NEWS | LEGISLATION | STUDIES
Here, we would like to keep you updated on some of the more recent private equity news, legislation regarding the industry and private equity studies.
There is now much attention on how private equity firms hurt health care companies.
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.
Bloomberg in May 2020 does a deep dive into private equity and how it endangers patients at dermatology practices.
The Washington Post in November 2018 examines how Carlyle-owned ManorCare, the nation’s largest nursing home chain, reduced customer care while the owner still made money.
Blackstone made four times its profits in British nursing home provider Southern Cross even though the chain in July 2011 collapsed with landlords repossessing the homes.
KKR in 2018 bought Heartland Medical, America’s largest dental chain.
Humana partnered with private equity firms TPG Capital and Welsh Carson Anderson & Stowe in July 2018 paid $1.4 billion for Curo Health Services, a hospice operator with 245 locations.
The Private Equity Growth Council lobbying group has a video portraying Blackstone’s Vanguard Health (profiled in the Buyout of America) as a savior of the Detroit Health System. (I have not done enough reporting to verify the Detroit claims).
Bloomberg does a great job in May 2012 revealing how private equity owned dental management practices serving the poor are doing unnecessary dental work—on young kids.
While the criticism mounts, private equity barons still pay a lower tax rate than most Americans.
The carried interest loophole that allows private equity fund managers to have their profits taxed as capital gains, and not ordinary income was somewhat limited in the 2018 Trump tax bill. Now private equity barons have to pay ordinary income for companies held less than three years, which represents about a quarter of their investments.
Trump said during his 2016 campaign that private equity barons got away with murder by paying low taxes. But not that much has changed.
Private equity investor Leo Hinderey Jr. says an honest assessment of the private equity industry shows it has plenty of warts.
Meanwhile, this is not the only area PE firms have been ruthless.
Bloomberg Business Week in January 2020 has a cover story on Apollo Global Management co-founder Leon Black titled “Ruthless”. Good reporting shows how Apollo often makes money by putting businesses including Caesar’s, Linens N Things and Claire’s at great risk.
Bank regulators have reversed the policy under President Obama in which banks were restricted from lending beyond a six times multiples of earnings before interest, taxes, depreciation and amortization (Ebitda) fueling the current buyout boom.
The Wall Street Journal in March 2015 reported that private equity firms felt the pinch of the Fed leveraged loan limits. Guidelines on the limits are detailed here.
Bain & Co. in its 2020 annual report says 75 percent of buyouts in 2019 were financed at a price higher than a six times Ebitda multiple.
The danger is we are in a recession making it harder for companies to repay loans.
The Fed in a May 2019 Financial Stability Report said, “Any weakening of economic activity could boost default rates and lead to credit-related contractions to employment and investment among these businesses.”
The PBS NewsHour quotes me in a Sept. 27, 2018 article speaking about the risks.
Collateralized Loan Obligation (CLO) funds, similar to the CDOs which were instrumental in the meltdown of the mortgage market, have raised record amounts of capital and buy more than half of the loans. Every CLO consists of a little bit of debt from perhaps 150-200 different loans, the idea being that if one of these pieces of debt fails, the others can make up the difference.
Loan covenant quality became weaker than in 2007, according to the “covenants to cushions” Moody’s December 2018 report.
Debt multiples are as high as they were in the prior 2006-08 boon.
To give an idea of what can happen in a worst-case scenario, the leveraged loan default raise rose to 10.5 percent in 2009 before the Government started purchasing securities helping to drive interest rates down.
Moody’s in Oct. 2018 warned that 90 percent of private equity-owned companies are rated B2 or below (considered speculative and subject to high credit risk), while 40 percent of non-private equity-owned companies with speculative debt had ratings that were that low. “The proliferation of lower-rated PE-owned companies with high leverage, small scale, niche business models, and fragile balance sheets will exacerbate the next, more prolonged default cycle,” Moody’s says.
Private equity-owned companies had pre-pandemic been increasingly borrowing money to pay their owners dividends, even more than they did during the 2004-07 boom. That is they were not taking the extra cash and paying their owners, but essentially taking second mortgages.
