This site is intended to pick up where the Buyout of America book leaves off.

The topic of private equity is very timely with Congress looking to raise money to pay for environmental initiatives. Much could be raised by closing the carried interest loophole (taxing the 20 percent commission from buying and selling companies as capital gains instead of ordinary income) and limiting the ability of companies acquired in leveraged buyouts from reducing the interest they pay on loans from their taxes (interest tax deductibility).

Unfortunately, private equity industry lobbyists in 2022 successfully got Arizona Senator Kyrsten Sinema to hold up the Inflation Reduction Act at the last minute unless the Senate Democrats agreed to keep both these loopholes open. Private equity professionals had donated nearly $1 million to her over the prior twelve months. The Senate relented.

PE firms charge management fees that more than cover expenses, so the argument for treating carried interest as ordinary income is pretty weak. Closing carried interest would have raised $18 billion over a decade. Academic studies show private equity firms also do not start companies or create jobs. They do make political donations.

The Inflation Reduction Act also imposes a 15 percent minimum tax on companies earning more than $1 billion a year. The plan was that since an individual private equity firm owns many companies that the earnings of these businesses would be combined and for many firms would have exceeded $1 billion. Then all of their companies would have been required to pay the 15 percent minimum rate. That would have been costly for private equity firms since their companies are often heavily in debt and take the interest they pay on loans off their taxes often lowering their rates to below 15 percent.

A revealing study on how PE-owned businesses paid much less in taxes than their peers came out after I finished writing the book. A 2012 article covered the same ground.

However, the Senate pushed by Senator Sinema changed the law so private equity firm-owned companies would be treated individually costing the government $35 billion over a decade.

President Biden likely was not going to fight Senator Sinema too hard considering he and his family celebrated Thanksgiving in 2021 at Carlyle Group Co-Founder David Rubenstein’s Nantucket home.

The six last US Treasury Secretaries: Steven Mnuchin,  Jacob Lew, Tim Geithner, Henry Paulson, John Snow, and Paul O’Neill have all worked for private equity firms giving the industry an air of respectability.

A former Democratic Senate Tax advisor told me what happened during the Inflation Reduction Act proves that private equity is the most effective lobbyist in DC.

Former Labor Secretary Robert Reich in December 2021 wrote a great opinion column on how Democrats are protecting the private equity industry and this scam of a loophole.

Senator Elizabeth Warren on Oct. 20, 2021 with several co-sponsors introduced the Stop Wall Street Looting Act to curtail leveraged buyouts.  The bill (explained here) would make the private equity firm partners responsible when their companies go bankrupt. Also, it would limit interest tax deductibility.

Eliminating interest tax deductibility in leveraged buyouts completely might raise more than $10 billion a year. Also, it would pressure private equity firms to really build their companies and not just make money through financial engineering.

Private equity firms buy companies the way that homebuyers acquire houses. They make a down payment, say 25 percent, and finance the rest. The critical difference, though, is while homeowners pay the mortgages on their houses, the PE firms have the businesses they buy take out the loans, making them responsible for payment. Much of the interest the companies pay on the loans is reduced from taxes, interest deductibility.

I explain in a video (clip is from the documentary CorporateFM) how private equity works, and that ending interest tax deductibility completely in takeovers would end destructive buyouts.

This 2022 video from More Perfect Union also does a good job explaining how private equity works…comparing it to a mafia operation.

The Senate Banking Committee held a hearing on Oct. 20, 2021 titled “Protecting Companies and Communities from Private Equity Abuse”.

There have been a few encouraging steps.

Congress limited interest tax deductibility, to 30 percent of taxable income, during the Obama years, relaxed it during the pandemic allowing companies to take essentially all the interest they pay on loans off their taxes, but then starting in 2023 limited it again to 30 percent despite the private equity industry’s lobbying efforts.

Leveraged buyouts boomed in 2021 benefitting from stimulus spending. The dollar value of global buyouts was $1.1 trillion, surpassing the prior $801 billion record set in 2006, according to the annual Bain & Co. report. A little more than half of the buyouts occurred in the US.

Buyouts represented 19 percent of the number of global mergers, and 13 percent of value when looking at deal size. The 13 percent is an all-time high.

Thirty percent of the buyouts were tech deals like the $15 billion McAfee LBO.

So might private equity firm owned companies cause the next great credit crisis when they succumb to rapidly rising interest rates?

The long-term possibility is there.

