[Plura-list] Private equity ghouls have a new way to steal from their investors

Thu Jul 20 08:36:26 EDT 2023

Read today's issue online at: https://pluralistic.net/2023/07/20/continuation-fraud/

_,.-'~'-.,__,.-'~'-.,__,.-'~'-.,__,.-'~'-.,__,.-'~'-.,_

I'm at San Diego Comic-Con!

Today (Jul 20) 16h: Signing, Tor Books booth #2802 (free advance copies of *The Lost Cause* - Nov 2023 - to the first 50 people!)

Tomorrow (Jul 21)

	1030h: Wish They All Could be CA MCs, room 24ABC (panel)

	12h: Signing, AA09

Sat, Jul 22 15h: The Worlds We Return To, room 23ABC (panel)

_,.-'~'-.,__,.-'~'-.,__,.-'~'-.,__,.-'~'-.,__,.-'~'-.,_

Today's links

* Private equity ghouls have a new way to steal from their investors: Continuation funds are a multi-billion-dollar blackmail racket.

* Hey look at this: Delights to delectate.

* This day in history: 2008, 2013, 2018

* Colophon: Recent publications, upcoming/recent appearances, current writing projects, current reading

_,.-'~'-.,__,.-'~'-.,__,.-'~'-.,__,.-'~'-.,__,.-'~'-.,_

👴🏻 Private equity ghouls have a new way to steal from their investors

Private equity is *quite* a racket. PE managers pile up other peoples' money - pension funds, plutes, other pools of money - and then "invest" it (buying businesses, loading them with debt, cutting wages, lowering quality and setting traps for customers). For this, they get an annual fee - 2% - of the money they manage, and a bonus for any profits they make.

On top of this, private equity bosses get to use the carried interest tax loophole, a scam that lets them treat this ordinary income as a capital gain, so they can play half the taxes that a working stiff would pay on a regular salary. If you don't know much about carried interest, you might think it has to do with "interest" on a loan or a deposit, but it's *way* weirder. "Carried interest" is a tax regime designed for *16th century sea captains* and their "interest" in the cargo they "carried":

https://pluralistic.net/2021/04/29/writers-must-be-paid/#carried-interest

Private equity is a cancer. Its profits come from buying productive firms, loading them with debt, abusing their suppliers, workers and customers, and driving them into ground, stiffing all of them - and the company's creditors. The mafia have a name for this. They call it a "bust out":

https://pluralistic.net/2023/06/02/plunderers/#farben

Private equity destroyed Toys R Us, Sears, Bed, Bath and Beyond, and many more companies beloved of Main Street, bled dry for Wall Street:

https://prospect.org/culture/books/2023-06-02-days-of-plunder-morgenson-rosner-ballou-review/

And they're coming for more. PE funds are "rolling up" thousands of Boomer-owned business as their owners retire. There's a good chance that every funeral home, pet groomer and urgent care clinic within an hour's drive of you is owned by a single PE firm. There's 2.9m more Boomer-owned businesses going up for sale in the coming years, with 32m employees, and PE is set to buy 'em all:

https://pluralistic.net/2022/12/16/schumpeterian-terrorism/#deliberately-broken

PE funds get their money from "institutional investors." It shouldn't surprise you to learn they treat their investors no better than their creditors, nor the customers, employees or suppliers of the businesses they buy.

Pension funds, in particular, are the perennial suckers at the poker table. My parent's pension fund, the Ontario Teachers' Fund, are every grifter's favorite patsy, losing $90m to Sam Bankman-Fried's cryptocurrency scam:

https://www.otpp.com/en-ca/about-us/news-and-insights/2022/ontario-teachers--statement-on-ftx/

Pension funds are neck-deep in private equity, paying steep fees for shitty returns. Imagine knowing that the reason you can't afford your apartment anymore is your pension fund gambled with the private equity firm that bought your building and jacked up the rent - and *still* lost money:

https://pluralistic.net/2020/02/25/pluralistic-your-daily-link-dose-25-feb-2020/

But there's no depth too low for PE looters to sink to. They've found an exciting new way to steal from their investors, a scam called a "continuation fund." Writing in his latest newsletter, the great Matt Levine breaks it down:

https://news.bloomberglaw.com/mergers-and-acquisitions/matt-levines-money-stuff-buyout-funds-buy-from-themselves

