A study published by Pitchbook (10/4/2025), a trade publication and data source for private equity, showed that private equity buyouts improve portfolio outcomes by
0.64% in annualized excess returns for the last 25 years. However, once the returns were adjusted for leverage, they did not provide much of an advantage.
In other words, the extra return–and that is an important point, that this is the “extra” return–goes from 0.64% to nearly nothing if it were not for private equity taking on a lot of debt.
Many firms do not improve after being sold to private equity. Quite often, as seen in numerous insolvencies, these firms deteriorate. This is an essential reason that regulators should only allow private equity to buy insurance companies with strict limitations on their debt loads. An additional restriction should be that regulators do not allow private equity to mine investme
t portfolios for winners to be removed and placed into private equity’s other portfolios, leaving a higher proportion of losers in the insurance companies themselves, deteriorating the quality and quantity of surplus. (Author’s note: “These are the Plunderers,” by Gretchen Morgenson, is an excellent book describing how private equity does this to insurance companies.)
Extra debt means a lighter balance sheet. In other words, a company can support operations with fewer assets. Amounts identified as “extra” assets can be returned to shareholders. In theory, this makes sense, and indeed, if a corporation has millions not being used, those millions’ best use is being returned to shareholders.
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However, private equity can take this to extremes when so many assets are returned to shareholders and replaced with debt that the operating company cannot function. Whether this is greed or incompetence, employees and policyholders lose.
Light Balance Sheets
A light balance sheet, meaning fewer assets relative to income and debt, is gaining momentum throughout the industry. This is likely a factor in why so many buyout firms are laying people off. (Their AI is likely not quite ready to replace that many people, and based on personal experience, they aren’t laying off the incompetent people who most likely would be replaced by AI.) This means these firms are not going to grow materially organically (high debt loads are negatively correlated with growth), distributors will pressure carriers to pay them more, and competitors without huge debt loads can obtain better employees more easily if they are proactive.
This is somewhat easy to measure at the carrier level. How much surplus does a company have relative to premiums? Carrying extra surplus is expensive. It costs money relative to the return on investment to shareholders. This is easiest to see in banking and why after the credit crisis, banks were forced to improve their balance sheets, but they did not want to carry more assets. It causes their ROI to decrease.
In insurance, Berkshire Hathaway is resisting the balance sheet lite trend because as of December 31, 2024, they had around 350% more surplus than premiums. Their balance is heavy, in a good way. On the other hand, Progressive was around 40%.
Progressive, however, likely can function quite well with a light balance sheet, whereas very few other carriers can. This is because Progressive’s underwriting profit margins are so high. The higher the profit margin, the more a company can manage successfully with a light balance sheet. Extremely few carriers can match Progressive’s profit margins, but they want to write as much business as Progressive relative to surplus. This is not a smart strategy but a desperate strategy for most.