Even Bankers Are Worried About Private Equity

“Is this the outcome we want?” Jamie Dimon asked. Plus our business news round-up.

By Eric Gardner, More Perfect Union

As the number of publicly listed companies in the U.S. declines, the accelerating growth of private equity is drawing concern from major bankers over diminished market transparency and investor oversight. 

“This trend is serious,” Jamie Dimon, the CEO of JP Morgan Chase, America’s largest bank, wrote in his annual letter to investors published last week. “We really need to consider: Is this the outcome we want?”

For most of the 20th century, the easiest way to raise a large amount of money for a business to fund expansion and operations was through a public stock offering. In exchange for the ability to sell their stock to the public, management has to regularly provide financial information, which is analyzed and scrutinized by regulators and investors. 

But over the past three decades, private equity has overtaken the public markets. According to JP Morgan’s research, there were 7,300 public companies in 1996; today, there are just 4,300, a decline of over 40 percent in less than 30 years. During the same period, the number of private companies backed by private equity firms rose almost 500 percent to 11,200.

Unlike public companies, the finances of private equity-backed corporations aren’t subject to regulatory or disclosure requirements. “With fewer companies listed, there may be a decrease in overall transparency and investor trust in the market,” an investment banker told CNN. 

Take Dollar General, America’s fastest-growing retailer. Dollar General has major issues, from its low pay to the rampant practice of mislabeling shelf prices. But a silver lining is that since it’s a public company, society has a pretty good understanding of its profits and business operations. After being fined millions of dollars for unsafe working conditions, shareholders voted to require the company to hire an independent auditor to review the company’s work environment and develop an action plan based on the findings. Dollar General’s management advocated against the proposal but is now legally required to carry out the plan.

The same can’t be said for private equity-owned retailers like Staples or PetSmart who dominate niche markets and aren’t subject to the same scrutiny. Their profits are unknown to the general public.

Dimon is biased, of course, in his assessment of private equity. In 2023, he was paid $36 million to oversee a firm that earns billions of dollars a year advising companies on entering the public markets. He also credits the exodus to private equity partly to regulations that require corporations to consider and disclose the environmental, social, and governance impacts of corporations. 

But his larger point rings true: an increasingly large part of our economy is under private control and disconnected from public safeguards.

The Biden administration has been fairly proactive in addressing the change. Last fall, the Federal Trade Commission sued a private equity firm specializing in healthcare, alleging that the company achieved a monopoly in anesthesiology in Texas. The lawsuit claims executives used their market power to “jack up prices” across the system, which is largely viewed as a warning sign to the industry. 

Last August, the Securities and Exchange Commission passed new reporting requirements for private equity and hedge funds, which typically seek big returns through high-risk investment strategies on behalf of wealthy individuals. In a 3-2 vote over the objection of the commission’s two Republican members, the SEC adopted new reporting requirements and changed how the industry interacts with its customers. It’s estimated that over $25 trillion of pension plans, endowments, and individual assets are managed by these funds. 

Under the new rules, private equity funds must provide quarterly financial statements detailing performance, fees, and expenses. At the time, SEC Chair Gary Gensler said the rule is “addressing some of the opacity” inherent to private ownership.  

“Economically, our investors, large or small, benefit from greater transparency and integrity,” he added. “These are significant enhancements in the capital markets.”

For more, see our video about how private equity has plundered the American economy below, or our coverage about Roark Capital, the private equity firm that’s bought up dozens of major restaurant chains, and our investigation into private equity’s takeover of emergency rooms:

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