Do you know who owns your NEIGHBOURHOOD V8? What about the dental clinic on the corner? Private equity firms are buying up businesses that generate steady cash flow, and it has some experts worried about quality and competition.

To find out more, I spoke with Rachel Wasserman, founder of Wasserman Business Law and the author of The Private Equity Playbook How Buyout Firms extract Rather Than Build Value and What to Do about it. Rachel, welcome to our studios. How are you?

I'm good. Thanks for having me.

All right. For our viewers who are not financial experts, break it down for us. What is private equity? How does it work?

So a very broad term that can mean a lot of different things to a lot of different people. So let's start very basic. So private equity is really just investing money in assets that are not publicly traded. So not stocks or bonds that you would see in the stock market or the bond market.

So this is buying up private assets. So real estate, private companies, infrastructure projects. There's nothing inherently wrong about private equity because, you know people are saying private equity is the big bad wolf right now. But that's not true of the generic private equity. Within private equity, there are actors and industries that invest in these types of assets and have specific a specific playbook of how they make their money. And within that are the critiques of where things in the economy perhaps aren't working as great as they could be.

And so within private equity, there is an industry of venture funds, buyout funds, real estate funds that are investing in the economy. That is really just a layer, a hidden layer up above what we as consumers see as the regular economy. It's ownership of existing businesses, buyout.

That's one that we will be delving into. It's one that seems to be hitting the headlines. We have seen over the years a number of Canadian businesses being bought up by these private equity companies. What types of businesses are we looking at?

It's literally everything. And so one that is quite notable that we're hearing a lot of in the news are buyouts of professional practices. So dentists, vets, massage therapists, HVAC, like effectively it's a playbook. It's a playbook of how you can extract value in economies of scale and economies of scale. And it gets deployed as frequently as it's profitable.

And so really what we're seeing is this consolidation of entrepreneurship in the economy for the purposes of building value for other people. And so there's a real change in the economy, which is when I'm an owner operator, someone owns a business, I get to decide how that business is run. Or maybe it's a family business. And my brothers and sisters and cousins were on the board, and we fight it out amongst ourselves. But this is a new layer being added on, which is an increasing number of businesses, a strong or a large percentage of businesses are now being run by people who are in the business of making money for other people.

So it it changes the mission of the underlying-- It's not about the culture. It's not about any of that.

It's about returning profits to the investor.

So the best example I can give in certification, am I allowed to say that.

You've said it, you're good.

So in edification is this concept of taking out the value and raising prices where you're just getting less value. And this is a strategy that's been deployed by the finance industry in our economy, where they're optimising profitability. So if I can sell a product and take some of the goodness out of it and raise prices in such a way that my profit stays the same, the decrease in revenue is balanced by the decrease in expenses.

And so it's really not about selling the best product possible. It's about making as much money as possible. And so the it's really a perversion of capitalism where we're putting the needs of the investor ahead of the business itself.

All right. I want to put the lens of a private equity company. I am looking and surveying the Canadian business landscape. What is a an attractive business for someone like me? If I am looking to buy?

Great question. Predictable cash flow. That is what it comes down to a safe bet. So the reason why I'm not a fan of these buyout funds, which is a subset of the private equity industry, these are it's called buyout because they buy out the whole company. And the reason why I don't love this is because of the massive amounts of debt used to subsidise the purchase price.

So I'm going to give a very simple example. So if I'm going to buy a business for $100 million, I'm only putting down 20. And then the business itself pays that out. Now the problem with this is that, you know, like asset backed loans are not bad. It's when they get used abusively and systemically that we have this problem. So an asset backed loan is not bad.

But we have to think about what is the opportunity cost of that asset backed loan. And that means the money that the business is paying to subsidise the purchase price from the shareholders. So the business gets no benefit from this loan. It's not going into capital expenditures. It's not investing in the growth of the business. It's just subsidising the price for the shareholders.

So think of it as a pure burden with no benefit. Running a marathon with a cinderblock on your back.

I have to imagine there are regulatory alarm bells ringing off because of all of these sales that we are seeing has, say, the Competition Bureau gotten involved. Are they looking into this?

They are looking into this, but our laws are not appropriate for what's going on in the market right now. Our you know, I spoke at the competition summit a few weeks ago. They are aware of what's going on, but private equity has been private for so long that unfortunately, our policymakers are only starting to figure out what is going on as we speak.

And so, for example, we have a bright line test over a certain dollar threshold. I think it's 93 or 96 million, $96 million, but we don't track death by a thousand cuts. So we don't see that someone has bought 20 dental practices in one year, because if they all fall below that 93 or $96 million threshold, there's very little, if any, regulatory intervention.

And so we need to be more progressive in terms of what's actually going on, as opposed to just setting bright lines and waiting for them to be triggered, because by the time they grow into these beasts, it's too late.

Now, some may argue and say that private equity is needed. There is a legitimate role for it in our economy. Saves businesses investments. Is there a role for it?

Absolutely. There's a role for it. In order to grow our economy, we need to invest. And that's something we don't talk about enough investing into businesses where they are spending money in research and development, in increasing wages, in training. Growth takes time, risk and investment, and we're not going to be able to grow the Canadian economy without a little bit of pain.

You know, you can't go to the gym and build muscle without some work. Fair enough. And I think that we have been accustomed to just consistent returns without that growth period, without that loss period for the growth to kick in. And that's really what we need to turn this economy around.

So we have a very interesting perspective as Canadians because not only are we allowing foreigners to plunder our economy, we are doing the same thing to others.

Very quickly in about 30 seconds we have left, why should Canadians care that this is happening?

Everyone needs to care that this is happening. This is the future of not just our economy, our political landscape, our social landscape. This is the consolidation of capital happening behind the scenes. This is the future of upward mobility. This is the future of equality. And if we don't care and intervene, we will create a society of have yachts and have nots.

Rachel, we're going to leave it there. Thank you so much. Some food for thought for sure.

Thanks for having me.