Buyout of America: How Private Equity Is Destroying Jobs and Killing the American Economy

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

We would like it to be a forum where we tell you what is presently going on with private equity companies and the private equity debate.

BC Partners in December 2014 led the biggest leveraged buyout in almost two years paying $8.3 billion for publicly traded PetSmart.

Seven of the biggest private equity firms agreed in 2014 to settle a lawsuit for nearly $800 million accusing them of agreeing from 2005-08 not to interfere with each other’s signed buyouts of public companies. That allegedly kept prices paid artificially low.

Half of the ten companies that borrowed more than $10 billion from 2004-07 to finance mega-buyouts have defaulted, as of June 2014.

Moody’s in June 2014 published a report analyzing 188 companies 14 of the largest US private equity firms purchased from 2004-07. The results were not pretty. Twenty-eight percent had defaulted on their debt. Most were formerly healthy businesses.

Cerberus Capital Management is known for pushing companies into default.

The firm that bankrupted Chrysler, GMAC and military contractor IAP Worldwide is struggling to keep America’s biggest gunmaker Remington Outdoor from burning through its remaining cash. Not only has Cerberus borrowed too much money against the business, it has reduced the quality of its rifles making them less popular with hunters.

Teamsters President Jimmy Hoffa Jr. in April 2014 alleged in a blistering editorial that Cerberus looted the pensions of World Airways pilots. The bankrupt World Airways flies US troops to war zones.

Cerberus too is into the fracking drilling space competing against Halliburton.

The company bought in the biggest leveraged buyout of all time, Texas utility Energy Future Holdings, went bankrupt in April 2014. Energy Future helps transmit half the state’s electricity. The company is still operating. Now, the question is if electricity rates will rise as a result of the financial collapse.

Henry Kravis and George Roberts of KKR whom led this buyout must be feeling a sense of déjà vu: Their firm led the biggest buyout of the 1980s — a $30 billion acquisition of RJR Nabisco — much of which also ended up in bankruptcy.

A highly leveraged Energy Future was not able to build the new power capacity Texas needs to avoid blackouts. A new owner might. This bankruptcy could also mean the state is on the hook for mine restoration.

The Sierra Club in May 2012 sued EFH alleging that by its own admission it was violating the clean air act.

KKR, separately, is now providing water and wastewater for the City of Bayonne, New Jersey, and in Dec. 2014 reached a deal to provide the same services for the Borough of Middletown, Pennsylvania.

Meanwhile, KKR’s $7.2 billion buyout of driller Samson is in deep trouble as oil prices tumble. It will likely run out of money in 2015.

Apollo Global Management and TPG Capital owned Caesars Entertainment, America’s biggest casino chain, put its largest subsidiary in bankruptcy in January 2015.

Private equity owned restaurant chains Quiznos and Sbarros both filed for bankruptcy in 2014.

Los Angeles Times article does a very good job focusing on Bain Capital’s 10 biggest investments during Mitt Romney’s time at the firm. Four of those formerly profitable companies went bankrupt.

My February 2011 story in the New York Post revealed how Mitt Romney’s past made him a Working Class Zero.

A new book, 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 authors also find workers at private equity owned companies see wages fall compared to peers.

Layoffs are also part of the story.

A Moody’s December 2011 report found the 40 biggest US LBOs in the 2006-08 period had revenue growth of four percent through June 30, 2011 compared to 14 percent for the broader universe of non-financial rated companies. But earnings kept pace with peers indicating “PE firms may have been more aggressive in reducing costs.”

Regulators are starting to get tougher on private equity firms.

The SEC in May 2014 said many private equity firms were not telling their investors, often state pensions, what fees they were being charged. “We have identified what we believe are violations of law or material weaknesses in controls over 50% of the time,” the SEC said.

Gretchen Morgenson of the New York Times in May 2014 writes a sharp column about the undisclosed fees private equity firms charge their companies hurting both the businesses they own and their investors.

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.

The Federal Reserve is telling the biggest banks they cannot fund leveraged buyouts if the target companies cannot pay back their bank loans in five to seven years. Their threats are getting more serious though, thus far, no bank has been penalized.

The biggest private equity firms are moving into new areas including lending forming a new shadow banking system.

