Why private equity acquisitions like the one that just claimed BioWare are so dreaded

Private equity acquisitions, like the recent takeover of BioWare by Saudi Arabia and Jared Kushner, often evoke dread among industry insiders. BioWare, renowned for creating popular RPGs such as Mass Effect and Dragon Age, faced an uncertain future after its acquisition. While the new owners might not have been as eager to preserve the studio, the broader trend of private equity acquisitions is troubling.

These firms acquire public companies with the intention of optimizing their performance for long-term returns, often through a strategy known as a leveraged buyout. In this process, the acquired company is purchased using a combination of borrowed money and private equity, with the acquired company itself taking on the debt. This leveraged debt becomes the responsibility of the acquired company, limiting the initial investment of the private equity firm while leaving them vulnerable if repayment becomes challenging.

The collateral for this debt is the assets of the acquired company, not the private equity firm. This setup allows private equity firms to maximize profits by cutting costs, raising prices, and selling off assets, potentially leaving the acquired company in financial ruin. The consequences have been widespread, affecting retail giants, digital media outlets, local news, and even hospitals.

Despite their role in precipitating bankruptcies, private equity firms often emerge financially unscathed, leaving the original owners and employees high and dry.