You might as well answer the door, my child, the truth is furiously knocking. - Lucille Clifton
Hello Friends,
I saw that a lot of you enjoy quotes—I love them, too, and have so many saved—so I’ll include them regularly. Here’s one for those of you who are writers, from Narratively:
Ultimately, the masterful words of Baldwin from a 1979 interview withThe New York Times, sums up the essentiality of grappling with social issues to the work of writers:
“If there is no moral question, there is no reason to write.” … “I’m an old-fashioned writer and, despite the odds, I want to change the world.”
I’m setting this post up early as I have plans for the week—a jazz festival, a birthday celebration, and a trip to Catalina Island for a few days. For today, I’d like to look at nonfiction—Bad Company by Megan Greenwell. In the next few weeks, I’ll be looking at fiction, including banned books since Banned Books Week is next week.
As Bad Company is about how private equity has changed life in the U.S., I’ll also note that I saw this news a few days ago:
Private Equity Firm Acquires Two Leading Hybrid Publishers from Publishers Weekly
Greenleaf Book Group and Amplify Publishing Group, two of the country’s oldest and best-known hybrid publishing companies, have been acquired by Civica Media, a new publishing company formed by the private equity firm BlackBern Partners.
Bad Company: Private Equity and the Death of the American Dream by Megan Greenwell
“HCA’s rise was a tiny early sign of what would become a drastic change in the American economy in the late twentieth century, a complete transformation in how revenue was generated. Sociologist Greta R. Krippner calls this shift ‘financialization’: companies began making their profits primarily through financial channels—interest, dividends, capital gains, and the like—rather than through the production of actual goods and services.” (32)
“Until it cost me my dream job, I had never given private equity much thought.”— first sentence of the introduction to Bad Company
As author Megan Greenwell admits, the end of her job at Deadspin, a digital sports magazine, where she was the editor and chief, was not the end of the world. However, its takeover by private equity firm Great Hill Partners prompted her to think about what private equity does when it takes over very important businesses and enterprises. (In 2024 Great Hill sold Deadspin to a “Maltese gambling company, which now uses the site to drive traffic to online casinos.” (xi)
The beginning of learning about private equity is to understand that it doesn’t function like other businesses, which make money when the companies they own make money and lose money when the companies they own lose money. This, of course, is difficult to understand. So how do you buy a company, completely destroy it, and make bank? In Bad Company, Greenwell has answers. Those of us who have never really paid attention to private business and finance don’t feel too bad about our ignorance: ‘private’ in private equity means that they don’t have to be very transparent. They report far less about their structure and operations than other types of companies. One result is that communities and individuals harmed by them don’t know who they’re dealing with or how to reach them when there’s a problem.
Bankruptcy doesn’t prevent private equity firms from making money for themselves. Private equity deals typically follow a structure known as 2-and-20: when outside investors commit their money to a private equity fund. They promise 2 percent of their total investment as an annual fee to the firm in charge. The firm also takes 20 percent of all profits from a deal beyond a certain threshold. Additional fees apply for ‘monitoring’ the portfolio company, as well as for transactions like mergers or refinancing. While earning the 20 percent requires the company to turn a profit, the fees are not dependent on performance.
The 2-and-20 set up guarantees a steady source of income to a private equity firm no matter how its portfolio companies fare. The high amounts of leverage and the firm’s insulation from a company’s debt combined with tax breaks and other legal protections, mean it wagers very little on any given deal. Taken together, it is very, very difficult for private equity firms to lose money. The only real risk is to the companies, their employees, and the communities they serve.” (xx)
In Bad Company, Greenwell looks at four people who lose something important to private equity firms. We follow Liz, Roger, Natalia, and Loren as they negotiate the before, during, and after of private equity takeovers. Liz was an employee of Toys R Us. Roger was a doctor in a very small community in Wyoming whose hospital was taken over by a private equity firm. Natalia was a journalist. Loren was moving from a government housing project into an apartment that was taken over by a private equity firm, which then became a nightmare. “Taken together, their individual experiences … pull back the curtain on a much larger project: how private equity reshaped the American economy to serve its own interest, creating a new class of billionaires while stripping ordinary people of their livelihoods, their healthcare, their homes, and their sense of security. At heart, this is a story about the hollowing out of the American Dream, and the people trying to do something about it.” (xxii)
The need for hospitals and journalists and safe housing are probably pretty obvious. The need for Toys R Us may be less obvious, but when you read the book, you see that a business like this really matters to small communities and for people who are trying to make a living without the benefit of a higher education. The end of these sorts of businesses within communities alters the entire area and, in consequence, opportunities for residents. Consider as well that 12 million people work for companies owned by private equity firms, “about 8% of the employed population, collectively generating $1.7 trillion of the nation’s gross domestic product.” (xii)
Private equity is run on Milton Friedman‘s understanding of shareholder theory wherein the only social responsibility of a business is to increase its profits. In other words, they’re only responsible to the shareholders. Friedman says that no other factors matter, and that anybody who takes into account things like providing employment, eliminating discrimination, avoiding pollution, etc. are just socialists and have no place in American capitalism. So a private equity firm can extend this philosophy: a business doesn’t need to exist if selling off its real estate or collecting management fees is going to make more money for the firm and its shareholders than producing goods does. If liquidation is the best option for the shareholders, this is what private equity firms do, community and employees be damned. The reason the equity firm itself doesn’t fail while driving a company into the ground is that it borrows money in the company‘s name and not in its own name. So even though the private equity firm is the company’s owner and the executives are the ones taking out the loans and making the decisions, it’s not legally responsible for paying the money back.
