This won't be at a 5yo level, but here's an attempt: there are a two things specific to private equity that often leads to higher prices and worsening service:

1. PE aren't investors like you and me. We can go to our brokerage and buy shares of a public company, hold those shares, vote on directors and proposals, etc... Or we can buy and sell ETF/mutual fund shares that own companies. Then, we (or fund managers) can sell those shares after any period of time we want. Could be years, decades, or minutes. Whatever meets our investing goals. The same is actually true for hedge funds. We buy a a piece of a company, hold it as long as we want, then sell to take profit/loss. When PE buys a company though, they buy the whole company AND they have a specific timeline in mind. This is because PE firms are actually temporary private "investment funds": partners put in money and expect a certain return on investment after a certain period of time. At the end, that's when the fund needs to wind down and return capital + returns. So, there's already a ticking clock on anything a PE firm buys, and pressure to generate return before time runs out. They typically do this by taking a company public on the stock market (maybe again) or selling it to someone else. (This doesn't always succeed, but there are other options then, like continuation funds.)

2. PE funds also take on a lot of debt. They can't afford to buy whole companies or roll up entire industries just with their investors' funds, so they borrow a lot. Now, the companies they buy for their portfolios not only need to generate returns for their investors, they also need to do that AFTER making payments on that debt. It multiplies the pressure.

There are a lot of cases where PE bought struggling companies, and with discipline and incentives turned things around on a timeline. But there are also a lot of cases where PE bought stable but boring companies, used debt and pressure to force them to raise prices, cut services, lay off workers, and lower quality in order to generate returns at the pace required.

(Most of this I learned from reading Matt Levine columns, I'm not an expert and don't work in this industry at all, so I may have some details wrong.)

An individual likely (hopefully) has a moral compass.

A family introduces some perverse financial incentives but you also get long term (ie multi generation) planning and reputation concerns.

A group of practicing professionals who own the operation will hopefully exhibit some shared pride and professionalism.

A co-op or similar arrangement ties the interests directly to the local community.

The larger the public company the less overlap there will be with the customer's interests. At least they might worry about reputation and stock price though.

Pretty much the only concern PE has is avoiding litigation. Their primary motivation is maximizing value extraction over the short or medium term.

The optimal version of a PE is to take a failing business and either turn it around or carve up assets and reallocate people to do something useful and profitable. The more a business is failing, the cheaper it is to takeover and for the PE to do the work of a fungus. But this process can also become a disease if it is too easy for them to takeover, taking a healthy host and carving it up. This is mimicked in real life when conditions turn a fungus into a hostile organism on something that is living; maybe it is just a little sick but the environmental conditions help the fungus more than it ought to leading to it being a killer instead of a resource freer.

The real question to ask is why can they take on so much debt? And for that, one needs to acknowledge the fact that, particularly for the well-connected, debt is easy to obtain as banks essentially create money for loans. There are constraints (otherwise the banks would make themselves trillionaires), but the constraint is not the quantity of money. This creation of money through lending leads to inflation which further supports operating via debt as those who take out loans see the real value of the loans decrease. The banks just made up the money so there isn't a direct loser from the inflation other than everyone who has to deal with increased prices. You can think of it as a broad, regressive tax on the population to fund these firms doing far more than they should.

With an actual constrained money supply tied to real wealth in the economy, the PE firms would have to focus on the best deals which means the businesses that are truly dying and their role is to turn the nonproductive assets into something productive.

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I asked ChatGPT to critique my answer (which is unaltered above) and it said to tone down the lending being propped up by inflation and instead emphasized the following:

>Inflation can help leveraged borrowers, but in PE the bigger structural advantages are: • Interest deductibility (a massive tax subsidy to debt) • Limited liability (upside captured, downside partially socialized) • Fee extraction independent of performance • Ability to load debt onto the acquired company, not the PE fund

I then asked it to answer the question without regards to my context and it basically said PE is different because of

> • short ownership horizons • high leverage • strong control • financial returns as the primary goal

Here is the link to the short conversation if interested: https://chatgpt.com/share/6963a0de-7a04-8012-8c36-afef5dd74f...

Just a driveby speculator but my guess is PE dillutes interest in and responsibility for the businesses.

Individuals or family holdings are more likely to have concern for their reputations in addition to finances, public companies are more likely to scrutinized offsetting what would be their much lower reputational concerns. But PE is diffuse and often distant enough to eliminate human reputational concerns while being held to far lower stadards than public companies.