Here's the deal: say you're a PE guy who's raised a $1b fund. That entitles you to a 2% annual "carry" on the fund: $20,000,000/year. But you've managed to buy and asset strip so many productive businesses that it's now worth $5b. Your carry doesn't go up fivefold. You could sell the company and collect your 20% commission - $800m - but you stop collecting that annual carry.

But what if you do *both*? Here's how: you create a "continuation fund" - a fund that buys your old fund's portfolio. Now you've got $5b under management and your carry quintuples, to $100m/year. Levine dryly notes that the FT calls this "a controversial type of transaction":

https://www.ft.com/content/11549c33-b97d-468b-8990-e6fd64294f85

These deals "look like a pyramid scheme" - one fund flips its assets to another fund, with the same manager running both funds. It's a way to make the pie bigger, but to decrease the share (in both real and proportional terms) going to the pension funds and other institutional investors who backed the fund.

A PE boss is supposed to be a fiduciary, with a legal requirement to do what's best for their investors. But when the same PE manager is the buyer *and* the seller, and when the sale takes place without inviting any outside bidders, how can they possibly resolve their conflict of interest?

They can't: 42% of continuation fund deals involve a sale at a value lower than the one that the PE fund told their investors the assets were worth. Now, this may sound weird - if a PE boss wants to set a high initial value for their fund in order to maximize their carry, why would they sell its assets to the new fund at a discount?

Here's Levine's theory: if you're a PE guy going back to your investors for money to put in a new fund, you're more likely to succeed if you can show that their getting a bargain. So you raise $1b, build it up to $5b, and then tell your investors they can buy the new fund for only $3b. Sure, they can get out - and lose big. Or they can take the deal, get the new fund at a 40% discount - and the PE boss gets $60m/year for the next ten years, instead of the $20m they were getting before the continuation fund deal.

PE is devouring the productive economy and making the world's richest people even richer. The one bright light? The FTC and DoJ Antitrust Division just published new merger guidelines that would make the PE acquire/debt-load/asset-strip model illegal:

https://www.ftc.gov/news-events/news/press-releases/2023/07/ftc-doj-seek-comment-draft-merger-guidelines

The bad news is that some sneaky fuck just slipped a 20% FTC budget cut - $50m/year - into the new appropriations bill:

https://twitter.com/matthewstoller/status/1681830706488438785

They're scared, and they're fighting dirty.

_,.-'~'-.,__,.-'~'-.,__,.-'~'-.,__,.-'~'-.,__,.-'~'-.,_

👴🏻 Hey look at this

* GET 2600 ON YOUR KINDLE https://www.2600.com/content/get-2600-your-kindle

* New York’s Driver-Owned Ride-Hailing App Is Putting Its Foot On The Accelerator https://nextcity.org/urbanist-news/new-yorks-driver-owned-ride-hailing-app-is-putting-its-foot-on-the-accelera (h/t Dan Gillmor)

* Framework Laptop 16: our exclusive hands-on https://www.theverge.com/22665800/framework-laptop-16-hands-on-preview-modular-gaming-laptop

_,.-'~'-.,__,.-'~'-.,__,.-'~'-.,__,.-'~'-.,__,.-'~'-.,_

👴🏻 This day in history

#15yrsago Bletchley Park kicks so much ass https://memex.craphound.com/2008/07/20/bletchley-park-kicks-so-much-ass/

#15yrsago Spamwar’s worst mistakes being recapitulated by the copyright wars https://www.theguardian.com/technology/2008/jul/15/copyright.filesharing

#10yrsago Cheap, easy, no-mess cold-brew coffee https://memex.craphound.com/2013/07/20/cheap-easy-no-mess-cold-brew-coffee/