If you’re in a hurry, that is a short answer to how private equity firms succeed and make money. Why it’s allowed of course is a completely different question.
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Private Equity and Toys R Us
Before being sold to private equity firms including KKR (Kohlberg Kravis Roberts & Co.), Bain Capital, and Vornado Realty Trust, a great mistake Toys R Us made was not to understand the value of online sales and immediately set up an online presence for selling toys. As Greenwell says, it “let Amazon eat its lunch.” (16) Walmart and others didn’t and their ‘loss leader’ strategy for selling toys worked. (In fairness to Toys R Us, they couldn’t use toys as a loss leader because there weren’t many other products to sell.)
Bain Capital has a real estate arm; Vornado is a real estate investment trust. Along with other new owners of Toys R Us, they sold the land Toys R Us owned, which made them money. Then they made Toys R Us rent the land back—a sure way to drive the company into the ground, especially when combined with the fact that Toys R Us was the principal holder of the debt from the buyout by KKR, Bain, and Vornado, who together borrowed $5 billion to finance the acquisition. The losers were the 33,000 Toys R Us low-wage employees.
The Toys R Us employees eventually manage to get their story out in the public forum. The pressure they put on their owners mostly came through educating pension fund holders, who took another look at investing with the kinds of companies that hurt workers and employees, something that may help other working class people in the future. To ease some of the pressure, KKR and Bain decided to give employees a small portion of the severance pay they were promised in their contracts. And some public employees pension boards paused new investments in KKR because of the way they treated Toys R Us workers.
The takeovers of hospitals is a more direct hit to a larger number of Americans.
Private Equity and Hospitals
Eight percent of private hospitals are private equity-owned. These firms consolidate services among hospitals they own to save money. Then, although patients have to travel farther for many services, their costs are, ironically, much higher because of the lack of competition. In addition, a landmark study from a team of scholars from Harvard and the University of Chicago showed that three years after private equity acquisition, the rate of preventable medical complications increased significantly at hospitals. In rural communities, the number of air ambulance flights can skyrocket.
“If a private equity-owned hospital can make more money by eliminating all but the most lucrative services, patients whose care won’t increase revenue will be turned away. The profit is the only point.“ (xxi)
In the case of the hospital discussed in Bad Company (located in the small town of Riverton, Wyoming), the county didn’t have a high enough tax rate to build something new without outside help. Rural residents don’t have a lot of money, so hospitals that serve them are seen as inviable. A further issue is the existence of the idea that hospitals have an obligation to make money, wherever they are located and whoever they serve. So rural communities like Riverton turn to private equity. When Riverton did, all the results mentioned in the study ensued—few services, long travel for services, higher costs, and preventable medical complications.
Fortunately, the ‘after’ phase of Riverton’s story is remarkable, a real feel-good ending. The story of how the community takes back their medical care could be a book of its own. The community has some savvy spokespeople. When the town can’t buy their hospital back, they decide to build a competing hospital. This seems impossible—I was incredulous as I read, but damnit, that’s just what they did. It required an ‘all-in’ attitude. Before investors would even think about lending money, the community had to fundraise lots of donations and pay for a $150K study that showed the hospital could function as a nonprofit. This is many years in the making with much free labor. And a particular special circumstance is that the area hospital was contracted to serve two local Native American/American Indian tribes. They, too, were receiving terrible service—they were ready to make a change, and they have the private insurance that hospitals need from their patients to stay solvent. The new hospital will serve the community much better, bringing back typical, necessary services such as maternity, labor and delivery care as well as minor surgery options. They won. In a big way.
The last two stories, of Natalia and Loren, are far less optimistic, but not without hope.
Private Equity and Newspapers
“Alden was destroying newspapers because it didn’t care about newspapers, and because it could make money off their ashes.” (x)
In the newspaper business, publishers failed to anticipate huge changes in their arena, particularly the downturn in the print ad market, They didn’t understand how they could monetize online subscriptions. When they were sold to private equity firms, those firms were able to continue or increase profits in the newspaper divisions by cutting the workforce. They also bought up local papers and consolidated them, pushing local news out of the media.
