Pluralistic: The long lineage of private equity's looting (02 June 2023)

Today's links

An overgrown graveyard, rendered in silver nitrate monochrome. A green-tinted businessman  with a moneybag in place of a head looms up from behind a gravestone. The right side of the image is spattered in blood.

The long, bloody lineage of private equity's looting (permalink)

Fans of the Sopranos will remember the "bust out" as a mob tactic in which a business is taken over, loaded up with debt, and driven into the ground, wrecking the lives of the business's workers, customers and suppliers. When the mafia does this, we call it a bust out; when Wall Street does it, we call it "private equity."

It used to be that we rarely heard about private equity, but then, as national chains and iconic companies started to vanish, this mysterious financial arrangement popped up with increasing frequency. When a finance bro's presentation on why Olive Garden needed to be re-orged went viral, there was a lot of snickering about the decline of a tacky business whose value prop was unlimited carbs. But the bro was working for Starboard Value, a hedge fund that specialized in buying out and killing off companies, pocketing billions while destroying profitable businesses.

Starboard Value's game was straightforward: buy a business, load it with debt, sell off its physical plant – the buildings it did business out of – pay itself, and then have the business lease back the buildings, bleeding out money until it collapsed. They pulled it with Red Lobster, and the point of the viral Olive Garden dis track was to soften up the company for its own bust out.

The bust out tactic wasn't limited to mocking middlebrow family restaurants. For years, the crooks who ran these ops did a brisk trade in blaming the internet. Why did Sears tank? Everyone knows that the 19th century business was an antique, incapable of mounting a challenge in the age of e-commerce. That was a great smokescreen for an old-fashioned bust out that saw corporate looters make off with hundreds of millions, leaving behind empty storefronts and emptier pension accounts for the workers who built the wealth the looters stole:

Same goes for Toys R Us: it wasn't Amazon that killed the iconic toy retailer – it was the PE bosses who extracted $200m from the chain, then walked away, hands in pockets and whistling, while the businesses collapsed and the workers got zero severance:

It's a good racket – for the racketeers. Private equity has grown from a finance sideshow to Wall Street's apex predator, and it's devouring the real economy through a string of audacious bust outs, each more consequential and depraved than the last.

As PE shows that it can turn profitable businesses into gigantic windfalls, sticking the rest of us with the job of sorting out the smoking craters they leave behind, more and more investors are piling in. Today, the PE sector loves a rollup, which is when they buy several related businesses and merge them into one firm. The nominal business-case for a rollup is that the new, bigger firm is more "efficient." In reality, a rollup's strength is in eliminating competition. When all the pet groomers, or funeral homes, or urgent care clinics for ten miles share the same owner, they can raise prices, lower wages, and fuck over suppliers.

They can also borrow. A quirk of the credit markets is that a standalone small business is valued at about 3-5x its annual revenues. But if that business is part of a large firm, it is valued at 10-20x annual turnover. That means that when a private equity company rolls up a comedy club, ad agency or water bottler (all businesses presently experiencing PE rollup), with $1m in annual revenues, it shows up on the PE company's balance sheet as an asset worth $10-20m. That's $10-20m worth of collateral the PE fund can stake for loans that let it buy and roll up more small businesses.

2.9 million Boomer-owned businesses, employing 32m people, are expected to sell in the next couple years as their owners retire. Most of these businesses will sell to PE firms, who can afford to pay more for them as a prelude to a bust out than anyone intending to operate them as a productive business could ever pay:

PE's most ghastly impact is felt in the health care sector. Whole towns' worth of emergency rooms, family practices, labs and other health firms have been scooped up by PE, which has spent more than $1t since 2012 on health acquisitions:

Once a health care company is owned by PE, it is significantly more likely to commit medicare fraud. It also cuts wages and staffing for doctors and nurses. PE-owned facilities do more unnecessary and often dangerous procedures. Appointments get shorter. The companies get embroiled in kickback scandals. PE-backed dentists hack away at children's mouths, filling them full of root-canals.

The Healthcare Private Equity Association boasts that its members are poised to spend more than $3t to create "the future of healthcare."!event-list

As bad as PE is for healthcare, it's worse for long-term care. PE-owned nursing homes are charnel houses, and there's a particularly nasty PE scam where elderly patients are tricked into signing up for palliative care, which is never delivered (and isn't needed, because the patients aren't dying!). These fake "hospices" get huge payouts from medicare – and the patient is made permanently ineligible for future medicare, because they are recorded as being in their final decline:

Every part of the health care sector is being busted out by PE. Another ugly PE trick, the "club deal," is devouring the medical supply business. Club deals were huge in the 2000s, destroying rent-controlled housing, energy companies, Mervyn's department stores, Harrah's, and Old Country Joe. Now it's doing the same to medical supplies:

Private equity is behind the mass rollup of single-family homes across America. Wall Street landlords are the worst landlords in America, who load up your rent with junk fees, leave your home in a state of dangerous disrepair, and evict you at the drop of a hat:

As these houses decay through neglect, private equity makes a bundle from tenants and even more borrowing against the houses. In a few short years, much of America's desperately undersupplied housing stock will be beyond repair. It's a bust out.