Moody’s Investors Service in October 2018 reported that 32 percent of the companies owned by the 16 biggest PE firms distributed debt-funded dividends. That is more than the 24 percent during 2004-07, and puts a greater number of companies at risk.
Dan Primack of Axios, typically a private equity advocate, writes a strong editorial saying tax laws should be changed to discourage these dividends.
Clayton, Dubilier & Rice, whose head Don Gogel has defended the industry on television, was sued in June 2012 by water bottle Culligan’s dealers for sucking money out of the business in a dividend leaving it unable to pay its debt.
The relatively good times for private equity firms have been happening while a number of their companies, especially retailers, are going bankrupt.
In May 2020, it was Neiman Marcus and J. Crew.
In December 2017, the Financial Times reported that more than half of the 31 largest leveraged retail buyouts completed since 2007 had either defaulted, gone bankrupt or are in distress.
I explain in this July 2018 Atlantic feature how private equity firms put retailers like Gymboree, J. Crew, Rue 21 and Claire’s Stores in so much debt that, “All it takes is for earnings to stop rising and level off, or even decline a little bit, and you’re in a whole heap of trouble.”
The Wall Street Journal in this sharp and critical 2018 profile shows how private equity giant Sycamore Partners makes money by buying and carving up retailers often leaving the remains for dead.
With the emergence of e-commerce, 43 large retail or supermarket companies filed for bankruptcy from the start of 2015 through April 2017, and more than 40 percent of them were owned by private-equity firms, according to a Newsday analysis.
This great article from University of Pennsylvania academics shows how private equity run supermarkets like Albertsons have too much debt to compete against Wal-Mart and others while peers such as Kroger, which are not burdened by debt, can.
Warburg Pincus in early 2014 hired Former US Treasury Secretary Geithner as President.
Great Washington Post story in July 2018 details how Geithner was now profiting from a predatory lender, after railing against the practice when he was Treasury Secretary.
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.
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. Largely, it has not happened because the low-rate environment allowed companies to re-finance their debt. Private equity, though, has caused the retailer credit crisis so the consultants were partially right.
Guy Hands from British PE firm Terra Firma in a June 2011 speech said the reason private equity firms bounced back after the recession has little do with their own efforts. Instead, it is because the Government bailed out the banks through TARP and they, in turn, were able to refinance debt in PE portfolio companies. Connection to speech highlighted here Boston SuperReturn – FINAL.
BusinessWeek writes great story in April 2013 about how private equity firms and Wall Street banks are buying companies that issue annuities, including Apollo in Athene, and then making risky investments with the money, including moving money into their own funds.
Athene, now publicly traded, in early 2018 bought Voya Insurance and Annuity Company from Voya Financial, Inc.
Private equity firms too have not been transparent with investors.
The SEC in June 2020 said it has spotted continued conflicted relationships at private equity firms and inadequate disclosures to investors.
This comes after 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{b5161931460abc8edbc6e48c0a741205172e2a81f9b40494b6449700e0c6d226} 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.
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 RBS Citizens executive in this Sept. 2013 video at 3:00 says private equity firms own about 25 percent of Corporate America.
CNBC’s Jim Cramer in 2014 questions 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 a convincing report showing that UK companies taken private in leveraged buyouts by private equity firms fare worse than their peers.
Hilarious, and largely accurate, video on how private equity firms hurt small business owners.
Private equity firms have become big in the tech industry.
Meg Whitman-led Hewlett-Packard reacting to Silver 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.”
That happens too in the food industry.
The companies responsible for the European horse meat scandal are owned by private equity firms. This New Statesman article suspects that cost-cutting might have went too far.
US private equity induced meat scandals: Strategic Investment and Holdings owned Topps Meat when its burgers in 2007 were linked to one of the country’s biggest E.coli bacteria outbreaks, and Morgan Stanley Capital Partners owned Premium Standard Farms when pollution from manure run-off endangered surface water.
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.
A 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.
Robert Reich in April 2012 gives a good video illustration of how private equity works by describing leveraged buyouts.
The private equity industry lobbying group, in its response, talks about how private equity firms provide growth capital to help businesses. No mention of debt or how a leveraged buyout is structured.
Private equity firms even rip off shareholders.
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.
Skype employee reveals how owner Silver Lake Partners made a fortune on the backs of scared employees, and would not share the wealth when it sold the business to Microsoft.