#5yrsago UK government accidentally includes Scarfolk poster endorsing culls of rabid children in official publication https://twitter.com/Scarfolk/status/1020290984549249026

#5yrsago UK government defends the use of under 16s as covert operatives https://www.theguardian.com/uk-news/2018/jul/20/child-spies-used-only-when-very-necessary-says-downing-street

#5yrsago Gmail rolls out DRM for email and office documents, calls it “Confidential Mode” https://www.eff.org/deeplinks/2018/07/between-you-me-and-google-problems-gmails-confidential-mode

#5yrsago Singapore healthcare provider breached, personal records of 1.5m people – including the Prime Minister – stolen https://www.straitstimes.com/singapore/personal-info-of-15m-singhealth-patients-including-pm-lee-stolen-in-singapores-most

#5yrsago Your phone company’s shitty security is all that’s standing between you and total digital destruction https://memex.craphound.com/2018/07/20/your-phone-companys-shitty-security-is-all-thats-standing-between-you-and-total-digital-destruction/

#5yrsago The American Conservative: “The Dickensian Return of Debtors’ Prisons” https://www.theamericanconservative.com/the-dickensian-return-of-debtors-prisons/

#5yrsago As hoax-fueled lynchings continue in India, Whatsapp puts limits on video-forwarding https://www.washingtonpost.com/world/whatsapp-launches-new-controls-after-widespread-app-fueled-mob-violence-in-india/2018/07/19/64433ec9-c944-446f-8d82-8498234ee8a9_story.html

#5yrsago In-depth look at the Financial Times’ weekly guide to ostentatious status goods for tasteless one-percenters https://www.theguardian.com/news/2018/jul/19/how-to-spend-it-the-shopping-list-for-the-1-percent

_,.-'~'-.,__,.-'~'-.,__,.-'~'-.,__,.-'~'-.,__,.-'~'-.,_

👴🏻 Colophon

Today's top sources: Dan Gillmor (https://mastodon.social/@dangillmor).

Currently writing:

* A Little Brother short story about DIY insulin PLANNING

* Picks and Shovels, a Martin Hench noir thriller about the heroic era of the PC. FIRST DRAFT COMPLETE, WAITING FOR EDITORIAL REVIEW

* The Bezzle, a Martin Hench noir thriller novel about the prison-tech industry. FIRST DRAFT COMPLETE, WAITING FOR EDITORIAL REVIEW

* Vigilant, Little Brother short story about remote invigilation. ON SUBMISSION

* Moral Hazard, a short story for MIT Tech Review's 12 Tomorrows. FIRST DRAFT COMPLETE, ACCEPTED FOR PUBLICATION

* Spill, a Little Brother short story about pipeline protests. ON SUBMISSION

Latest podcast: Let the Platforms Burn: The Opposite of Good Fires is Wildfires https://craphound.com/news/2023/07/16/let-the-platforms-burn-the-opposite-of-good-fires-is-wildfires/

Upcoming appearances:

* Comic-Con (San Diego), Jul 20-23
https://www.comic-con.org/cci/programming-schedule

* Decentralization of the Internet Research Group (IETF-117)
https://dirk-kutscher.info/events/dinrg-ietf-117/

* Midsummeer Scream (Long Beach), Jul 30
https://midsummerscream.org/

* Armadillocon (Austin), Aug 4-6
https://armadillocon.org/d45/

* Defcon (Las Vegas), Aug 10-13
https://defcon.org/

Recent appearances:

* UCL Peter Kirstein Lecture
https://www.youtube.com/watch?v=Yn47ptAtVH0

* The Homeless Romantic
https://www.youtube.com/watch?v=wXn9wy5bHq0

* Why the internet is getting worse
https://www.cbc.ca/listen/cbc-podcasts/209-front-burner/episode/15992083-why-the-internet-is-getting-worse

Latest books:

* "Red Team Blues": "A grabby, compulsive thriller that will leave you knowing more about how the world works than you did before." Tor Books http://redteamblues.com. Signed copies at Dark Delicacies (US): and Forbidden Planet (UK): https://forbiddenplanet.com/385004-red-team-blues-signed-edition-hardcover/.

