Gretchen Morgenson headshot and Plunderers book cover

How Private Equity Runs—and Wrecks—America

The debate about whether private equity provides any real value to the economy comes down to whether they force worthwhile business efficiencies. Or are instead, as it was memorably put in 2010 “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

Little question the stance from the 2023 book “These Are the Plunderers: How Private Equity Runs—and Wrecks—America” by Pulitzer Prize­­­–winning journalist Gretchen Morgenson and financial policy analyst Joshua Rosner. It’s thorough and puts into context the people effected by private equity, a murky financial industry that owns businesses that employ something like 12% of all American jobs.

Below I share my notes for future reference.

My notes:

  • KKR and Lee Partners start PE in the 1970/ a when public companies had assets worth more than they were valued for; then junk bonds surged
  • The 1978 revenue act effectively killed new employee pensions
  • Does private equity wring our efficiencies or extract value?
  • 10% more deaths at nursing homes run by PE
  • Hospitals used to be run by nuns and now they’re run by financiers
  • Very small number of PE multimillionaires
  • Federal reserve: 26% Americans have no retirement
  • “private equity is a catchall phrase, but the financiers we are highlighting take over companies in transactions using high cost, borrowed money raised in the corporate bond markets from investors willing to take on greater risks. They are not entrepreneurs or traditional business people, prospering, while creating jobs and opportunities for others.”
  • They’ve perfected “Asshole Capitalism,” as Aaron James put it
  • 20% of PE firms file for bankruptcy, 10 times the normal rate, according to 2019 CA polytechnic state university research (do they take on sicker companies or make them sicker?)
  • “In Maine, 1.7 of the state’s food stamp recipients work for Dunkin Donuts. In Arkansas, 1.1% work for Sonic. In Washington State, 1.4% of the state’s food stamp recipients were 1,163 employees of Safeway.”
  • 12m or 7% of US workforce employed by PE, according to American investment council
  • PE like banking in Great Recession: They demand hands off when times are good but come for help in tough times (Apollo memo leaked begging for government help during Covid pandemic
  • In Washington the real scandal is what’s legal
  • Apollo is firm they follow most closely
  • Investment Council: what is best PE case study? They pointed to Tate’s Cookies by Riverside or Cosmopolitant Casinio by Blackrock; Hilton by Blackrock and Blue Yonder by Blackstone
  • Henry Kravis, Schwartzman , Rubinstein and Leon Black primary principals
  • “Privateers are not entrepreneurs.”
  • Katie Waton Leon Black’s Apollo bought Executive Life insurance
  • Leon Black’s fathers bribery helped lead to 1977 Foreign Corrupt Practices Act (father committed suicide (Leon Black was associated with Jeffrey Epstein and rape allegations)
  • Reagan fired the air traffic controllers, spurning the labor movement
  • John Shaab: Reagan-era reduced review of mergers (LBO boom)
  • John Kenneth Galbraith on leveraged buyouts (LBOs): “It doesn’t produce goods or increased efficiency”… This creates “nothing economically useful”
  • Drexel firm and Lebow were linked to this era (Also, lots of Milken and junk bond references creating this environment)
  • Leon Black -Garamendi deal where Executive Life assets were worth more than it sold for (including bonds); though contested on legality and costing policyholders, Black built his reputation on the massive gains and grew Apollo by getting CalPERS (overrunning the “Drexel taint” and S&L scandal)
  • 2019 NBER: among 10k company buyouts between 1980-2013, employment fell by 13% when PE took over pubic company
  • Drexel Lambert was “the epicenter of 1980s greed”; It collapsed but spawned so much else
  • Too big to fail
  • Clinton era teams reduced banking regulation: Carried interest loophole firmed in 1993
  • Shift off pension to “inferior” 401k plans where unsophisticated planners are sold expensive products, authors write
  • Iconic 1916 photo of the Samsonite family standing on its luggage: strong enough to stand on, now a PE case study
  • PE firms frequently collude not compete and use the companies to pay fines and fees
  • PE likes industries with lots of real estate to sell and employees to trim
  • Noranda electric rate reduction controversy
  • PE requires one of their companies to work with another, a kind of PE feudalism that looks like today’s conglomerates — is that really good for economy?
  • Carlyle and manorcare
  • CBO 2006 report on pandemic preparedness talked about ventilators and need to invest in systems that PE wouldn’t want: “There were simply too many rich veins in the healthcare industry to be mined to spend time worrying about a possible pandemic.”
  • Bill Frist who was part of CBO Pandemic report later invested in $33b deal over Hospital corporation of America; a HCA frontline worker Jamelle Brown got a 13 cent raise at same time that CEO Samuel Hazen got a 13% raise in 2020 to $30.4m, 556 times median HCA worker; 1000 times Browns
  • By Covid 2020, Blackstone and KKR owned one-third of the nation’s ER rooms
  • Calls them plunderers and privateers, not entrepreneurs
  • Doctor Patient Unity is a nonprofit PE tactic; fund a pressure group (reminds me of Merchants of Doubt)
  • Carried interest tax rate of 15% was meant to help small business but strengthened of PE; Obama administration wanted to close this loophole;
  • Schwartzman compared that Obama move to Hitler entering Poland in 1939
  • Authors shoutout Inquirer reporter Joe Distefano’s analysis of Apollo under performing for the PA Public School Employees Retirement Systems, after agreeing to put $100m more into Apollo.
  • 2020 Harvard / Stanford analysis said PE fees shrunk pie by 10% (So why does anyone use these PE firms to manage money?)
  • Bank for International Settlements in 2020: in 1980s 4% of public companies were over indebted zombie companies; in 2017 it was 15%
  • Bayonne NJ water privatization with KKR
  • Apollo and Athene merger let it be publicly listed and get passive index fund money
  • Trump/ DOL turned ERISA allowing 401k to put money into private equity
  • PE lobbying
  • Nicholas Brady predicted the market would correct excesses in LBO
  • Are there too many PE firms now? 5k of them including one with Kim kardashisn
  • (My note: What is difference between VC and PE in their usage and count?)
  • In 2009, typical PE deal was for 8 times earnings, now it is 14; secondary buyouts (SBO) were 5% in 2001 and now 40%
  • Forbes founder: “Diamonds are chunks of coal that stuck to their job”
  • Enablers like university endowments and public pension funds/ : it’s a mystery why they’re enthralled with them since their returns hardly outpace S&P when fees are considered
  • Stop Wall Street Looting act; but the policy would impact small business and PE is expert at disguising itself as entrepreneurship
  • Oren Cass of American Compass
  • SEC Commissioner Allison Herren Lee’s 2021 Going Dark speech
  • West Virginia vs EPA Supreme Court said only Congress could determine pollutants and other regulatory agencies put on notice
  • Author shouts out Robert McNamara at Temple for advice on dangers of corporations practicing medicine
  • David McGraw is called the “greatest first amendment lawyer alive”

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