KKR in a July 2010 SEC filing revealed how much it makes annually from fees, after expenses: try $411,666 per employee. Three quarters of that comes from management fees to its investors, mostly underfunded state pensions.
The private equity phenomenom is global.
KKR and other private equity firms including Carlyle are making money by investing in fast-growing Chinese companies. KKR bought a minority stake in a Chinese wastewater treatment plant. Carlyle founder David Rubenstein even met China President Hu Jinatao. Carlyle’s companies though are often found to have accounting irregularities.
Meanwhile, KKR is also lending money to Indian businesses.
TPG has had trouble gaining a foothold in Russia; while the Chinese Government in May 2011 trying gain a US foothold took an ownership stake in TPG.
Australia in May 2011 upheld a court ruling forcing foreign private equity firms to pay local taxes when making profits off local businesses.
There is a private equity-military industrial complex.
Disgraced CIA Chief David Patraeus in May 2013 joined KKR. Former NATO commander Wesley Clark in June 2013 joined Blackstone.
It is our pensions that are some of the biggest investors in buyout funds.
Pensions & Investments Magazine in April 2013 published a list of the 10 pensions who were the biggest private equity investors, and the 10 biggest private equity firms.
There is more than $100 billion trapped in zombie funds, firms that have taken more than the required time to invest and are not planning on raising additional funds and are basically collecting unjust management fees, according to the Financial News.
Private equity titans too do not pay their fair share of taxes.
Vanity Fair in its August 2012 issue discloses how Mitt Romney evaded taxes, and pushed tax laws to the point he might have broken them. The reporter, Nicholas Shaxson, quotes me speaking about how Bain brags about how it uses more leverage in its buyouts than other private equity firms.
Romney, like other private equity titans, bought overseas companies, stripped them dry and collected profits for mainly US investors without paying local taxes. Italy knows the score and the country’s residents are angry at Mitt.
The private equity giants are still living large.
TPG’s David Bonderman in November 2012 threw himself a 70th birthday party featuring Paul McCartney. Meanwhile, his company Energy Future Holdings, Texas’ biggest utility, in April 2014 filed for bankruptcy.
Bonderman too in 2018 bought a Seattle NHL expansion franchise.
Apollo’s Leon Black threw a 60th birthday party for himself in August 2011 that featured Elton John as the main attraction. And he paid $120 million for Edvard Munch’s “The Scream” painting. Fellow Apollo co-founder Marc Rowan sold his Hamptons estate for $28.5 million. Apollo’s Josh Harris owns the Philadelphia 76ers and New Jersey Devils.
PE firms dominate the restaurant space.
Caxton-Iseman made a fortune from Buffets while driving the chain into a 2010 bankruptcy.
Job losses typically follow buyouts.
Stephen Colbert compares Mitt Romney to Gordon Gekko and cites an article I wrote starting at 8:40.
Industry consultants say private equity firms need to change their way of thinking and focus on organically growing their companies, while admitting this has not been past practice.
A few private equity firms including Wasserstein & Co. buy companies out of bankruptcy and then run them in a destructive manner. Case in point: Apollo Management bought aluminum maker Aleris which private equity firm TPG Capital drove into bankruptcy, and then within a year had Aleris borrow money to pay itself a dividend, putting it again in crippling debt.
John Ginsberg from the Pension Benefit Guaranty Corp. published a paper in spring 2011 calling for more clarity in laws regarding fraudulent transfers in leveraged buyouts, where the buyout itself puts the company at undue risk. He believes there is little incentive for private equity firms to consider the consequences of bankrupting pensions since pension holders have little legal recourse.
The Wall Street Journal does a nice job revealing how New York City is finding that apartment complexes acquired in leveraged buyuots are in too much debt and cannot keep up with repairs. By fining them more, the City is trying to drive down their values so they are repurchased at more realistic prices.
Blackstone, meanwhile, is becoming a real estate giant now eyeing strip malls.
Private equity owned hospital operator HCA in November 2010 issued its third dividend of the year to its owners (it is not taking the money from surplus cash but borrowing money to pay its owners). For more, read Chapter Six: Plunder and Profit in the Buyout of America.
