Trump Just Gave Job Killing Private Equity a Huge Boost
“Private equity — more secret than the mafia.”
-Sign on protest at London School of Economics, 2011
Private equity’s sources of funds are drying up so it lobbied Trump to get access to the $12 trillion private pension fund market and succeeded. Recently Trump signed an executive order directing the Department of Labor to allow employee pension plans to now invest in private equity.
Why Private Equity Is a Problem.
• Private equity’s main tool is slashing jobs after taking over a company.
• Private equity owns 1 in 5 of American businesses and is expanding rapidly.
• It is the third largest employer in the US after Amazon and Walmart yet it operates totally in the dark the way corporations did before the crash in 1929.
• In the health care area, it is putting up costs and lowering quality of care.
• More than half (55.4 percent) of retail bankruptcies since 2015 were at private equity owned chains.
Who Are They?
They are another way that the super rich group together to increase the clout of their investment power.
The term ‘private’ indicates that they only operate private companies because those are completely unregulated by the SEC so there is no supervision or oversight. If they take over a public corporation, they take it private. Then, whatever they do within the corporation is kept from public scrutiny.
They Operate Only in A Dark Market
Through an SEC sophisticated investor exemption, private equity raises the money to purchase the shares of a company privately and confidentially from large organizations such as hedge funds, pension funds, university endowments and not by a public solicitation such as selling shares. Because of this sophisticated investor exemption, the information they give to investors to raise money from fund managers is not subject to any supervision by the SEC. That exemption is based on the belief that the fund manager investors are sophisticated and can protect their funds.
This is the same situation that corporations were in that caused the Great Depression. There was no supervision by government regulators over the accuracy of what the corporations were saying to potential investors. FDR established the Security and Exchange Commission (SEC) and rules to ensure accuracy. No such rules respecting private equity exist today. They can write their own stories and there’s no regulator checking for accuracy.
Once private equity was confined to raising money from sophisticated sources. Now under Trump, private equity can solicit funding from the $12 trillion 401(k) employer sponsored retirement plans of the average worker. This opens an immense new source of funding from vulnerable employees for these vampires of the financial world.[1]
How Big Are They?
In 2024 there were about 11,500 private equity companies operating in the United States. That was a 400% increase since 2000.[2]
In his book, Plunder: Private Equity’s Plan to Pillage America,[3], Brendan Ballou, a federal prosecutor specializing in private equity, notes that just the three largest US private equity groups now control so many companies that collectively they would be the third largest employer in America behind Walmart and Amazon.
How Destructive Are They?
Here is a partial list of some of the better-known businesses that have been taken over by private equity, put through their ruthless extractive business model and then into bankruptcy causing loss of employment and loss of pensions:
Bed, Bath and Beyond, J,Crew, Neiman Marcus, Toys “R” Us, 24 Hour Fitness, Aeropostale, American Apparel, Brookstone, Charlotte Russe, Claire’s, David’s Bridal, Deadspin, Fairway, Gymboree, Hertz, KB Toys, Linens ’n Things, Mervyn’s, Mattress Firm, Musicland, Nine West, Payless ShoeSource, RadioShack, Shopko, Sports Authority, Rockport, True Religion, Wickes Furniture, and others.
A report by The Center for Popular Democracy found:
“Private equity has been a driving force in retail bankruptcies: More than half (55.4 percent) of retail bankruptcies since 2015 were at private equity chains. Before the pandemic, from 2015 to 2019, nearly two-thirds (62.5 percent) of retail chains that entered bankruptcy were owned by private equity firms. During 2020, when the pandemic drove a broader retail downturn, nearly two out of five (39.3 percent) of bankruptcies were at private equity-owned chains.”[4]
Former employees have spoken up about their experience after private equity took over their employer. In March 2004, private equity firm TH Lee took over Art Van Furniture, at the time, the largest furniture store in the Midwest. At its peak it had over 200 stores. In March 2020, TH Lee put it into bankruptcy. Here is what Melody Crawford had to say about her experience with a private equity controlled business:
“I worked at Art Van Furniture for 13 years before private equity killed my job earlier this year…Driven by greed, T.H. Lee not only denied severance pay for me and thousands of other workers, but they also took away our health insurance in the middle of a pandemic. I’m now on unemployment and struggling to make ends meet.”[5]
Harvard medical school published a study detailing the harmful effects private equity cost cutting goals have on healthcare. Their analysis shows an alarming increase in patient complications, especially new infections and falls.