* "Chokepoint Capitalism: How to Beat Big Tech, Tame Big Content, and Get Artists Paid, with Rebecca Giblin", on how to unrig the markets for creative labor, Beacon Press/Scribe 2022 https://chokepointcapitalism.com

* "Attack Surface": The third Little Brother novel, a standalone technothriller for adults. The *Washington Post* called it "a political cyberthriller, vigorous, bold and savvy about the limits of revolution and resistance." Order signed, personalized copies from Dark Delicacies https://www.darkdel.com/store/p1840/Available_Now%3A_Attack_Surface.html

* "How to Destroy Surveillance Capitalism": an anti-monopoly pamphlet analyzing the true harms of surveillance capitalism and proposing a solution. https://onezero.medium.com/how-to-destroy-surveillance-capitalism-8135e6744d59 (print edition: https://bookshop.org/books/how-to-destroy-surveillance-capitalism/9781736205907) (signed copies: https://www.darkdel.com/store/p2024/Available_Now%3A__How_to_Destroy_Surveillance_Capitalism.html)

* "Little Brother/Homeland": A reissue omnibus edition with a new introduction by Edward Snowden: https://us.macmillan.com/books/9781250774583; personalized/signed copies here: https://www.darkdel.com/store/p1750/July%3A__Little_Brother_%26_Homeland.html

* "Poesy the Monster Slayer" a picture book about monsters, bedtime, gender, and kicking ass. Order here: https://us.macmillan.com/books/9781626723627. Get a personalized, signed copy here: https://www.darkdel.com/store/p2682/Corey_Doctorow%3A_Poesy_the_Monster_Slayer_HB.html#/.

Upcoming books:

* The Internet Con: A nonfiction book about interoperability and Big Tech, Verso, September 2023

* The Lost Cause: a post-Green New Deal eco-topian novel about truth and reconciliation with white nationalist militias, Tor Books, November 2023

This work - excluding any serialized fiction - is licensed under a Creative Commons Attribution 4.0 license. That means you can use it any way you like, including commercially, provided that you attribute it to me, Cory Doctorow, and include a link to pluralistic.net.

https://creativecommons.org/licenses/by/4.0/

Quotations and images are not included in this license; they are included either under a limitation or exception to copyright, or on the basis of a separate license. Please exercise caution.

How to get Pluralistic:

Blog (no ads, tracking, or data-collection):

Pluralistic.net

Newsletter (no ads, tracking, or data-collection):

https://pluralistic.net/plura-list

Mastodon (no ads, tracking, or data-collection):

https://mamot.fr/@pluralistic

Medium (no ads, paywalled):

https://doctorow.medium.com/

(Latest Medium column: "Let the Platforms Burn: The Opposite of Good Fires is Wildfires" https://doctorow.medium.com/let-the-platforms-burn-6fb3e6c0d980)

Twitter (mass-scale, unrestricted, third-party surveillance and advertising):

https://twitter.com/doctorow

Tumblr (mass-scale, unrestricted, third-party surveillance and advertising):

https://mostlysignssomeportents.tumblr.com/tagged/pluralistic

"When life gives you SARS, you make sarsaparilla" -Joey "Accordion Guy" DeVilla
-------------- next part --------------
A non-text attachment was scrubbed...
Name: OpenPGP_0xBF3D9110957E5F4C.asc
Type: application/pgp-keys
Size: 4820 bytes
Desc: OpenPGP public key
URL: <http://mail.flarn.com/pipermail/plura-list/attachments/20230720/9a26c8fc/attachment.bin>
-------------- next part --------------
A non-text attachment was scrubbed...
Name: OpenPGP_signature
Type: application/pgp-signature
Size: 840 bytes
Desc: OpenPGP digital signature
URL: <http://mail.flarn.com/pipermail/plura-list/attachments/20230720/9a26c8fc/attachment.sig>