The Problems With Private Equity

learn about issues that affect our daily lives. And also one to just you know, I want to share with you all of the ways in which I am learning over time how much like we are being screwed in so many different ways, and it's actually really wild. So on today's show, I sit down with Brendan Blue, who is the author of the book Plunder Private Equities Plan to Pillage America. And Brendan and I, you know, I tell him at the start of the interview, I said, look, you know, give me a one oh one class in

private equity. And you know, he gives a wonderful description and low down of fifty thousand foot view of what private equity is. But then we talk about the ways that private equity has been essentially targeting low income and black and brown communities and basically, I don't even know what to say, Like pillage is absolutely the right word that Brendan uses to describe his book, and that is exactly what they are. They are private equity are vultures

that go into low income communities. They take over services and industries that are desperately needed by people with little income. They then basically turn those businesses and services into trash, cause a lot of harm. And then because they are private equity firms, guess who doesn't have the ability to sue the people. And so it's just another way in

which we think. For instance, when you're putting, let's say a loved one in a nursing home, and you think that if something goes wrong, if they were to slip, if they were to God forbid die, that then you can go ahead and sue that nursing home. Well, that nursing home has now been bought over by a private e equity firm that has no liability whatsoever, and also don't need to tell you that it's been bought by

private equity firm. They did this after the foreclosure crisis, right, go in and gobble up a bunch of low income housing, drive up the costs like, it's just this interview was so eye opening and just so disturbing. So I hope that you gain as much insight and information as I did. Coming up next, my conversation with Brendan Blue, the author

of Plunder Private Equities Plan to Pillage America. Folks, I am very excited to welcome to ook at Daily Brendan Blue, who is the author of Plunder Private Equities Plan to Pillage America. You basically are the authority on private equity, and I want to understand because I will tell my listeners it was like I was the kid that I think that was took statistics because I had to took economics because I had to because of my because of my degree in politics, not because I understood anything about

business or math. So please Brandon, give us a fifty thousand foot view, a one oh one explainer on what private equity is.

that I'm sure you've heard of. I'm sure most of your listeners have heard of, but if we're honest, probably a lot of us don't actually know what it is. The basic idea behind private equity is very simple. So private equity firms use a little bit of their own money, some investor money, and a whole lot of borrowed money to buy up companies. They then try to make financial or operational changes to those companies with the aim of

selling it for a profit a few years later. So that is a very simple idea, and yet it has had extraordinary consequences for the entire economy. Last year or in twenty twenty two, I don't think we've gotten the statistics for twenty twenty three. Yet private equity firms spent over a trillion dollars buying up companies in the United States, and for comparison, the entire US GDP is about twenty five trillion dollars. So we're talking about a not insubstantial

part of the economy. You know, if you you know, went to the veterinarian, went to the obg yn decided you know, needed to get an ambi or needed to rent an apartment, there is a good chance that you

ultimately paid a private equity firm. And just as you are seeing bad consequences in veterinary care, in medical care, in the housing market, at least part of those problems, I would argue are the consequence of private equity and the unique problems that that business model has, which I'm happy to get into.

deaths in New York in the nursing homes. Then come to find out, like a little bit down in the article, is that these nursing homes were being run by private equity firms and not by who we thought that they

were going to be. And so when I think about private equity, I think about the fine print that we all just kind of scroll down, whether it's I'm purchasing something or I'm looking at my credit card statement that says do you agree, and I'm like yes, because I don't have the seven days it's going to take me nor the degrees in order to understand what I'm agreeing

to in the fine print. And so talk to us how it is that these private equity firms can buy up places that we use on a regular basis, services companies that are providing services that we use on a daily basis, But we don't actually know that the people who are in charge know what the hell that they're doing other than making money.