The Bank of England (the equivalent of our Fed) in a March 2013 quarterly report said “the amount and maturity profile of buyout debt could present risks to UK financial stability.” It goes further stating it will be important to monitor the use of debt in acquisitions. The Bank cites the Buyout of America in the report!

The Government Jan. 22, 2014 filed a lawsuit againt Providence Equity Partners owned USIS for rushing through security checks, like the one the security provider conducted on Edward Snowden, to cut costs. The book shows how private equity owned  companies commonly reduce customer service to pay their onerous debts.

Uncle Sam too is investigating Providence owned for profit college Education Management Corp. for paying commissions to recruiters and not properly screening students.

Warburg Pincus in early 2014 hired Former US Treasury Secretary Tim Geithner as President. Five of the last nine US Treasury Secretaries have joined private equity. The reason: PE is where you make the most money.

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).

Harvard in Oct. 2013 said that its private equity returns over 10 years were no better than public equities, making the asset class disappointing.

Sharp Pitch Book analysis of how private equity may still cause the Next Great Credit Crisis.

A RBS Citizens executive in this Sept. 2013 video at 3:00 says private equity firms own about 25 percent of Corporate America.

No wonder the Carlyle Group hosting its September 2013 annual investor meeting drew Goldman’s Lloyd Blankfein and JPMorgan’s Jamie Dimon. Besides, likely 2016 Presidential Candidate Hillary Clinton was the keynote speaker. Former Obama Cabinet Member Austan Goolsbee also appeared.

Carlyle’s political pull did not stop CNBC’s Jim Cramer in 2014 from questioning the value of private equity in an exchange with Carlyle Founder David Rubenstein. As usual, Rubenstein said private equity firms save troubled companies, which is factually inaccurate. They instead typically saddle healthy companies with burdensome loans.

Republican House Ways and Means Chair David Camp in Feb. 2014 recommended ending carried interest so private equity giants pay their fair share, and government could use the proceeds to lower the overall corporate tax rate. The proposal did not go anywhere.

The President with an executive order can end carried interest, an influential tax expert argued in June 2014.

But, Treasury responded to me later that month saying it would not intervene. Former Treasury Secretary Tim Geithner even wrote Senator Sheldon Whitehouse in 2010 telling him as much (Geithner Letter to Sen Whitehouse (1)

The Private Equity Growth Council in this video says carried interest is fair. No mention of how private equity firms collect fees that cover their investments, and then some. Or how the CEOs at their companies run their businesses so they also provide limited sweat equity.

Private equity titans, though, are more worried about a movement to end corporate interest tax deductibility than carried interest.

Corporate interest deductibility allows companies to take the interest they pay on loans, even if used to finance LBOs, off their taxes. Several key Republicans are open to limiting the loophole, including former Republican Vice Presidential Nominee Paul Ryan!

I explain in a video (clip is from the documentary CorporateFM) how private equity works, and why it does not make any sense. Also, I explain that ending interest tax deductibility in corporate takeovers would end destructive buyouts.

President Obama on Feb. 22, 2012 also unveiled plans to reform the tax code including reducing corporate  interest tax deductibility.

The Financial Times in June 2013 does an excellent study on how British companies bought in leveraged buyouts pay much less in taxes, 11 percent, than their peers, 20 percent. The G8 is concerned about the tax break.

There is a good question and answer segment I had Jan. 12, 2012 on how Bain makes money from tax gimmicks, and how our tax laws should be changed. The New Yorker weighs in with a good analysis.

British academics in June 2013 release convincing report showing that UK companies taken private in leveraged buyouts fare worse than their peers.

Here is quite a turn: Meg Whitman-led Hewlett-Packard reacting to Siver Lake Partners’ $24 billion buyout of Dell said Feb. 6, 2013, “Leveraged buyouts tend to leave existing customers and innovation at the curb.” She is a long-time friend of 2012 Republican Presidential Candidate and Bain Capital founder Mitt Romney.

Moody’s Investors Service found in June 2014 when studying companies owned by 14 of the biggest private equity firms that from 2010-13 the number of downgrades was greater than the number of upgrades. “The vast majority of these downgrades were due to sponsored companies failing to meet expectations for improving financial performance.” The increase mostly affected companies bought after the financial crisis.