“During the past five years, we have reduced our workforce from 4100 employees to approximately 2300.” —Scripps 2013 annual report to the SEC.
In Natalia’s case, the best thing for both her and the newspapers she worked for was to go nonprofit. “Media is almost singular among public goods for how it must grapple with competing notions of value: worth to the community versus worth to profit-minded executives.” (45) “The only hope many people saw started with divorcing journalism from shareholder value entirely.” (210) Ideas for change include “tax credits for newsrooms to hire reporters and for small businesses to advertise in community publications, vouchers for residents to spend on local news outlets of their choice … . (213) Nevertheless, It seems that philanthropic dollars are necessary for the future of local news.
Private Equity and Residential Property
Private equity firms became heavily involved in residential properties during the economic meltdown of 2008. “ All private equity functions essentially like house flipping: a firm buys a property, spruces it up, and sells it for profit. In most industries, though, there’s at least a small amount of gambling involved – while there’s little financial risk to the firm itself, it’s never clear that the bet will result in a huge payout. But when private equity firms get involved in actual house flipping there’s far less danger: because the value of real estate generally appreciates over time, even small investments can result in outsize returns. And whereas the exceptions to that generally can bankrupt individual families, firms worth billions of dollars can easily stomach the occasional loss, knowing that bigger wins are just down the road.” (68)
if the firm owns a large swath of properties in the area, it can jack up rents. Add to this that private equity is the lucky recipient of a large number of Fannie Mae and Freddie Mac low-interest loans. (Why??? 😩)
“U.S. tax law helps private equity in several key ways. Like many types of corporations, private equity firms are based offshore, which allows their returns to compound tax-free. Interest payments on borrowed money, meanwhile, are tax-deductible. But most importantly, private equity profits are treated, not like those of every other imaginable type of business, but as ‘carried interest,’ a structure unique to the finance industry. … carried interest has been treated, not as regular income, but as capital gains, which comes with preferential track tax rates. Corporate and individual income taxes top out at 37 percent; capital gains are taxed at 20 percent.” (37-8)
Loren, who moved from a government housing project to the Southern Towers apartments in Alexandria, VA, in hopes of providing safety for her family, had a nightmare experience with mold, water seeping between the tiles of the laminate floorboards which later became flooding inside her apartment (with no emergency number to call and no one at the desk with any idea who to contact), roaches and mice. The private equity firm that owned the building, the CIM Group, did not respond to work orders or complaints. Instead, they evicted her family and ordered them not to speak to the building manager.
A local group, African Communities Together, fought back by bringing local politicians on tours of the apartments, and showing them “mold, leaks, damage caused by rodents, a flooded elevator, holes in the walls, bugs, broken appliances, and more.” (143) However, city leaders have no authority over a distant company, one which is a heavy contributor to national politicians on both sides of the aisle. “According to data provided by the city government in response to the Freedom of Information Act request, in the four years before CMI bought the complex, the building department found two violations there. In the three and one half years afterwards, it found 185.” (145)
While the ‘annoy them until they go away’ method has worked for some properties—including CIM properties—that were then sold to residents or other businesses, this didn’t work against CIM in the case of the Southern Towers. One takeaway: “As long as the Federal Housing Finance Agency continues to provide them an always flowing spigot of cheap money, low income renters will continue to suffer under private equity’s thumb.” (226)
Greenwell concludes with some outside examples of people having success in fights against private equity firms. One was about mobile home owners. Earlier in the book Greenwell wrote: “Most infamously, Frank Rolfe, the co-owner of a large chain of mobile home parks, once compared the business to a ‘Waffle House where everyone is chained to the booth.’” (71) In the conclusion, she discusses mobile home owners who are now buying their parks and thus beating being ‘chained’ to the outsize rent increases of other owners. However, things don’t look great. Senator Elizabeth Warren tried to get the “Stop Wall Street Looting Act” passed. It would have ended leveraged buyouts, but according to Greenwell, it didn’t stand a chance. A more ‘center’ proposal is to close the carried-interest loophole and its dramatically lower tax rate. We’ll have to see if that ever happens.
Bad Company includes references in hundreds of endnotes. The index is handy, especially for looking back at the names and actions of various private equity firms or for the relationships of individuals to private equity (say, for example, Mitt Romney and Bain Capital). There are many subheadings helping to make these connections. Yet the structure and focus of the book are its most compelling aspects. By focusing on four individuals in a variety of circumstances and telling their stories, Greenwell engages readers’ empathy as they learn a bit about how the world around them works (or doesn’t). Well worth a read!
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