nursing homes because of private equity ownership. We've seen lots of anecdotal cases of private equity firms buying up a business, buying up a nursing home, and then patient care suffering health complaints, rising complaints about rodents and vermin and nursing homes and people dying. The basic problem that we've got is it is very hard to hold private equity firms

responsible for the consequences of their actions. And I think this is an important point because it helps to explain why private equity firms are different than many other kinds of companies. So if a nursing home was owned by a public company and somebody dies there, the family of that resident or the state of that resident could generally sue the parent company would be very easy to figure out who owns it, and be very easy comparatively to

hold them responsible. That's not necessarily true for private equity firms because of their ownership structures, where they advise what are called funds that are owned by quote unquote limited partners that then own assets through several shell companies. It can be hard to figure out, even to your point, whether a private equity firm owns a business, and then even if you can figure that out, to hold them

legally responsible for the actions of that business. And so you have a business model where private equity firms can often benefit if things go well at a nursing home, at any other kind of business, walk away legally or financially if things go poorly and at the risk of going on for a long time for your fairly you know,

straightforward question. You mentioned the fine print. One of the things that I think private equity firms have been extraordinarily good at is identifying the fine print that's going to benefit them the most. So to stick on the example of nursing homes, yeah, private equity firms were have often put in forced arbitration clauses into contracts to be admitted

into a nursing home. So if you go to a nursing home, they would, you know, require you to sign agreement saying you couldn't you know, bring a suit if somebody, you know, if something happens to you at this nursing home. There was rulemaking under the Obama administration to try to

throw that get that away that was enjoying. The Trump administration did a significantly less ambitious rule all, which is to say that I think oftentimes private equity executives aren't necessarily that good at running a business, but they are really good at identifying and developing the fine print that you mentioned.

there is no real recourse that we can take. But we didn't know that when we placed our loved one into this facility, right, we just assumed that they knew how to provide care, that it was going to be the best care that we could afford, and that if something terrible were to happen then they would be held liable.

on it. It changes whether you're going to invest in your employees and your infrastructure, if you're going to treat your customers and your patients. Well, that's problem one. Problem two is that private equity firms tend to load up companies with a lot of debt and extract ourn fees.

And so you might have a business that was functional, a functional nursing home, functional, you know, doctors clinic, but suddenly there's so much debt that the business has to pay off, has to service, that it can't invest in

its future, in its operations, in its employees. And then the third thing is what we were just talking about, and which you alluded to in your question, which is insulation from liability, where private equity firms can typically capture the financial upside if things go well and then walk

away if they don't. And let me give you sort of one concrete example here, which is one that it really sticks with me I've used many times, is the private equity acquisition of Friendlies, which was this diner chain in the northeast.

lawyers can make up, but it was this complicated transaction

sells itself from itself to itself emerges from bankruptcy. And the reason that it does that is by executing this transaction, it's able to push the pension obligations that it had to employees and retirees onto what's called the pension Benefit Guarantee Corporation, which is this separate, quasi governmental organization, and suddenly the private equity firm was able to continue to control this business without any of those obligations that it

had to employees into retirees. And I think that's an example of where private equity firms again may or may not be that great at running a business. Like I said, many, if not most friendlies diners unfortunately have cleared do now, but are really good at understanding sort of the gaps or sort of holes in the law that allow them to essentially capture benefit when things go well, walk away when things go poorly. So tell me.

likely to go bankrupt as companies that aren't. And the interesting thing is that the economists that did that study controlled for exactly the question that you were asking, which is our private equity firms just buying up distressed businesses? And they looked at a comparative set of businesses, you know, of various levels of size and health and so forth, and said, no, this, this is robust sort of across

the kinds of businesses that private equity firms buy. So it's not just that private equity firms, you know, sort of are attracted to sort of the most failing companies. It's that private equity ownership at least sometimes can cause those businesses to fail.

your life. YadA YadA, YadA. You shrink it, you get rid of that, You privatize everything, and everyone wins, except everyone doesn't win. It's the people that are the shareholders. It is the CEOs that win everyone else who are workers of the working class, which I believe is everyone

else doesn't. And so I ask, then where does government come in to regulate these entities that are actually not providing anything other than benefits to themselves to make more money and to do so without having any risk whatsoever.

