Private Equity is the Killer
Just one more thing . . . .
Large-scale financial crime follows a plot. It’s not the classic whodunnit in which an intrepid detective follows clues to track down an unknown killer. No. Financial murder is a howcatchem. Like a Colombo episode, the crime occurs in full view of the audience. We know who the killer is. The suspense comes from the pursuit of the criminal. Will the perpetrator be exposed and brought to justice? And how?
We are living in a perverse Columbo episode. The killer is known. The witnesses have come forward. Nine-one-one has been called . . . right? But who—and where—is the crime-fighting gumshoe who will make the case? Will justice be served?
Crime Number One: Looting Hospitals
This was a complex, well-planned, multi-stage crime. The Private Equity perpetrator, or PErp for short, targeted deep-pocketed investors (who asked no questions) to whom they promised huge returns. With the OPM (other people’s money) in hand, the PErps bought up hospitals, “restructured” them into healthcare “systems,” then sold hospital assets (e.g., land and buildings) to shell companies they controlled.
Private Equity operations work like an auto strip shop, extracting the high-profit components and scrapping the rest. With hospitals, the “rest” is the unprofitable part, like staffing and providing services to patients. Since taking care of sick people doesn’t generate wealth long term, it’s important to extract as much “value” as possible from the hospitals in the early stages of ownership. This happens in two ways. First, use OPM to buy more healthcare companies and expand quickly to attract additional investors. Second, play the “dividend recapitalization” gambit. Renowned financial journalists Joe Nocera and Bethany McLean explain how this works:
[First] fold in other companies so it appears as though you’ve got a fast-growing business. Then you can flip it back to the public markets, via an initial public offering, before the problems that inevitably follow a debt-fueled acquisition binge show up in financial reports. By 2004, when Forstmann Little sold its interest in the hospital chain, it had tripled its early investment . . .
[Second] . . . Blackstone and other investors bought another hospital chain, Vanguard Health Systems—which later. . . acquired hospitals such as the Detroit Medical Center. In the ensuing years, Vanguard also added more than $1 billion of debt—money that was in part used to pay dividends to private-equity investors. Such actions have become known as “dividend recapitalizations”: The company borrows additional money not to invest in itself, but to pay the investors who control it. [emphasis added—m.o.]
What’s left after the looting? People with chronic or acute illnesses get the run-around and huge, unpredictable medical bills. Nurses, doctors, and technicians have to “do more with less” and they get the run-around when expressing concerns about quality of care. Communities get sicker. And when the hospital is hollowed out and run down, it no longer functions as an economic hub for ancillary employment and services. Communities get poorer.
Some would argue that this is just run-of-the-mill financial fraud. Shouldn’t it be a matter of civil liability and damages—and not one for the police?
“No,” I say. “Arrest these PErps!” On charges of grievous bodily harm to a community (dismantling its medical infrastructure) and felony murder (killing a local economy during the commission of another serious crime).
Hey—IANAL, but I can strain an analogy with the best of them.
Crime Number Two: Stealing Homes
The hollowing out strategy deployed by private equity in one domain is fully transferable. Real estate is an easy target. High finance had experience fleecing this particular mark—remember the housing crisis of 2007-2008 that cratered the US economy? In 2010, the Dodd-Frank law enacted mild regulations on investment banks. The goniffs had to find a new home. The PErps got busy.
The private equity incursion into residential neighborhoods followed a now-familiar playbook. To wit: use buckets of OPM to outbid individual home buyers, buy up vast swaths of neighborhoods, convert single-family-owned properties into rentals, increase rents, and decrease maintenance expenditures to maximize profit. The PErps use their buckets of money to stifle competition and control local real estate markets.
Metro Atlanta is a case study illustrating this sophisticated thievery. In their investigation, the Atlanta Journal-Constitution found:
Metro Atlanta has become ground zero for an investor takeover of the American Dream.
Long the bedrock of family wealth for the middle class, single-family homes have been snatched up in the thousands by private equity firms and publicly traded companies, converted into rental properties and bundled into complex investment vehicles.
These firms did not create Atlanta’s affordability crisis. . . . But a growing body of evidence leaves little doubt that the flood of cash from investors has exacerbated it.
“They go after every listing under $500,000 … it’s like clockwork,” said Maura Neill, a realtor in Alpharetta. “The property gets listed and, sight unseen, they make offers within an hour.”
