The Financial Sector Was Tottering Even Before Trump

I phoned McLean to ask her whether that brick wall is something that you and I need to worry about. Might private equity take us down with it? Absolutely, she replied. “Private equity has become too big to fail,” she said, “which raises a whole question of whether it should be private at all.” The solution, McLean said, is to regulate private equity as we do commercial banks and public corporations, with comparable transparency and legal limits on what it can do with our money.

Private equity started to falter around the time Lina Khan became chair of the Federal Trade Commission, because any limit on mergers is a limit on how private equity firms reassemble the companies they acquire. Rising interest rates dealt another blow. Mostly, though, private equity was a victim of its own success. It ran out of things to buy and bid up the price of whatever was left. Default rates for private equity–backed companies, McLean pointed out, hit 17 percent during the previous three years, more than double the rate for companies not backed by private equity.

By 2022, nearly half of all the supposedly slimmed-down and tuned-up companies exiting private equity firms were sold to other private equity firms, prompting one investor to tell The Financial Times, “This is the start of, potentially, I’m saying ‘potentially,’ a pyramid scheme.” In January, the FT columnist John Plender, writing about systemic risks in private equity, concluded: “No prizes for guessing where the next financial crisis will emerge from.”