water services. Private equity firms have gotten extremely interested in the higher education business, investing in for profit colleges, and have also taken over increasing parts of our prison system, buying up businesses like prison healthcare companies, prison commissaries and cafeterias, and prison phone companies. So it's an interesting intersection where private equity firms are actually somewhat taking over some aspects that we traditionally deserve for government in terms of what

the government role should be. I think it ultimately goes back to the basic problems that I was talking about, where private equity firms invest for the short term load companies up with a lot of debt and fees insulate themselves from liability. If you can solve those problems, private equity can become a much less destructive. It can become a productive part of our financial system. The question is

how do you get there? And I've laid out there are a lot of things that can be done at the federal level in terms of regulation at the SEC and Treasury Department, Federal Reserve, and so forth, you know, sort of in the weeds, banking regulation and so forth. But there's also a lot that states and localities can do here to reign in or ban sort of the

most abusive tactics that private equity firms engage in. So I think that understandably, activists often look to the federal government to provide the answer here, but there's actually a lot that can be done right in our own communities to try to protect local businesses and prevent them from being pillaged.

when you're talking about municipalities and their water system. The only thing that came to my mind was Jackson, Mississippi, and Flint, Michigan and other places where you go in again, and this is why I asked about is it the fact that they look for places businesses and cities and areas that are already problem areas right, which largely are those areas in businesses and in communities that have a high population of black and brown people. Do you know

what I'm saying? And so there seems to be this affinity for these entities to go after populations and places that they can abuse and that people won't notice.

parks to that. Where private equity firms have found real success in large part because you have captive audiences in some places literally captive audiences that don't have an alternative. And so in those situations, some firms have found real success by raising prices cutting the quality of care because they know that there really is an alternative for the clientele.

So I think, I think it's a really interesting or you know, concerning issue in that the people who are often affected the most by this business model or the flaws of the business model are the ones that are least able to do something about it.

I guess in where where the benefit is. So you use the you know, the Obama administration versus the Trump administration, and let's look at those two because the fact is right that you know, Obama, whom I love, did not do well in terms of dealing with the banking crisis, in terms of providing those people that caused a series of foreclosures around this country for people to lose their jobs and all of these things, and given out to banks that were too big to fail, right, given out

to industry too big to fail, right, put the burden on the people. Then you have Donald Trump, right, who could care less about the people and is all about cutting deals and favors for his friends and you know,

and tax cuts and the like. What I'm saying is that there's not a real, seeming big difference between who is doing right by the people as it pertains to private equity, to corporations and the regulations that are necessary so that people consumers know what they're getting into and also have the ability to understand how they're being tanken advantage of It's like there, it doesn't seem to be one way or the other. And you tell me that

I'm wrong. An administration or party that doesn't get some type of advantage right, because the advantage obviously for them is either money or what have you. I just I'm confused about who is actually fighting for the people.

You know, when you talk about private equity and the abstract, not only is it often kind of boring, it's kind of overwhelming, you know, it seems like a problem too big to sort of tackle. Had on, where I think there's been real success has been looking at specific issues.

So we were talking about prisons earlier. The advocacy work done terrain in the cost of prison phone calls done by a handful of activities, right, Yeah, enormously successful, you know, as you know, you know, started with sort of local legislation in cities, then there was state level legislation. Finally legislation was passed in Congress to address this, which is just extraordinary growth and success. So that's one area. I think.

Nursing homes have been another area of success in that for the first time there's federal rulemaking to establish minimum nursing home staffing criteria. You know, that's the work of activists to make this happen. So I think, you know, I don't want to be overly optimistic or pollyanni ish about this, but I do think that when people pick specific issues where private equity is active and stick with it, I think they can succeed, because we've seen examples of success in the recent past.

If you can change that and hold private equity firms responsible for the consequences of their actions, then you're going to have a situation where private equity firms have to act responsibly because if they don't, they're going to lose a bunch of money. Congress could take action on that.

Regulators can to a certain extent, but I think a lot of that action is going to happen in city councils and in state legislatures over the next few years, and if there's the energy to do that, I think sort of the worst excesses of the private equity business model.