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

The topic of leveraged buyouts should be more timely as ever with President Trump speaking about American job losses, and corporate tax reform on the table. While some job loss is due to trade agreements, more is likely due to the proliferation of leveraged buyouts and heavily indebted companies making cuts.

Private equity firms through LBOs own companies employing roughly one of every 10 Americans in the private sector.

President Trump’s proposed tax reform includes limiting interest tax deductibility, the tax loophole that fuels leveraged buyouts. Companies can presently deduct the interest they pay on loans from their taxes. As a result, private equity owned companies pay half the tax of their peers.

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

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.  The interest the companies pay on the loans comes off of taxes.

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

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, which is similar to the US laws on corporate debt.

Several key Republicans in the recent past have been open to limiting the loophole as part of corporate tax reform, including Senator Dan Coats and House Speaker 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 also unveiled plans to reform the tax code including reducing corporate  interest tax deductibility.

Meanwhile, there is also momentum for the less courageous move of ending the carried interest loophole that allows private equity fund managers to have their profits taxed as capital gains, and not ordinary income. Carried interest would be less important if President Trump succeeds in lowering the overall top tax rates.

Republican Presidential candidate Trump said during the 2016 campaign that private equity barons got away with murder by paying low taxes. Hillary Clinton and Bernie Sanders said the same.

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

President Obama would not. Former Treasury Secretary Tim Geithner even wrote Senator Sheldon Whitehouse in 2010 telling him as much (Geithner Letter to Sen Whitehouse (1)

Warburg Pincus in early 2014 hired Former US Treasury Secretary 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.

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 so they take no risk. Or how the CEOs at their companies run their businesses so they also provide limited sweat equity.

The FT reports in March 2016 that private equity barons are even increasingly borrowing the money they invest in their own funds, so they have very little skin in the game.

Our Government while threatening to close private equity tax loopholes in October 2017 stopped setting guidance on leveraged loans.

The Government Accountability Office said the Federal Reserve’s 2013 guidance limiting leveraged lending beyond certain multiples of earnings should have gone through Congress.

The guidance had the effect of tamping down the number of LBOs because financing was choked off.

The Wall Street Journal in March 2015 reported that private equity firms felt the pinch of the Fed limits.

Now, private equity firms that have a record amount of money to deploy can borrow more and buy $10 billion-plus public companies.

In my book, consultants forecast, and I learned later that Treasury Secretary Henry Paulson feared, that private equity would cause the next great credit crisis. It has not happened yet because private equity firms in a low-rate environment were largely able to re-finance their troubled businesses.

Still, the result of the buyouts of companies during 2004 to 2008 boom are being felt.

Bain Capital owned Toys R US in September 2017 declared bankruptcy, and the media blamed the debt Bain placed on the company. Toys did not have the resources to build a competitive e-commerce site, or to spruce up its stores.

Private equity owned retailers Gymboree, J. Crew, Neiman Marcus, Rue 21 and Claire’s Stores are having similar issues and have not all been able to refinance their way out of trouble, as WSJ reported.

Half of the ten companies that borrowed more than $10 billion from 2004-07 to finance mega-buyouts have defaulted, and iHeart could go bankrupt early next year.

The Wall Street Journal in Sept. 2017 reported leveraged loans though were back and on pace to top pre-financial crisis records.

Private equity firms also continue to hurt customers, like families of prisoners who are gouged when calling their loved ones.

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!

Today the most active private equity-like firm is Brazilian based 3G Capital that now owns Anheuser-Busch, Heinz, Burger King and Kraft. The Warren Buffett backed firm does put companies in debt and makes very deep cuts to raise short-term profits. My May 2015 New York Post exclusive on 3G shows how a confidential McKinsey & Co. memo reveals that 3G puts its companies at risk.

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 say workers at private equity owned companies see wages fall compared to peers.

Private equity firms too have not been transparent with investors.

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 their businesses and 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.

Professor Victor Fleischer in August 2015 writes that endowments pay private equity firms more in fees than they spend on education.

The Government Jan. 22, 2014 filed a lawsuit against Providence Equity Partners owned USIS for rushing through security checks, like the one the security provider conducted on Edward Snowden, to cut costs (USIS parent company Altegrity filed for bankruptcy in 2015). The book shows how private equity owned  companies commonly reduce customer service to pay their onerous debts.

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

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 its private equity returns over 10 years were no better than public equities, making the asset class disappointing.

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 2016 Democratic Presidential Candidate Hillary Clinton as the keynote speaker.

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.

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 by private equity firms 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.

A European labor leader at Davos 2013 tells CNBC’s Maria Bartiromo in a must-watch discussion 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.”

Former Reagan Budget Director, and private equity investor, David Stockman writes a scathing Newsweek feature revealing that Mitt 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.

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.

2 Comments

  1. James
    Posted July 31, 2016 at 3:04 pm | Permalink

    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
    Posted September 4, 2017 at 10:59 am | Permalink

    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.

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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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