The illustrations below, based on the AJC data analysis, show the pattern of private equity acquisitions. PErps passed over Atlanta’s upscale residential areas with their expensive homes and well-heeled owners. Private equity devoured the “less desirable” neighborhoods.
These PErps don’t leave fingerprints. Goldman Sachs is several arm lengths away from Pretium Partners. Invitation Homes, with the most properties in Metro Atlanta, is the bagman for private equity behemoth Blackstone Inc.
Back in the day, younger people, working people, and middle-class people could save up for a downpayment, apply for a loan, purchase a “starter home,” and commit to building equity over time. For this—a long-term process promoting economic and family stability—a fair and competitive real estate market is required. However, a housing market dominated by a few private equity companies with inexhaustible financial resources is neither fair nor competitive. Their heist is massive and in broad daylight. Everyone can see the PErps absconding with the loot.
Other criminal enterprises:
Having already used up my weekly word count, I am unable to cover the remaining misdeeds of our PErps. Investigations are ongoing. Here are some links . . .
The manufactured housing park scam.
Same PErps, same modus operandi.
Our Crusading Detective
Has all this criminality gone unnoticed?
Given the abundance of political donations by PE executives, it’s not surprising that most politicians have overlooked their financial thievery. One senator has not. This aptly titled article describes our solitary crime fighter’s uphill battle: Elizabeth Warren’s long, thankless fight against our private equity overlords.
Detective Warren has gathered the evidence:
Warren highlighted private equity’s troubling pattern of squeezing as much as they can out of companies, workers, and consumers in order to line their pockets. Private equity’s retail takeover has killed more than 1.3 million jobs over the last decade, and research shows that private equity ownership of nursing homes led to a 10% jump in short-term mortality rates.
Warren introduced her Stop Wall Street Looting Act bill in the Senate in 2019. No takers. In October 2021, her bill was reintroduced with a number of co-sponsors.
Although Warren’s legislation has not advanced, the Biden administration has taken some baby steps in the right direction. The antitrust divisions of the DOJ and FTC have drafted new guidelines to strengthen federal antitrust enforcement.
While no sector has been singled out, some of the draft principles are particularly relevant to the tech industry and buyout groups. Khan and Kanter, progressive antitrust officials appointed by Biden, have already adopted a tougher enforcement stance, vowing to crack down on anti-competitive conduct in Big Tech and private equity [emphasis added—m.o.].
Midseason Finale (Cliff-hanger)
This is the easiest-to-write script of the season: The PErps slipped away again! (Do we know how many episodes are left?)
And now . . . your moment of anatomical ingenuity
Writing—and reading—about serious subjects can be fairly depressing. That’s why I’m introducing a new feature at the end of each essay. Here’s a story about starfish . . .
Starfish ‘arms’ are actually extensions of their head, scientists say
Marine biologist Dr. Jeff Thompson:
To summarise starfish anatomy, I would say it’s a mostly head-like animal with five projections, with a mouth that faces towards the ground and an anus on the opposite side that faces upwards.
Dr. Thurston Lacalli added that you could think of the body of a starfish as
a disembodied head walking about the sea floor on its lips — the lips having sprouted a fringe of tube feet, co-opted from their original function of sorting food particles, to do the walking.
Related Grounded articles:
How Cheap? (October 31, 2023)
Why is Life So Hard Here? (August 29, 2023)
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Notes:
Arianna Coghill, Elizabeth Warren’s long, thankless fight against our private equity overlords.
Brier Dudley, Private equity firms buying newspapers cut local news.
Brian Eason and American Dream For Rent: Investors elbow out individual home buyers.
Rogé Karma, The secretive industry devouring the U.S. economy.
Joe Nocera and Bethany McLean, What financial engineering does to hospitals.
NPR, What happens when mobile home parks are taken over by private equity.
Stefania Palma, New US antitrust guidance puts private equity and tech deals in focus.
Connor Raikes, The “Howcatchem” Hero
Emily Stewart, Elizabeth Warren’s latest Wall Street enemy: private equity
Heather Vogel, When private equity becomes your landlord.
Great article. But what can we DO?
The result (or cause?) of economic inequity. Unfortunately, this has been going unchecked since the Reagan presidency and why? Maybe because the average American has absolutely NO understanding of the private equity market, how the stock market actually works nor the amount of influence that these people have on local, state and federal government. These are the "Robber Barons" of the 20th and 21st century.