Even by the standards of the financial sector, private equity—the $7 trillion industry that laid waste to Toys “R” Us, Radioshack, Fairway, and Payless—has a uniquely bad image problem. A majority of Americans believe the industry is ripe for a regulatory crackdown. And in Congress, that sentiment is, to no great surprise, widely shared among progressive lawmakers, including Senator Elizabeth Warren, who recently reintroduced sweeping legislation to rein the industry in. But apart from the political roadblocks sure to bedevil Warren’s bill, she and her colleagues face the even greater challenge of regulating an industry that, by design, remains extremely opaque.
In his new book Two and Twenty: How the Masters of Private Equity Always Win, Sachin Khajuria promises the “first true insider’s account” of an industry that has “succeeded in near-stealth—until now.” Drawing from over a decade of experience at Apollo Global Management, one of the largest, most aggressive private equity firms in the country, Khajuria purports to offer his readers an “unflinching examination” of the industry’s “traits, culture, and temperament.” Unflinching as he claims it might be, Khajuria, who still runs his own family office, serves up a firm vindication of private equity, touting the industry’s “mission to serve retirement systems as a for-profit enterprise” as well as its mysterious ability to do “the financial equivalent of turning water into wine.”
For readers who are less fascinated by this alchemy than the question of whether private equity should exist at all, Two and Twenty is an enlightening book. It captures the ethos of an industry that, while cool and rational from the outside, is utterly paranoid about the prospect of waste and loss from within. Every decision is seemingly made on borrowed time (or money), and nothing (to the extent that is humanly possible) is left up to chance. Private equity is built on the back of “painstaking due diligence” and “relentless negotiation,” Khajuria explains, both of which can drag on for years, if not decades, before an investment is turned around. While Khajuria writes as an insider sharing his tips for success, it’s hard not to see each of these features as an argument against the industry itself.
In its most illuminating moments, Two and Twenty walks us through a detailed series of deal sketches, based on real events, where the company Khajuria only calls “the Firm” identifies against-the-grain investment opportunities to exploit with sophisticated financial engineering. Just about all of these sketches involve what’s known as a leveraged buyout, where the Firm borrows a mountain of cash to acquire a private company’s “distressed assets,” or assets nearing bankruptcy. Using this newly borrowed war chest, the Firm takes the company private, assigns it a monstrous amount of debt, and wrests near-complete control over the company’s management. In most cases, the company is subject to a highly extractive debt schedule until the Firm can bring the company public again at a much higher price, allowing the Firm to collect a pretty penny for its clients (i.e., institutional investors and pension funds) and for itself (through management and performance fees). “This process,” Khajuria writes, “is dynamic and iterative and comprises a vital part of the private equity job,” which, he claims, requires a high level of “empathy and emotional IQ.”
Dynamic as Khajuria’s sketches might be, the empathy he mentions is hard to see in them. Consider the Firm’s takeover of “Foodmart,” a grocery retailer with a strong presence in relatively affordable cities across America. Foodmart’s stores, Khajuria writes, are “popular with a loyal middle-class clientele, but they have aged and are somewhat down-market. Affluent white-collar young people tend to shop elsewhere, even if they have to pay higher prices. The company’s stodgy brand does not appeal to them.” Treating it as self-evident that “down-market” businesses are necessarily failing ones, the Firm decides that Foodmart will “transition upmarket,” which naturally involves raising the company’s prices. After 12 months, the investment has turned sour due to “dissatisfaction in communities” where stores had been shuttered as a result of the rebrand, prompting the Firm, in its infinite wisdom, simply to “ditch the aspiration to be upmarket” and ensure that “nothing about the company will smack of Wall Street.”
In the end, the Firm is able to turn the investment around, raking in three times what it originally invested. On that limited metric, it’s a success. But the deal team spends no time taking stock of the damage it might have inflicted along the way. There’s no reflection on the thousands of middle-class customers who faced painful price hikes—particularly those on tight budgets, who might have slipped into a yearlong period of food insecurity.
These kinds of oversights are a recurring pattern in Two and Twenty, which often reveals more about the industry’s mindset through omission than admission. Nowhere is this pattern clearer than in the book’s failure to address one of the industry’s favored cost-cutting measures: layoffs. In 2019, researchers at Harvard and the University of Chicago found that companies undergoing a leveraged buyout by private equity firms tend to see a 4.4 percent drop in employment two years into the deal. In the retail sector alone, the industry is estimated to have killed at least 1.3 million jobs since 2009. And Apollo, Khajuria’s former employer, is likely among the worst offenders, having presided over mass firings at Gannett, Yahoo, Cox Media Group, Rackspace Technology, Tegra, CareerBuilder, Tech Data, and more.