HCA went public in early March 2011 as the biggest PE-backed IPO ever. Read my story to see how Bain Capital made a fortune by sapping proceeds from its own investors. Meanwhile, there are a growing number of private equity buyouts of for-profit hospitals.
Private equity firms made a fortune from the BankUnited IPO because the FDIC has guaranteed to cover all losses, and is not sharing the upside. In fact, the Government is taking a big loss. Thankfully, the FDIC did not give away many more sizable banks to PE firms after this sale.
New York Times piece on how private equity firms recruit future stars.
Warren Foss, the former head of high-yield at Salomon Brothers believes “much of the leveraging of corporations by LBO shops has been disastrous for the country.”
House Minority Leader Nancy Pelosi seems to be a private equity booster, and has never supported raising taxes on them despite the House voting to end carried interest three times. Read the attached story to find out why.
The Congressional Oversight Panel in March 2010 released a very critical report on Treasury’s bailout of auto finance company GMAC. It questions the systemic importance of GMAC, and why private equity firm Cerberus received preferential treatment. Readers of the Buyout of America know Cerberus Chairman –and former Treasury Secretary– John Snow may have influenced Treasury’s decision to invest $17.2 billion in GMAC.
The PE lobbying group renamed itself the Private Equity Growth Capital Council as part of an industry-wide effort to remake themselves. In fact, PE controlled companies typically do not grow businesses. The Council in Dec. hired House Republican Campaign Communications Director Ken Spain to help spread its deceptive message.
The Sacramento Bee has a nice article detailing how Apollo Management’s placement agent allegedly gave a California Public Employees’ Retirement System trustee an all expenses paid private jet trip to New York to attend a Museum of Modern Art gala honoring Apollo’s Leon Black. After this trip, CalPERS committed billions to Apollo. In a separate article, the Los Angeles Time reports on CalPERS not being transparent about how it makes investment decisions with public money.
The Pension Benefit Guaranty Corp. that invests its money conservatively, largely in fixed income, does much better than most public pensions which have more invested in public equities and from 2005-2010 increased their allocations to private equity.
Fortress Investment Group is trying to build a sub-prime lending business that is the biggest in the country. They have the right man to lead the effort: Daniel Mudd who led Fannie Mae when it bought too many sub-prime mortgages from 2005 to 2008. Fortress in October was unsuccessful in buying GMAC’s Rescap mortgage business.
The Congressional Joint Committee on Taxation in April 2011 was putting together a report on leverage. Look for report on reforming Internal Revenue Code.
Shortly before the credit crisis, the House held hearings on how private equity owned companies impacted their workers. It was not a serious effort, but gives readers a chance to see who was responsible for taking no action. Putting pressure on public officials can make a difference.
A blog for the restaurant franchisee community does a great job showing how former Dunkin’ Brands CEO Jon Luther gave deceiving answers during the hearings (see the second and third parts of this posting).
Bain & Co. in March 2016 releases its annual private equity report. Bain_and_Company_Global_Private_Equity_Report_2016 Good information and data.
British academics in June 2013 release convincing report showing that UK companies taken private in leveraged buyouts led by private equity firms fare worse than their peers.
Michael Milken Institute May 2013 slide presentations on private equity (good data) attached Mid Market Private Equity and New Directions in Private Equity.
Oxford University 2013 revealing study on how private equity firms inflate earnings when fund-raising. Shows need to standardize reporting.
Center for Economic and Policy Research releases a great Feb. 2012 study. Love how it reveals difference between the thorough World Economic Forum (Davos) Study on private equity that shows big job losses at private equity owned companies, and how the same professors that did that study then conduct a much less thorough second study that indicates private equity firm does not hurt employment. These professors, I know, are very friendly to the private equity industry. Pages 17-19.
They also on p.24 break down the differences in the academic studies done on private equity returns, revealing that the most thorough ones show average returns below the S&P 500.
Data firm Prequin in February 2012 releases good industry data, showing that private equity firms post-recession are using their companies more often to buy competing businesses, and less frequently are making new investments.
University of Chicago Professor Steven Kaplan gives a report Kaplan, PE, Past and Present, 2011. It is worth reading to better understand the argument private equity defenders make, and the data used to support their case.
New York times gives a good rundown of many academic private equity studies.