In the US, there are recent projections that default rates for below investment grade loans could grow from below 2% in 2022 to 7.8% by fall 2023 as interest rates stay above historical norms, input costs stay high and the economy slows. About two-thirds of the lowest rated companies are owned by private equity firms.

Also, since February 2022 the market for refinancing the riskiest loans, CCC, have basically frozen.

However, a significant amount of these loans to private equity owned companies do not mature until 2025 and 2026. And they have very loose covenants.

So, there would need to be a long recession to present a “cause the next great credit crisis” kind of risk.

Much of the debt today is held by the shadow banking system and not the JPMorgans of the world so the government would find it harder to fix the problem through quantitative easing or a TARP like program.

NBC in October 2021 reported about job loss at private equity-owned companies.

A 2019 study by the National Bureau of Economic Research analyzed almost 10,000 debt-fueled buyouts between 1980 and 2013 and found that employment fell by 13 percent when a private-equity firm took over a public company. Employment declined by even more — 16 percent — when private equity acquired a unit or division of a company.

This study was published by academics sympathetic to the industry. Still, it shows US companies bought in leveraged buyouts reduce employment over two years by 4.4 percent compared to their peers, and wages by 1.7 percent.

A prior study by mainly the same professors covering LBOs from 1980 to 2000 (13 fewer years) showed job loss over two years was 3.6 percent. So job loss in more recent years has been greater. Also, the prior study showed job loss in years three to five doubled. So, the new study if it included job loss for the first five years, using the same math, would have shown about an 8.8 percent job loss over five years.

The new PE study covers roughly 7 million workers. That’s 616,000 American workers needlessly fired.

Private equity firms through LBOs own companies employ 12 million Americans, more than one of every 10 Americans in the private sector.

Job losses have a big impact on certain industries, like nursing homes.

Federal Trade Commission Chair Lina Kahn in 2022 said nursing homes typically experience an increase in mortality rates after being acquired by private equity. Khan announced that the FTC would take a “muscular” approach to regulating these kinds of transactions moving forward.

DOJ Deputy Attorney General Andrew Forman expressed similar thoughts saying private equity ownership can “lead to disastrous patient outcomes and, depending on the facts, may create competition concerns.”

New Yorker in August 2022 has a great story on how a thinly staffed nursing home proved to be no match for Covid and resulted in unnecessary deaths.

The National Bureau of Economic Research in Feb. 2021 found that private equity-owned nursing homes have a 10 percent higher mortality rate than their peers.

MSNBC in April 2021 aired the documentary “Children That Pay” which shows how private equity-owned Sequel Youth Services cuts costs while making big money from government reimbursement. Their actions endanger and even kill kids.

My appearance is at the 16-minute mark.

New York Times writes a great story in November 2022 about how a Blackstone Group-owned company lends money at 30 percent interest rates to exonerated convicts waiting for settlement.

Private equity firms are also diversifying.

Apollo Global Management and others are becoming bigger shadow lenders moving in to fill the void being left by banks.

In May 2020, Apollo said it was raising $20 billion for distressed opportunities.

KKR has started raising tens of billions to invest in infrastructure, and billions more to invest in its new growth area, Asia.

Private equity firms used to raise about a third of their money from state and corporate pensions. With pensions shrinking overall, they are now buying life insurance companies and some of those insurance assets are being invested in their funds creating a permanent pool of capital. The Center of Economic and Policy Research in 2022 released an informative report saying PE firms controlled 9.6 percent of US life insurance assets—a total of $471 billion.

Partners at the private equity firms often make money even if their companies fail, like TPG Capital in bankrupt J. Crew. TPG’s investors did not make a profit, but the partners who ran the firm made three times their money.

Private equity firms, meanwhile, paid higher earnings multiples in 2021 for leveraged buyouts than at any time in recent memory.

A judge’s ruling in December 2019 put company boards on notice that when they sell to private equity firms they need to examine whether the buyout will bankrupt the company, and not just think about the money they will collect from the sale.

Lawmakers in June 2020 criticized Leonard Green & Partners, a J. Crew co-investor, for taking $658 million in fees and dividends from a struggling safety-net hospital operator and wants it to give the money back to the company.

The largest private equity firms from 2006 through 2015 collected $230 billion in fees and delivered returns to investors that were about the same as stock market index funds, according to an Oxford Business School professor who said in June 2020 it was a giant transfer of wealth.

