(2023-04-28) Ballou Private Equity Is Gutting America And Getting Away With It

Brendan Ballou Opinion: Private Equity Is Gutting America — and Getting Away With It. Companies bought by private equity firms are far more likely to go bankrupt than companies that aren’t. Over the last decade, private equity firms were responsible for nearly 600,000 job losses in the retail sector alone. In nursing homes, where the firms have been particularly active, private equity ownership is responsible for an estimated — and astounding — 20,000 premature deaths over a 12-year period. Why do private equity firms succeed when the companies they buy so often fail? In part, it’s because firms are generally insulated from the consequences of their actions

(Mr. Ballou is an attorney and the author of the forthcoming “Plunder: Private Equity’s Plan to Pillage America,” from which this essay is adapted.)

Consider the case of the Carlyle Group and the nursing home chain HCR ManorCare. In 2007, Carlyle — a private equity firm now with $373 billion in assets under management — bought HCR ManorCare for a little over $6 billion, most of which was borrowed money that ManorCare, not Carlyle, would have to pay back.

ManorCare soon instituted various cost-cutting programs and laid off hundreds of workers. Health code violations spiked.

In 2018, ManorCare filed for bankruptcy, with over $7 billion in debt. But that was, in a sense, immaterial to Carlyle, which had already recovered the money it invested and made millions more in fees.

The family of one ManorCare resident, Annie Salley, sued Carlyle after she died in a facility that the family said was understaffed.

Yet when Ms. Salley’s family sued for wrongful death, Carlyle managed to get the case against it dismissed. As a private equity firm, Carlyle claimed, it did not technically own ManorCare. Rather, Carlyle merely advised a series of investment funds with obscure names that did.

When firms, through their takeovers, load companies up with debt, extract onerous fees or cut jobs or quality of care, they face big payouts when things go well, but generally suffer no legal consequences when they go poorly.

But it isn’t just that firms benefit from the law: They take great pains to shape it, too. Since 1990, private equity and investment firms have given over $900 million to federal candidates and have hired an untold number of senior government officials to work on their behalf. lobbying

Such investments have paid off, as firms have lobbied to protect favored tax treatments, which in turn have given them disproportionate benefits when their investments succeed. The most prominent of these benefits is the carried interest loophole, which allows private equity executives to pay such low tax rates. The issue has been on the national agenda since at least 2006, and three presidents have tried to close the loophole. All three have failed.

Most recently, in 2021, as part of his first budget, President Joe Biden proposed to end the benefit for people with very high incomes. But as he made his pitch, private equity opposition surged, and the largest firms each spent $3 million to $7 million on lobbying that year alone. One firm, Apollo Global Management, employed the former general counsel to the House Republican caucus, a former senior adviser to a past speaker of the House, a former chief of staff to another speaker and a former senator, plus more than a dozen other former officials.

Congress can clarify that firms can be sued for wrongs committed by companies they effectively control. States and cities can do the same when portfolio companies are based in their jurisdictions. By making private equity firms responsible for their own actions, we can build a better — and fairer — economy, and make tragedies like that at ManorCare less likely. All we need is the courage to act.