You know all those exploding trains filled with dangerous chemicals that poison entire towns? Private equity bust outs:

Where did PE come from? How can these people look themselves in the mirror? Why do we let them get away with it? How do we stop them?

Today in The American Prospect, Maureen Tkacik reviews two new books that try to answer all four of these questions, but really only manage to answer the first three:

The first of these books is These Are the Plunderers: How Private Equity Runs—and Wrecks—America by Gretchen Morgenson and Joshua Rosner:

The second is Plunder: Private Equity’s Plan to Pillage America, by Brendan Ballou:

Both books describe the bust out from the inside. For example, PetSmart – looted for $30 billion by Raymond Svider and his PE fund BC Partners – is a slaughterhouse for animals. The company systematically neglects animals – failing to pay workers to come in and feed them, say, or refusing to provide backup power to run during power outages, letting animals freeze or roast to death. Though PetSmart has its own vet clinics, the company doesn't want to pay its vets to nurse the animals it damages, so it denies them care. But the company is also too cheap to euthanize those animals, so it lets them starve to death. PetSmart is also too cheap to cremate the animals, so its traumatized staff are ordered to smuggle the dead, rotting animals into random dumpsters.

All this happened while PetSmart's sales increased by 60%, matched by growth in the company's gross margins. All that money went to the bust out.

Tkacik says these books show that we're finally getting wise to PE. Back in the Clinton years, the PE critique painted the perps as sharp operators who reduced quality and jacked up prices. Today, books like these paint these "investors" as the monsters they are – crooks whose bust ups are crimes, not clever finance hacks.

Take the Carlyle Group, which pioneered nursing home rollups. As Carlyle slashed wages, its workers suffered – but its elderly patients suffered more. Thousands of Carlyle "customers" died of "dehydration, gangrenous bedsores, and preventable falls" in the pre-covid years.

KKR, another PE monster, bought a second-hand chain of homes for mentally disabled adults from another PE company, then squeezed it for the last drops of blood left in the corpse. KKR cut wages to $8/hour and increased shifts to 36 hours, then threatened to have workers who went home early arrested and charged with "patient abandonment." Many of these homes were often left with no staff at all, with patients left to starve and stew in their own waste.

PE loves to pick on people who can't fight back: kids, sick people, disabled people, old people. No surprise, then, that PE loves prisons – the ultimate captive audience. HIG Capital is a $55b fund that owns TKC Holdings, who got the contract to feed the prisoners at 400 institutions. They got the contract after the prisons fired Aramark, owned by PE giant Warburg Pincus, whose food was so inedible that it provoked riots. TKC got a million bucks extra to take over the food at Michigan's Kinross Correctional Facility, then, incredibly, made the food worse. A chef who refused to serve 100 bags of rotten potatoes ("the most disgusting thing I’ve seen in my life") was fired:

TKC doesn't just operate prison kitchens – it operates prison commissaries, where it gouges prisoners on junk food to replace the inedible slop it serves in the cafeteria. The prisoners buy this food with money they make working in the prison workshops, for $0.10-0.25/hour. Those workshops are also run by TKC.

Tkacic traces private equity back to the "corporate raiders" of the 1950s and 1960s, who "stealthily borrowed money to buy up enough shares in a small or midsized company to control its biggest bloc of votes, then force a stock swap and install [themselves] as CEO."

The most famous of these raiders was Eli Black, who took over United Fruit with this gambit – a company that had a long association with the CIA, who had obligingly toppled democratically elected governments and installed dictators friendly to United's interests (this is where the term "banana republic" comes from).

Eli Black's son is Leon Black, a notorious PE predator. Leon Black got his start working for the junk-bonds kingpin Michael Milken, optimizing Milken's operation, which was the most terrifying bust out machine of its day, buying, debt-loading and wrecking a string of beloved American businesses. Milken bought 2,000 companies and put 200 of them through bankruptcy, leaving the survivors in a brittle, weakened state.

It got so bad that the Business Roundtable complained about the practice to Congress, calling Milken, Black, et al, "a small group [that] is systematically extracting the equity from corporations and replacing it with debt, and incidentally accumulating major wealth."

Black stabbed Milken in the back and tanked his business, then set out on his own. Among the businesses he destroyed was Samsonite, "a bankrupt-but-healthy company he subjected to 12 humiliating years of repeated fee extractions, debt-funded dividend payments, brutal plant closings, and hideous schemes to induce employees to buy its worthless stock."

