Private equity guts corporate America

Investment Analysis Clubs Macro Economic Trends and Risks
1

It’s hard to overstate how much I loathe private equity firms that load companies with debt, gut their work force and then sell them or bankrupt them.

https://www.nytimes.com/2023/04/28/opinion/private-equity.html

Private Equity Is Gutting America — and Getting Away With It

By Brendan Ballou, The New York Times, April 28, 2023

…
Companies bought by private equity firms are far more likely to go bankrupt than companies that aren’t. Over the last decade, private equity firms were responsible for nearly 600,000 job losses in the retail sector alone. In nursing homes, where the firms have been particularly active, private equity ownership is responsible for an estimated — and astounding — 20,000 premature deaths over a 12-year period, according to a recent working paper from the National Bureau of Economic Research. Similar tales of woe abound in mobile homes, prison health care, emergency medicine, ambulances, apartment buildings and elsewhere. Yet private equity and its leaders continue to prosper, and executives of the top firms are billionaires many times over.

Why do private equity firms succeed when the companies they buy so often fail? In part, it’s because firms are generally insulated from the consequences of their actions, and benefit from hard-fought tax benefits that allow many of their executives to often pay lower rates than you and I do. Together, this means that firms enjoy disproportionate benefits when their plans succeed, and suffer fewer consequences when they fail…

[snip horror stories, shell-company shenanigans, lobbying, etc.]

[end quote]

From a practical standpoint, never invest in a company owned by private equity (since it’s likely to be a zombie) or go to a hospital or nursing home owned by private equity (since it’s likely to be understaffed).

Will this corrupt mess ever be fixed? Not as long as lobbyists can toss around millions of dollars to influence politicians.

Wendy

12 Likes
2

One of the proxies I voted this spring had a management proposal that the board members be shielded from liability for their own actions that breech their fiduciary duty.

Ever see “Blood Diamond”? There are a couple scenes between DiCaprio and the South African army officer he trained under, where the catch phrase is “TIA”, meaning why are things so chronically honked up and chaotic? “This Is Africa”.

Here, the question is why is corruption so rampant, the people in charge never held accountable, and, what would be fraud in other countries, is “good business practice” here? TIS; This Is Shiny-land.

Steve

3 Likes
3

In this case the reason the fraud is happening is a tax advantage and a corporate set of advantages.

It is not really about what is criminal and much more about what should not be legal.

2 Likes
4

The typical PE MO is to borrow a big pile of money, take the company over, use a variety of excuses to transfer the debt to the company, while sucking all the cash out of it. Then dump the company into BK to roger all the other stakeholders. Some PE firms, the ones with real chutzpah, then buy the company out of BK, after all the other stakeholders have taken a haircut, and repeat the process. Back in the day, this would be “fraud by conversion”, but, in Shiny-land, today, it’s perfectly legal.

Steve

4 Likes
5

It is not that simple. Many businesses get to a larger size that their founders can not handle. Later as the top line is good but the bottom line is bad a new management and ownership team are necessary.

That said I do not think that excuse is all that good for the other practices involved in many of these deals.

I will make a separate post about something similar.

6

I am in the process of dropping my NFTs. I wont get into my details in that.

Related to the NFTs there are a lot of guys who have dropped NFTs and mean to create a businesses helping others.

The rest of the art community do not know the “helpers for hire” are artists. It is assumed they are scammers.

Because most of those deals wont sell the NFTs in fact now those “helpers” are scammers.

People in business genuinely want to help do business. At least that story lasts for a while.

1 Like
7

I’ve never understood how private equity can do it. It’s like me buying your house Wendy, but making you take out the mortgage for me.

3 Likes
8

Very easy to understand.

  1. Acquire the business CHEAP.
  2. Make it APPEAR able to pay a lot of debt.
  3. You collect the LARGE debt PAYMENTS.
  4. Skip as many other payments (bills, payroll, taxes, etc) as possible.
  5. Go to 3 until company bankrupt.
  6. Rinse and repeat from 1 with new set of suckers.
2 Likes
9

No. What I don’t understand is how a PE firm can borrow money to buy company X, and yet it is company X who is on the hook for the loan, not the PE company.

2 Likes
10

They usually use a set of transactions to get there.

It’s does start off with a loan to the PE firm. They always buy companies with really good cash flow. They then use this cash flow to pay dividends to themselves so they can pay off the purchase loan pretty quickly. But now the company with great cash flow has no cash (it all got sent to the owners). So the company borrows from the bank. After all, they have good cash flow, but no cash. So they can easily make payments on the debt. The key here is to borrow from a smaller bank so that the company is a big fish - an important customer - to that smaller bank. Then the company makes it’s payments for a while. But they don’t invest anything back into the business. Instead, they pay management big bonuses for all the hard work they’ve done milking the cash flow to pay those early big dividends and now for arranging this important loan. Cash flow is now falling because of the increased expenses. But it’s still positive. So then PE management decides to borrow more from another bank. And they again collect big bonuses for this hard work. And they still pay dividends to the owners (which is the PE management). Now you start eliminating all capital spending. Then you let repairs and maintenance go. If you can, arrange for yet another loan and another, until no bank will lend you money. The terms aren’t important, it’s getting the cash. Keep paying the bonuses to management through all of this. Then you start selectively stiffing people. No raises or promotions to employees. Lay some off to cut costs. Start slow paying vendors. Stop servicing debt. But never ever under any circumstances stop paying bonuses to top management. Keep this up until the business reputation is ruined and creditors force you into bankruptcy.

–Peter

9 Likes
11

You missed the part where they steal the money from the pension funds! Somebody will clean up the mess!

JimA

5 Likes
12

Naked capitalism interview with Brendan Ballou author of " Plunder: Private Equity’s Plan to Pillage America".

private equity I think is probably as an industry one of the most successful in lobbying the federal and state governments. Private equity and investment firms have spent something like $900 million on federal candidates and elected officials since 1990. They have hired just untold numbers of senior government officials.

  • One of the surprising things that I saw in researching this book is, private equity firms often target industries that service not rich people, but rather poor people. And I found that rather counterintuitive. Because if you’re in the business of making money, you sort of figured you’d go towards the rich people. But it turns out that industries that service working class people are often very attractive to private equity firms. Because working class people often don’t have alternatives. And so it’s very easy to raise the price of a given product or to lower the quality care, knowing that people really don’t have other options.*

In Plunder, Brendan Ballou explains how private equity has reshaped American business by raising prices, reducing quality, cutting jobs, and shifting resources from productive to unproductive parts of the economy.

Perhaps most startling is Ballou’s insight into how this is happening with the active support of various arms of the government.

No surprise there.

It would be nice if a candidate would arise in 2024 committed to ending the corrupt merger between state and corporate power.

4 Likes