New York Times reports in December 2021 that private equity returns might be overrated. “Since the [2008] financial crisis the industry has had a tougher time outperforming public equity benchmarks,” JPMorgan Asset Management Chair of Market and Investment Strategy Michael Cembalest noted. He also asked if today’s returns were high enough “given the illiquidity of private equity.”

Wall Street Journal reports that Blackstone, Apollo, Carlyle and KKR collectively reported roughly $9 billion in management fees from their private-equity businesses between 2008 and the end of 2013, regulatory filings show. The amount compares with only $12.2 billion in “carried interest,” their 20 percent share of deal profits.

State pensions, like Pennsylvania’s biggest pension, sometimes pay big travel expenses to its managers to meet with private equity firms even though the PE returns often lag the stock market, according to an April 2021 Philadelphia Inquirer story.

A new think tank, American Compass, run by conservative-leaning founders in May 2020 said private equity invents, creates, and builds nothing.

The New York Times in a great January 2020 column shows how private equity reduces real productivity cutting to shreds the only positive shown in the private equity study.

Private Equity At Work, published in May 2014 by two economists finds private equity-owned companies are twice as likely as public companies to file for bankruptcy.

The private equity industry lobbying group is throwing out anecdotes to show how they can help businesses, like in the buyout of Popeyes. The main problem with the Popeyes example is it was bought out of bankruptcy, not a typical leveraged buyout.

What are the benefits of LBOs? It usually results in largely indebted companies that struggle compared to their peers and sometimes go bankrupt. And since companies can take the interest they pay on loans off taxes, this also means less money for the government.

This January 2020 article from Vox explains how private equity puts companies at risk. Great opening about how the private equity industry lobbying group complained in 2010 to the PBS NewsHour after it airs a segment with me criticizing leveraged buyouts. The lobbying group in 2010 says Toys R US is a perfect example the NewsHour could have used to show how PE firms help companies. Yet Toys R US in 2017 ends up liquidating costing 33,000 jobs.

“Leveraged buyouts—such as those facilitated by your companies—often result in mass job loss, closure of profitable businesses and unnecessary financial burdens for local government,” a letter from 19 Democratic Senators about Toys R Us to its private equity owners states.

Bain and KKR, as a result put $20 million in a fund that in December 2018 started paying severance to the 33,000 Toys workers who lost their jobs.

The Spectacular Failures podcast, in which I am interviewed, does a nice job detailing the Toys fall.

There have been recent Congressional investigations of private equity firms that invest in the private prison industry to determine if their ownership leads to lower service; private equity firms that invest in colleges and universities; and those that own physician practices including KKR and the Blackstone Group whose companies present surprise billing to emergency room patients.

California doctors in December 2021 sued to stop private equity firms including Envision from running emergency rooms.

The New Yorker in April 2020 wrote a very good story about how the private equity firms have fought against legislation stopping surprise medical billing.

Private equity returns are not so good.

Bain & Co. in February 2020 published its annual report on the industry and the main takeaway was that over ten years public equities outperformed private equity.

Warren Buffett in May 2019 said private equity fund returns were not as great as advertised. “We have seen a number of proposals from private equity funds where the returns are really not calculated in a manner that I would regard as honest.”

The SEC in late 2022 was finalizing rules that would require private equity firms to publish quarterly reports to investors that more clearly account for all fees and costs. They also are starting to crack down on directors at private equity firms that sit on the boards of competing companies believing it results in too much market concentration.

A Nov. 2013 Columbia Business School study shows private equity firms, when factoring in fees and the costs of committing money years before it is spent, generate average returns (no better than the stock markets).

In Feb. 2019, Buffett said private equity was really “private debt” since private equity firms put little equity in their businesses. Start watching the “I would like buying a business” video at 1:15.

Amazingly, KKR Managing Director Vini Letteri in an April 2019 Fortune question-and-answer profile admitted that his firm has not grown companies. “We made a strategic decision to shift towards what we would call growth-oriented buyouts. That is, going after companies that have high revenue growth but still have the opportunity to scale—versus “financial buyouts of legacy, cash-rich, slow-growth companies, where you put leverage on them and make your return by containing costs.”

Three of the seven largest LBOs done between 2004 and 2008 were run with containing costs in mind and went bust — including radio station giant iHeart Media (formerly Clear Channel), Caesars Entertainment (formerly Harrah’s), and utility Energy Future Holdings (formerly TXU).

US Congresswoman Rashida Talib (D-Mich.) in April 2020 asked Thomas H. Lee Partners to pay Van Art Furniture employees health insurance after quickly shutting down.