IMF recommends that governments stop rewarding corporations with tax breaks for borrowing money. They are very direct in saying interest tax deductibility hurts economies. Unfortunately, no mention how interest tax deductibility makes leveraged buyouts profitable. Still, a step in the right direction.
Bloomberg writes a sharp analysis about how US state pensions have unrealistic return expectations, and are reaching for yield by investing in private equity. US state pensions have increased their allocation to private equity from three percent in 2000 to 8.8 percent in 2010.
Law firm Schulte Roth studies leveraged buyouts of public companies made from Jan. 1, 2010 to June 30, 2011. Its focus are terms in the merger agreements and it is quite thorough.
Debtwire published a compelling report on how many European private equity owned companies restructured their debt from 2008-2010. Key takeaways: 24 percent of companies between 2008 and 2010 that borrowed money in leveraged deals have already defaulted. Many German restructurings. Senior secured lenders more than half the time repossessed businesses in restructurings.
The New York Times Deal Professor conducts a study showing how merger agreements with low termination fees leads to more instances where private equity firms break merger agreements.
A January 2011 EDHEC Business School Report examines 7500 global investments made over 40 years. Key takeaways: firms making simultaneous investments perform poorly. Investments held over longer periods of time (six years plus) perform much worse than those held for shorter periods perhaps explaining why PE-owned businesses listed on the public markets tend to underperform. Average gross return from companies acquired from 1973-95 is 26 percent; 96-2005 18 percent. Also, PE firms do best when buying German businesses, and worst when acquiring companies in developing countries.
This talk on private equity fees is quite revealing.
Leverage and cyclical industries (where earnings can fluctuate greatly from year to year) do not mix. A study of the 10 biggest leveraged buyouts of global media companies from 2005 through 2009 shows private equity firms are losing money, as of Sept. 30, 2010, in nine of the 10 buyouts.
Providence Equity Partners head Jonathan Nelson says private equity firms grow companies, yet his firm drove movie studio MGM into bankruptcy (and Univision is not faring that much better).
My former Daily Deal colleagues, and friends, David Carey and John Morris, wrote a book published in October 2010 on The Blackstone Group, The King of Capital. The book and their blog are worth reading, and provide a more positive take on the industry than my own.
They do say in the footnotes that my analysis of a World Economic Forum study showing private equity owned companies lay off more workers than their peers is misguided because I ignore the conclusion. That’s true. I just look at the unbiased facts. The World Economic Forum study, despite being written with a pro-PE slant,has great data on the industry including how many companies have been bought and how PE firms have exited them.
London think tank Centre for the Study of Financial Innovation released a study in July “Private equity, public loss?” that generated much publicity. The Center is not a left wing organization and is a promoter of free markets. I found the report very informative. Mostly, it focuses on how private equity firms make most of their money off leverage and general economic growth. Also, there is discussion about how private equity internal rates of return are highly inflated. My favorite passage: “Bracketing leveraged buyouts with Google (a venture capital start-up success) is like comparing a gas-guzzling sports utility vehicle with environmentally friendly car battery technology.” The report costs $50. Link to order above.
Peter Morris in the report says, “Private equity is like an expensive new cancer drug that has been marketed with increasing success for 30 years. Yet neither regulators, nor politicians have taken the responsibility for assessing how well it works, or for ensuring that patients can judge clearly. That would be inconceivable in medicine; it should be unacceptable in finance too.”
Here is the British Venture Capital Association’s response to the report. Very personal, as the Private Equity Council’s attacks against me have been.
FDIC Chair Sheila Bair testified before the FCIC that “corporate sector practices [have] had the effect of distorting of decision-making away from long-term profitability and stability and toward short-term gains with insufficient regards for risk.” Read the last three paragraphs to see the references to private equity and corporate behavior. She makes a good point too about the rising percentage of corporate profits generated by the financial sector, 34 percent in 2008.
Consulting firm McKinsey & Co. in January 2010 published an interesting report Debt and Deleveraging: The Global Credit Bubble and Its Economic Consequences that includes detailing the dangers of leveraged buyouts.
The Government commissioned a 2008 report on private equity. I found it worth reading although it did not attempt to break much new ground. GAO-08-885, September 9, 2009