Yet Two and Twenty by and large has nothing to say on layoffs. Khajuria speaks vaguely of the Firm “slashing headcount” at a chemicals manufacturer called “Plastix”—an investment, he writes that “soured irretrievably” amid “rolling strikes protesting … harsh severance terms for the departing employees.” But Khajuria eschews any serious analysis of why the Firm’s layoffs did the exact opposite of what was intended by adding costs. Instead, he says that Plastix was “not able to adapt adequately to disruption in its production facilities,” despite “upgrading management to better-qualified executives.”
If the book is clear about one thing, it’s that private equity firms believe themselves to be incredibly valuable to society. Khajuria claims that the industry’s austerity is necessary for achieving noble ends. Private equity companies inject capital into moribund businesses, he writes. They donate widely to philanthropic causes. They promote a broader mission of diversity, equity, and inclusion. All of these arguments feature prominently in Two and Twenty, which notes that while “scale of wealth created in the industry can tilt the discussion unfavorably in some circles,” private equity is “a far cry from the stereotypical image of excess often heard on Wall Street about private equity. In fact, it’s closer to the image of a responsible anchor of the economy, an industrial stalwart.”
Khajuria emphasizes that private equity firms take money from retirement funds and grow it for future retirees. They are, he writes, the “responsible custodians of ordinary workers’ money,” acting on the “unimpeachable goal to help investors like the … retirees whose pension funds form one of the bedrocks of the investor community.” To some degree, self-justifications of this kind are true: If private equity takes a tumble, so do pensioners, whose holdings are heavily invested in the industry’s funds. But the notion that private equity is somehow the guardian of ordinary workers’ retirements does not exactly accord with the industry’s tireless habit of trimming its pensions. In one deal sketch, the Firm conducts a sweeping cost-cutting analysis for an insurance company, suggesting that employee pensions “can be scaled back to the lower end of targets set by regulators.”
Despite its many omissions, Two and Twenty is at times surprisingly candid about the psychology of a workforce dedicated to eking out profits. Khajuria describes the Firm’s budding associates as being “deep down … eager to achieve life-changing money and power.” Khajuria also suggests that the Firm’s founder, who “donates generously to a wide range of humanitarian and philanthropic causes,” is driven by the goal of being “long-term greedy.” At the office, “everyone looks a bit serious,” he writes, and “even when they share a joke or smile, every emotion is a bit measured, and nearly every word spoken is deliberate.”
The solemn dedication to capital lightens, it seems, only at mealtimes, when luxury catering stands in as a form of mental health awareness. “Lavish spreads from Michelin-starred restaurants and famous local delis add a touch of comfort and luxury to every meal in the office,” he writes. “It’s all designed to be supportive, to reassure, to reflect the Firm and its status.”
Beyond the careful displays of both discipline and consumption, however, the lopsided deals that the Firm strikes best reveal how unwieldy the industry actually is. In just about every deal, Khajuria explains, the Firm sets out to take maximal control over its target companies while exposing itself to minimal risk, through leverage. This power dynamic, he argues, is seemingly offset by the personal equity that investment professionals themselves purchase in the Firm’s target companies. Investment professionals “have a personal incentive for their work to succeed, in the form of equity participation in the outcome of the deal, not just a cash and stock bonus if the deal completes,” he writes, creating an “ingrained sense of personal ownership in private equity that does not exist in a comparable form elsewhere on Wall Street.”
Yet having skin in the game doesn’t necessarily put private equity firms on the same team as the companies they target. In leveraged buyouts, Khajuria details, private equity firms can restrict companies from declaring bankruptcy; subject them to unduly high interest rates and fees; and even employ debt covenants, which allow private equity firms to demand immediate repayment if their target companies don’t meet certain financial indicators. “You do not want to be in the position where the fate of your business is now in the hands of private equity that has lent to you,” Khajuria writes. He is right: Roughly 20 percent of private equity takeovers have ended in bankruptcy over a 10-year period after the deal.
This is the story that played out at Toys “R” Us, which was acquired by three private equity goliaths in 2005, forcing the company to spend almost 100 percent of its operating profit on debt services. The company eventually stopped creating new products, shuttered hundreds of stores, and in 2018, officially filed bankruptcy, forcing 30,000 Americans out of their jobs. And even when companies like Toys “R” Us go bankrupt, their private equity owners can still reap a profit through dividends on loans applied to their target companies, as Vox’s Emily Stewart notes, which makes the industry blithe to the failure of its own investments.
Outcomes like the demise of Toys “R” Us are hard to square with the “hyperactive control” Khajuria describes as being central to private equity’s mode of asset management. Still, they’re not especially surprising when the industry views “chaos,” as Khajuria writes, as “profit in disguise.” Private equity is an industry that thrives on failures. It is a form of economic activity with so few redeeming features that even a sympathetic account of its workings becomes an indictment of its track record, its culture, and its practices. When, as Khajuria puts it, the “masters of private equity always win,” the rest of us, invariably, lose.