engages instead in extracting resources from previously existing assets. Eventually, by excessive extraction of revenue flows, the companies are bound to fail. The termites eat away at the foundations until the house falls down.

Sheila Smith, Termite Capitalism: how private equity is undermining the economy

A very apt metaphor, alas. It is frankly insane that governments and financial institutions not only tolerate these parasites but encourage them.