AMERICAN EQUITY

The financial media is forever focused on two forms of capital investment - public and private equity. Neither deserves the attention or the often unbridled adoration they receive from the pundits, many of whom profit personally from the influence they can exert over the markets. Instead, our focus should be on a form of equity that could dramatically improve our collective well-being.

Private equity are the huge pools of money - usually funded by the super wealthy, insurance companies, pension funds and the like - that find clever ways to make money as quickly as possible while minimizing risk. The private equity folks are the ones who buy companies - typically only putting up a small fraction of the price using their own money - and borrowing the rest by putting the company in debt. If that seems like a bad deal from the get go - for the company and the people who work there - it is.

Here’s what happened when private equity - KKR, Bain Capital and Vornado - bought Toys R Us in 2005 for $6.6 billion.. They put up $1.3 billion of their own money and created an empty shell company which borrowed the remaining $5.3 billion from banks. Then they merged the shell company into Toys R Us , so now it was on the hook for $5.3 billion. The people who made the decision to sell did fine. The shareholders got $26.75 a share. The CEO got $65.3 million. The board members got paid. The workers had no say in the matter.

Before the buyout, Toys R Us had $2.2 billion in cash. After the buyout, it owed $5.3 billion and had to pay $400 million a year just in interest. Money that couldn’t go to remodeling stores, building a web presence to compete with Amazon or invest in its workers. It all went to banks.

After the buy-out, the private equity firms collected $15 million a year in “advisory fees” with a contract that explicitly said no minimum hours were required. They got paid for advice they didn’t have to give. Every time they restructured the debt, they took a transaction fee. By the time the private equity geniuses sent Toys R Us into bankruptcy in 2017, KKR, Bain, and Vornado had extracted roughly $470 million.

Thirty-three thousand workers lost their jobs. They got no severance. The $470 million would have been $14,000 for each of them. Instead it went to Manhattan. It’s a “heads I win, tails you lose” proposition. But here’s the thing. While folks point to Toys R Us as a private equity failure, the success stories are worse.

Dollar General is the poster child for private equity done right. KKR bought it in 2007, tripled the stock price, exited in 2013. Massive financial success.

Here’s what that success looks like on the ground.

The median Dollar General worker earns $17,773 a year. That’s the bottom 10% of all retail wages. The CEO makes 986 times what the median worker makes. Stores are routinely staffed by a single person responsible for 7,500 square feet of retail space. That’s one worker for every 823 square feet. Walmart has one per 490. Managers work 70+ hour weeks. Forty-nine people have been killed at Dollar General stores since 2014. OSHA has conducted more than 240 inspections since 2017 and proposed more than $21 million in fines. The company was added to OSHA’s severe violator list in 2023.

The “innovation” KKR brought? They removed all decision-making from folks on the ground, centralized everything at headquarters, cut out local managers and made workers do more with less. Fewer workers means higher margins. Higher margins means better returns to investors.

That’s it. That’s the magic. Pay people less. Work them harder. Staff stores are so thin that employees take pain medication to get through their shifts. Watch the stock price climb.

Private equity didn’t invent anything. You could always load a company with debt. You could always cut workers and make the survivors do more for less. You could always structure deals so you win regardless of whether the company survives. You could always take your fees before the wreckage.

The only thing stopping people was shame. The social contract said you don’t do that. Private equity’s contribution to American business is making it normal. Their innovation is shamelessness.

And public equity? All those stocks you hear about in reverential tones? The ones you’re told to buy because it’s the best way to create long-term financial security? There’s one problem - there’s nothing public about this equity. Ninety-three percent of all publicly traded stock is in the hands of the top 10%. The bottom 50% of Americans own roughly 1% of all stocks. In sum, most people are struggling so hard to make ends meet, they have no shot at every buying stock, much less a meaningful amount such that it would create wealth. The term public equity is gaslighting. At least private equity is appropriately labeled.

Instead of toggling its attention between public and private equity, the financial media should focus instead on the form of equity that has been proven to create massive, multi-generational wealth for millions and millions of Americans - not equity that benefits only the elite. It is the money that the government spends to build things, to create things that are worth having. Like hospitals, highways, public universities, housing, electric grids, high-speed railroads, technologies that created the internet, the space industry, and the intellectual capital behind thousands of useful products. This is American Equity - the money that poured into the Interstate Highway System. Rural electrification. The Tennessee Valley Authority. Land-grant universities. The GI Bill. Public research that created the internet, GPS, and the foundations of the tech industry.

When the government built things and kept them, the returns went to everyone. Highways that move goods. Power that lights homes. Educated workers. Clean water.

We stopped doing that. We were told the government couldn’t do things efficiently. So we turned it into a checkbook for private industry. Money goes out, private actors siphon it off, and problems never get solved. Then we’re told the government doesn’t work.

If you’re in the bottom 50-70 percent and you’re not willing to work 120-hour weeks, you’re shamed as lazy. Pull yourself up. Hustle harder. Meanwhile the people at the top collect fees for advice they never give, take dividends from debt they’ll never repay, and walk away rich whether the companies they control survive or not.

We need to build again. Public ownership. Public capacity. Public competition. Public benefit.

American Equity. The investment that built a middle class and can do so again.

Corbin Trent & David Simpson