A new book by a Pulitzer Prize winner unsuccessfully tries to take down the private equity industry and fixates on Leon Black. Here's what it gets wrong.

The economic and political influence of the private equity sector has exploded in the last 20 years.

The total assets under private equity management globally now exceeds $10 trillion. In 2002, 13 new funds larger than $1 billion were raised to scout for deals, and none were as big as $10 billion. In 2022, and every year for the last five, over 100 hundred new such funds were raised — and more than 50 of these recent funds are greater than $10 billion in size.

The latest journalist to take a stab at examining the impact of the sector is Gretchen Morgenson, who won a Pulitzer Prize at The New York Times over 20 years ago for her Wall Street coverage. The dramatic conclusions of Morgenson and her co-author Joshua Rosner, a managing partner at Graham Fisher, are on full display in the salacious title of their new book: "These Are the Plunderers: How Private Equity Runs — and Wrecks — America."

Cherry-picked data and an incoherent narrative

The biggest problem with the authors' full-throated attack on the sector is that the overarching narrative into which they try to stuff the facts is, well, incoherent.  

According to the authors, private equity firms "buy companies and load them with debt while bleeding them of assets and profits," only to, within a few years, "sell these same companies off to new owners … at a substantial gain." 

On its face, the idea that one could regularly flip unprofitable businesses drained of productive  assets for spectacular gains just doesn't make sense. Sure, you could find a few anecdotes in which an aggressive private equity firm successfully foisted an overleveraged company it had subjected to excessive cost-cutting onto an unsuspecting buyer.  But is this credible as a strategy for deploying trillions of dollars of capital? No way. 

"Plunderers" says its sweeping claims are supported by "decades of data" that provide unambiguous proof. It's true that few topics have attracted greater attention from not only crusading journalists but serious academics than the impact of private equity ownership. But the authors' cherry-picking of research papers, combined with their use of demonstrably false statements without any attribution, renders their purported reliance on data laughable.

For instance, they assert that "the pirates typically put down a single-digit percentage of the purchase price when they buy a company." This supports their belief that private equity firms "carry very little risk if the company fails."  This view of a "typical" private equity deal is simply untrue: Even back in 2005, the average loan-to-value percentage for new private equity deals was 68% — firms already contributed over 30% in equity to the deals not under 10% as claimed. By 2020, the equity component approached 50%.

Similarly, the writers repeatedly make the claim that 20% of PE-backed deals go bankrupt within 10 years, based on a single paper in a field journal that examined a small sample of old deals as small as $50 million. Following a recurring pattern in "Plunderers," contradictory research published by the leading economists in top journals is not referenced. 

The authors' peculiar obsession with Leon Black

One of the important developments in private equity of the last decades has been the emergence of major private funds focused on technology investing. These were once largely the exclusive province of venture capital or small so-called "growth" funds. 

Growth funds, as their name suggests, typically generate their returns by investing in long-term growth, often at the expense of short-term profitability. This has resulted in many billion-dollar buyouts without any debt at all, like Francisco Partners' recent $1.7 billion acquisition of Sumo Logic, which in part explains the overall decline in leverage of PE-backed deals.

This would all come as news to a reader of "Plunderers."

The authors' focus on a dated conception of the sector is paired with a peculiar obsession with Leon Black, the founder and one-time leader of Apollo. The first third of the book is overwhelmingly devoted to all things Black — his father's suicide, his years working at Drexel Burnham alongside junk bond king Michael Milken, the Epstein scandal, the Russian mistress, his resignation from Apollo and subsequent litigation with former partners. And more than any of those mostly irrelevant asides, "Plunderers" digs deep into the first major transaction that made Apollo as a firm: the 1991 acquisition of the insurer Executive Life.

Executive Life had invested in many Drexel junk bonds. When the firm came under distress, Black used his unique knowledge of the underlying credits to quickly craft a phenomenally profitable deal for his firm. But for all the ink spilled in the book on this ancient transaction, the takeaway is no different than the headline from a 1994 Forbes cover article that the book cites: "Smart Buyer, Dumb Seller."

Last year, another equally unconvincing Leon Black-obsessed book — "Two and Twenty," by a former Apollo partner — reached the exact opposite conclusions as "Plunderers": namely that private equity's growth is an unambiguous boon to society, and that the practitioners' financial success is fully justified by their almost supernatural powers.

There are plenty of legitimate issues with private equity highlighted by "Plunderers": the fees charged, the transparency provided, the tax policies applied and the impact on wealth inequality, for instance. The authors' focus on bad behavior in sectors like healthcare, where unrestrained capitalism is not in society's best interest, is a reminder of both the importance of government oversight and the unintended consequences of well-meaning regulation. But even here, the case studies often do not prove that the problem is private equity: Purdue Pharma was family-owned, not a PE-owned business after all.

A fresh look at private equity is called for, but this book isn't it 

With 7 percent of our labor force now working for private equity-owned businesses, there's no question that a fresh look is needed. The policy recommendations proposed by the authors, however, often seem disconnected from the particular problems identified.

The antitrust laws, for instance, seem ill-suited to correct these excesses. And the authors' embrace of the rise of the populist right along with the suggestion that some kind of deep state at the SEC is thwarting the will of the progressive commissioners is less than convincing. 

Hopefully someone without a Leon Black obsession, or any other agenda, will re-examine those "decades of data" and offer a balanced approach to the mix of opportunities and dangers posed by the dramatic growth of private equity.

Jonathan A. Knee is a professor of professional practice at Columbia Business School and a senior advisor at Evercore. His most recent book is "The Platform Delusion: Who Wins and Who Loses in the Age of Tech Titans."