A European labor leader at Davos 2013 tells CNBC’s Maria Bartiromo in a must-watch discusssion that the world is suffering from a private equity mentality.

Designer Jimmy Choo’s co-founder, Tamara Mellon, in Oct. 2013 writes a book claiming private equity firms “are the sociopaths of investment banking.”

“They come in and raid – raid your bank account and take your accomplishments. It’s all about fattening the pig for the slaughter, with no care about the people or the product.”

Please read my Oct.2, 2012 Salon op-ed about how Mitt Romney said during his Presidential campaign that he helped build Sealy, and how that does not square with upstart Tempur-Pedic agreeing to buy Sealy for only $2.20 per share.

Former Reagan Budget Director, and private equity investor, David Stockman writes a scathing Newsweek feature revealing that Romney did not make money by building businesses but instead from financial manipulation. He makes a convincing case.

Hilarious, and largely accurate, video on how private equity firms hurt small business owners.

I appeared on CNBC’s Squawk Box August 6, 2012 explaining why I believe private equity firms hurt the economy to Andrew Ross Sorkin.

The New York Times in August 2012 did great investigative reporting revealing how private equity owned HCA, the largest hospital chain in the country, put profits over patients to pay debt and performed unnecessary heart surgeries. A second story showed exactly how it boosted profits.  That is consistent with what I found in my book when examining the private equity owned Iasis hospital chain. It is also similar to what ProPublica found in examining private equity owned dental chains. Texas in Jan. 2013 announced it wanted to take action to regulate dental chains. Then, Salon wrote an investigative story about how Bain owned CRC Health Group, the largest provider of residential troubled teen and drug  recovery centers, neglects and abuses patients. Very scary pattern.

Meanwhile, Bain Capital in Summer 2013 bought the Government owned blood bank business in a privatization.

Private equity and health care shows the dangers of privatizing public sectors.

My Rolling Stone May 22, 2012 op-ed on “Why Private Equity Firms Like Bain Are The Worst of Capitalism”.

On the Jan. 18, 2012 PBS NewsHour I debate a partner at a private equity firm about how the PE industry impacts the economy.

Private equity investor Leo Hinderey Jr. says an honest assessment of the private equity industry shows it has plenty of warts.

We ask you to send in reflections on your experiences with private equity owned companies, which will be shared with readers, and thoughts on the subject.

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.


Private Equity Updates
Share Your Experience | Private Equity News

Next Great Credit Crisis Delayed, But Still Looming

In 2013 private equity owned U.S. cos. taking advantage of this low-rate environment refinanced $110 billion of their debt through Sept. 11, according to S&P. US non-financial cos., as of the end of 2012, had $645 billion of below investment grade debt  that needed to be paid by 2017, according to a Moody’s report. The most, 40%, came due in 2017.

Leveraged buyouts cause defaults

The January bankruptcy of Caesars Entertainment means three of the five biggest leveraged buyouts of all time have resulted in bankruptcies. Besides Caesars, Energy Future Holdings (formerly TXU), filed for bankruptcy last April, and much of what RJR Nabisco became, World Kitchen, filed for bankruptcy in 2002.HCA and Equity Office Properties are fine.

WATCH & LISTEN»

Josh Kosman Debating the merits of Private Equity March 3, 2011 at Sciences Po University, Paris Watch Josh Kosman speak»|Watch Panel Discussion (heated exchange starts at 42:00)»

Josh Kosman speaking at media lauch party for the November 17 release of the paperback edition of Buyout of America at the Empire Room (on the ground floor of the Empire State Building) where the crowd drunk "Screwed Worker" cocktails. Watch Josh Kosman's speech»

Featured on PBS Newshour's Potential Risks of Buying Companies on Borrowed Money Examined on July 16, 2010 Watch PBS NewsHour Report»

Listen to NPR's Joshua Kosman, Predicting The Next Credit Crisis on November 16, 2009 Listen to NPR Radio: Fresh Air with Terry Gross»
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  • About The Book

    Few people realize that the top private equity firms, such as Blackstone Group, Carlyle Group, and Kohlberg Kravis Roberts, have become the nation’s largest employers through the businesses they own.
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