Much worse, the report found the consequences of this cost cutting business model can be deadly. “Private equity acquisitions of nursing homes led to an estimated 20,000 premature deaths”[6] — and made private equity managers’ billions.
Coming to a Business Near You
Historically, they went after big targets — hospitals, hotels, manufacturing. But now they’re coming after your daily life:
• Dental offices
• Veterinary clinics
• Funeral homes
• Daycares
• Physical therapy clinics
• OB-GYN offices
• Grocery stores and gas stations[7].
How Do They Do It?
Their secret sauce is called by the obfuscating name, ‘leveraged buyout’. It means using mostly other people’s money: leveraged means borrowed.
The private equity firm typically first raises money from investor sources and then borrows 20 to 50% of the purchase price of the shares of the target company. Not a penny of this purchase money goes to the corporation. This money goes to shareholders not to the corporate treasury.
If the company is public, it is taken private. Then, because it is a private corporation, the private equity firm makes the corporation responsible for repaying that loan. This is effectively buying a company with one of its own assets, its credit worthiness.
You the taxpayer help the private equity firm because, as a business expense, this loan is deductible from income.
Eileen Appelbaum, co-director of the Center for Economic and Policy Research, says, “Wall Street firms were giddy at the discovery that they could load companies up with debt they’d never be responsible for paying down themselves, and take an ample cut of the proceeds that came from stripping a company bare-and it was all legal”.[8]
They immediately start paying themselves a management, monitoring or advisory fee, which is on top of, not a replacement of the existing executives’ salaries. It will recover the proportion of the acquisition costs that was its own money quickly through this management fee.Private equity seeks out a well-established business that has sufficient cash flow to repay this new loan and pay the new management fee.
They force companies to sell off profitable assets for immediate cash that is quickly stripped out in dividends. By a favorite maneuver, they have the company sell its real estate and then rent those same buildings. The sale results in an immediate cash bonanza for dividends, but long-term future higher costs in rent when these shareholders will be long gone. Sometimes a plus: the private equity firm will be the buyers of the buildings to get the benefit of the prime locations for redevelopment when the target company goes bankrupt.
Because it distributes generous dividends, the private equity firm will have the company take out loans to meet its operating costs. Often the money is borrowed from a company owned by the private equity firm. The company gives that private equity lender a lien on corporate assets ahead of other creditors so the private equity firm gets repaid in priority and there is little left for other creditors in bankruptcy.
Our politicians do their part to help these well named plunderers of businesses by giving them a tax incentive to encourage this type of investment. The politicians give private equity managers a special tax rate that is camouflaged under the name ‘carried interest’. The managers are allowed to pretend that this income earned from investments is not income but capital gain taxed at a much lower rate.[9]
Eliminating carried interest would save the government an estimated $14 billion over 10 years, according to the nonpartisan Congressional Budget Office.[10]
The Uniting of The Right and The Left
The abuse of the leveraged buyout is one of the issues that has authors on both the right and the left raising an alarm.
Josh Kosman, writing on the right, captured his opinion of the dangers of the leveraged buyout in the title of his book, The Buyout of America: How Private Equity is Destroying Jobs and Killing the American Economy.[11]
Gretchen Morgenson and Joshua Rosner, on the left, also say it in the title of their book, These Are the Plunderers: How Private Equity Runs-and Wrecks-America.[12]
Both books have hundreds of alarming examples of the private equity firms’ predatory tactics.
The worst about private equity is yet to come, next post.
The previous articles in this series are here:
1. Hedge Funds and Private Equity: The Hottest Game in Town
2. The New Market Crash Billionaire Maker: The Hedge Fund
3. The Tragedy of Sear: How Hedge Funds Profit from Bankruptcy
