Harvard University professors warn that most Americans do not truly realize the degree of concentration in the financial industry. With the continuous expansion of index funds and private equity funds, the scale of industries and companies currently controlled by private equity has reached 15-20% of the overall U.S. economy.
John Coates, a professor of law and economics at Harvard Law School, stated in an official interview video released on October 23 that private equity originated from leveraged buyouts in the 1970s and 1980s. The idea at the time was to borrow a large amount of money and then buy out publicly listed companies. Private equity firms would then use their control to increase the value of the companies, eventually selling and exiting after 3-5 years.
However, the situation has changed significantly. Since 2000, the compound annual growth rate of private equity has far exceeded the economic growth rate. They have begun to increasingly use various types of investments to "take over" the economy, not just leveraged buyouts, but also investments in credit funds, real estate funds, and commodity markets.
As the scale of operations continues to expand, private equity no longer buys publicly listed companies, enhances their value, and then sells and exits. Instead, they acquire them and then sell them to other private equity firms. Ultimately, private companies have formed an independent capital world, which has become a part of the U.S. economy.
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John Coates estimates that with the strengthening of market concentration, the scale of industries and companies currently controlled by private equity has reached 15-20% of the overall U.S. economy, and all of this is happening in an extremely opaque manner.
Due to their success in lobbying Congress, U.S. private equity legal disclosure is currently in a "gray area." Under current laws, they do not disclose or release public reports. The public has no information to assess what they are doing.
With the rapid development of index funds, this trend of increasing financial market concentration is intensifying.
John Coates stated that financial economists in the 1960s theorized that finding investments that outperform the entire market is very difficult, and a better way to invest is to directly buy index funds. Vanguard Group was the first to market this concept in the 1970s and achieved great success.
By the 1990s, the top four U.S. index funds held equity stakes of 20-25% in every listed company on the exchange, even reaching 30% at their peak. With high equity stakes, index funds began to have a very high proportion of voting rights in corporate boards, determining who sits on the board or how shareholders vote on various issues.
John Coates believes that due to the drive of economies of scale, index funds exhibit a positive feedback mechanism where the larger they are, the better they perform, and the better they perform, the larger they become. Unless the political environment changes, the U.S. market will eventually see a situation where a few index funds (3-4) own the majority of the equity in most publicly listed companies and ultimately control the companies (with the exception of family businesses).
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