“This is yet another example of private equity firms destroying companies, while screwing over workers and leaving communities to suffer,” she said.

The United Nations in March 2019 accused The Blackstone Group of fueling a global housing crisis by buying single-family homes, renovating them and then “massively inflating rents” making it hard for low and middle-income families to afford.

In March 2020, the New York Times published a great Sunday Magazine story covering the same ground. Blackstone, and other Wall Street investors, make money by purchasing single-family homes taking the chance of home-ownership away from many ending their chances at wealth creation.

Blackstone is proving to be a slumlord when renting single-family homes.

Cerberus Capital, run by the chair of President Trump’s Intelligence Advisory Board, is acting like a slumlord in the way it handles tenants who rent from its single-family homes.

The Carlyle Group and other private equity firms in 2019 get roasted by John Oliver for buying mobile home parks and increasing rents. Carlyle is run by the same Rubenstein who hosted President Biden in 2021 for Thanksgiving.

In December 2018, The Washington Post does a nice job detailing how private equity firms including Sun Capital sometimes make money while bankrupting pensions, such as with Marsh Supermarkets.

I detailed in a 2017 New York Post article how the Supreme Court ruled that Sun Capital shafted workers and how Sun often made money at the expense of workers.

See more current news Under The News Tab including how private equity firms hurt health care companies

Portfolio published the paperback of the Buyout of America  Nov. 30, 2010.

There are new updates throughout the book, which is more timely than ever with the public concerned about how Wall Street impacts Main Street.

4 Comments

  1. James

    I liked your book. I found it easy to read and I could understand the different concepts used with only a little difficulty. You have added another piece to the puzzle that explains why we find ourselves in the difficulties we are in today. It’s easy to understand why these PE company owners do what they do; greed, wealth, and power. Three of humans worst personality traits that can get out of control very quickly if not contained. And it’s easy to understand how they justify their behavior. Like all wealthy and powerful and greedy people of the past and present they believe they are special and because they are special they deserve what they have. Sometimes they will admit to feeling smarter than the rest of us, superior to us in most ways, and they think that they work harder than the rest of us. I never thought of wealth, power, greed, or believing you are special or smarter than others as virtues. They come closer to being vices. We have two huge problems in this country that if not corrected our world and our American ideas and hopes will be a thing of the past. Global warming is the first and biggest problem we must solve for all the obvious reasons. The second problem that must be corrected is the lobbyist and big money interfering and corrupting our political system. I don’t know if we are smart or brave enough to correct these problems. President Obama has been a big disappointment, so pro-business. Our two choices for President in 2016 will be between Mr. Corporation and Mrs. Establishment–bought and paid for. The problem is that we have to go to all our politicians, who are bought and paid for, and ask them to fix our corruption problem. I know that there are some politicians, like Bernie Sanders, who will not be bought. But they are few. A third and maybe even a fourth party is looking better all the time. I truly believe that the above-mentioned problems, if not fixed yesterday, will be the downfall of America and what she stood for. Donald Trump would simply make these problems worse and Hillary Clinton will simply not address them. We are going to have a choice between BAD and BAD. One more comment please, I realize that we the people are also responsible for the predicament we find ourselves in today. For the last 35 or so years, it was us who voted the politicians into office who brought this catastrophe upon us.

  2. K

    Josh,

    Fantastic work and deeply appreciated. I am a few pages from finishing your book but one thought has been going through my head this whole time – you speculated when you published in 2009 that by 2010-2012 we would see a number of defaults. However, unless I’m mistaken, that did not really occur. I am wondering if we just saw another large PE turnover at that time. Or, has PE just kicked the can so to speak – is it the near zero borrowing costs that have prevented the anticipated collapse.

  3. Priscilla Shaheen

    I learned from your book, “The Buyout of America.”
    Time for you to write another informative text.
    Please do that soon.

  4. Laura Katz Olson

    I am a professor at Lehigh University and have just finished a draft
    of my manuscript “Ethically Challenged: Private Equity Storms U.S.
    Health Care.” Your research, especially “The Buyout of America,” has
    inspired my own inquiry into private equity.

    I am writing to ask if you would be willing to read a chapter or two
    so I could get feedback from an expert such as yourself.

    I do understand that since you don’t know me this may be too much for
    you to undertake. But if you are willing it would be greatly
    appreciated. Please let me know if you need any more information for
    you to consider my request.

    Sincerely.

    Laura Katz Olson

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