Books about the business world usually aren’t compelling page-turners. And yet Megan Greenwell accomplishes exactly this in Bad Company: Private Equity and the Death of the American Dream, her deep dive into the murky realm of private equity companies.
It’s something that most Americans know little about, but it casts long shadows over our nation’s economic landscape.
Greenwell spells this out early on: “Twelve million people work for companies owned by private equity firms—about 8 percent of the employed population, collectively generating $1.7 trillion of the nation’s gross domestic product.”
However, given private equity’s under-the-radar way of doing business, many of these employees don’t know that they’re essentially working for outfits like Blackstone and Apollo Global Management.
Private equity has left its mark on many sectors of the economy, including private hospitals; oil, coal and gas producers; supermarket chains; fire departments; emergency medical clinics; and commercial and residential properties.
Not only that: Private equity firms own Cirque du Soleil and the rights to several Taylor Swift albums.
So what makes these companies “private”?
Unlike publicly traded firms, they aren’t required to share much information about themselves. For example, they don’t have to identify which businesses they own, nor do they need to reveal how those businesses are doing.
Where did the notion of private equity firms come from?
Greenwell traces their origins to an essay penned by economist Milton Friedman in the New York Times in 1970.
In this piece, Friedman contends that “[t]he social responsibility of business is to increase profits”—period. Other considerations—things like providing employment opportunities, cutting back on pollution and battling discrimination—should play no role whatsoever in American capitalist practices. Indeed, for Friedman such concerns would be “socialist.”
And how do private equity firms tend to operate?
As a rule, they buy businesses and then take on complete control of them. Bank loans provide most of the cash used to purchase these companies. In fact, loans accounted for 74% of the average leveraged buyout between 2013 and 2023.
The loans are structured so that, should a company get into financial straits, it will be held accountable to pay off those loans—and not its private equity owner.
Private equity deals also typically follow a “2-and-20” arrangement. When outsiders invest in them, they hand over 2% of their total investment as an annual fee.
The firms also take 20% of all profits from a deal beyond a certain threshold, and further fees—for keeping an eye on portfolio companies or completing tasks such as mergers or refinancing—also help to feather the private equity nest.
The “2-and-20” model means that such firms will take in a reliable flow of profits no matter how the businesses in their portfolios are doing.
How do private equity firms run the companies that they buy? If they perceive a financial advantage to doing so—and often there is one—they might well run those businesses into the ground.
One way of doing that: Trimming labor costs by cutting back on the number of employees.
Another tactic: In sectors with lots of property—hospitals, retail outlets, newspapers—those real estate assets can be sold and the profits from the sales pocketed. Subsequently, the portfolio companies will often be required to pay rent on the same site that they once owned.
An interest in earning money, rather than cultivating successful businesses over the long term, means that such companies are, in effect, “little more than a mine awaiting extraction.”
Which accounts for a revealing statistic: In 2019, researchers reported that companies purchased by private equity firms go bankrupt far more often than other firms. Within a decade, such companies go into bankruptcy proceedings 10 times more often than others will.
Bad Company grounds its critique of private equity in the stories of four employees in different sectors of the economy: retail, healthcare, print news and housing.
Liz Marin, for example, began working at Toys R Us when private equity had already owned it for seven years.
As with many other such firms, Toys R Us fell into financial difficulties because of the loans it had to pay off—the very loans that its new owners had taken out to buy it in the first place.
Toward the end of the company’s existence, management was cutting back on positions and training to the point that customer complaints grew by leaps and bounds, and workers like Marin had to do janitorial tasks in addition to their regular duties.
Three days before the collapse of Toys R Us was made public, company executives received $16 million in bonuses. Shortly thereafter, 33,000 employees lost their jobs. The private equity firms involved with Toys R Us—KKR, Bain and Vornado—didn’t lose money, though.
Bain, for example, earned $61 million in fees during the dozen years that it co-owned the firm—$18 million more than it had paid in. In addition, Bain collected fees and interest every time that Toys R Us had to refinance its loan debt.
Greenwell also recounts the rude awakening of Roger Gose, a dedicated physician in Wyoming. After Apollo Global Management bought two hospitals in different towns, it soon decided to prune expenses by cutting off many of the services that they were offering. The result: the residents of one town couldn’t quickly get the healthcare they needed in an emergency anymore.
One of the hospitals shuttered its mental health ward—the only one of its kind in the whole county. As a result, mental health patients had rooms close to other patients.
In late November 2020, one psychiatric patient was placed in a regular room without security guards. He later entered another room and started gouging out an elderly woman’s eyes with his fingers. Before someone could intervene, he’d completely removed one of her eyes. She later died because of the injuries she sustained; her death was labeled a homicide.
Greenwell offers a plethora of unsettling episodes like these.
So what’s being done to reform this sector?
At the federal level, some measures that would regulate private equity have been proposed. Some are fairly modest, but one—Sen. Elizabeth Warren’s (D–Mass.) Stop Wall Street Looting Act—is far more consequential. If enacted into law, it would effectively prevent private equity from operating as it does now.
Some positive developments have happened at the state level. Recently, Massachusetts passed a bill that mandates more oversight of private-equity deals that involve healthcare; Pennsylvania is now mulling over a similar measure.
Private equity contributes lavishly to both major political parties. In 2020, it shelled out $42 million on Congressional contests, and two-thirds of that amount went to Democratic candidates. Only 12% of Congressional members failed to receive such donations during that election year.
Three years ago, Sen. Chuck Schumer (D–N.Y.), the Senate majority leader at that time, received more than $1.2 million from the sector. Kyrsten Sinema, then a senator from Arizona, got more than $500,000 from the sector; she later helped to preserve the carried-interest loophole, a tax advantage that the industry treasures.
It’s clear that achieving lasting reform will be an uphill battle.