The money to buy Samsonite – and many other businesses – came through a shadowy deal between Black and John Garamendi, then a California insurance commissioner, now a California congressman. Garamendi helped Black buy a $6b portfolio of junk bonds from an insurance company in a wildly shady deal. Garamendi wrote down the bonds by $3.9b, stealing money "from innocent people who needed the money to pay for loved ones’ funerals, irreparable injuries, etc."

Black ended up getting all kinds of favors from powerful politicians – including former Connecticut governor John Rowland and Donald Trump. He also wired $188m to Jeffrey Epstein for reasons that remain opaque.

Black's shady deals are a marked contrast with the exalted political circles he travels in. Despite private equity's obviously shady conduct, it is the preferred partner for cities and states, who buy everything from ambulance services to infrastructure from PE-owned companies, with disastrous results. Federal agencies turn a blind eye to their ripoffs, or even abet them. 38 state houses passed legislation immunizing nursing homes from liability during the start of the covid crisis.

PE barons are shameless about presenting themselves as upstanding cits, unfairly maligned. When Obama made an empty promise to tax billionaires in 2010, Blackstone founder Steve Schwarzman declared, "It’s a war. It’s like when Hitler invaded Poland in 1939."

Since we're on the subject of Hitler, this is a good spot to bring up Monowitz, a private-sector satellite of Auschwitz operated by IG Farben as a slave labor camp to make rubber and other materiel it supplied at a substantial markup to the Wehrmacht. I'd never heard of Monowitz, but Tkacik's description of the camp is chilling, even in comparison to Auschwitz itself.

Farben used slave laborers from Auschwitz to work at its rubber plant, but was frustrated by the logistics of moving those slaves down the 4.5m stretch of road to the facility. So the company bought 25,000 slaves – preferring children, who were cheaper – and installed them in a co-located death-camp called Monowitz:

Monowitz was – incredibly – worse than Auschwitz. It was so bad, the SS guards who worked at it complained to Berlin about the conditions. The SS demanded more hospitals for the workers who dropped from beatings and overwork – Farben refused, citing the cost. The factory never produced a steady supply of rubber, but thanks to its gouging and the brutal treatment of its slaves, the camp was still profitable and returned large dividends to Farben's investors.

Apologists for slavery sometimes claim that slavers are at least incentivized to maintain the health of their captive workforce. This was definitely not true of Farben. Monowitz slaves died on average after three months in the camp. And Farben's subsidiary, Degesch, made the special Zyklon B formulation used in Auschwitz's gas chambers.

Tkacik's point is that the Nazis killed for ideology and were unimaginably cruel. Farben killed for money – and they were even worse. The banality of evil gets even more banal when it's done in service to maximizing shareholder value.

As Farben historian Joseph Borkin wrote, the company "reduced slave labor to a consumable raw material, a human ore from which the mineral of life was systematically extracted":

Farben's connection to the Nazis was the subject of Germany’s Master Plan: The Story of Industrial Offensive, a 1943 bestseller by Borkin, who was also an antitrust lawyer. It described how Farben had manipulated global commodities markets in order to create shortages that "guaranteed Hitler’s early victories."

Master Plan became a rallying point in the movement to shatter corporate power. But large US firms like Dow Chemical and Standard Oil waged war on the book, demanding that it be retracted. Borkin was forced into resignation and obscurity in 1945.

Meanwhile, in Nuremberg, 24 Farben executives were tried for their war crimes, and they cited their obligations to their shareholders in their defense. All but five were acquitted on this basis.

Seen in that light, the plunderers of today's PE firms are part of a long and dishonorable tradition, one that puts profit ahead of every other priority or consideration. It's a defense that wowed the judges at Nuremberg, so should we be surprised that it still plays in 2023?

Tkacik is frustrated that neither of these books have much to offer by way of solutions, but she understands why that would be. After all, if we can't even close the carried interest tax loophole, how can we hope to do anything meaningful?

"Carried interest" comes up in every election cycle. Most of us assume it has something to do with "interest payments," but that's not true. The carried interest loophole relates to the "interest" that 16th-century sea captains had in their cargo. It's a 600-year-old tax loophole that private equity bosses use to pay little or no tax on their billions. The fact that it's still on the books tells you everything you need to know about whether our political class wants to do anything about PE's plundering.

Notwithstanding Tkacik's (entirely justified) skepticism of the weaksauce remedies proposed in these books, there is some hope of meaningful action. Private equity's rollups are only possible because they skate under the $101m threshold for merger scrutiny. However, there is good – but unenforced – law that allows antitrust enforcers to block these mergers. This is the "incipiency standard" – Sec 7 of the Clayton Act – the idea that a relatively small merger might not be big enough to trigger enforcement action on its own, but regulators can still act to block it if it creates an incipient monopoly.

The US has a new crop of aggressive – fearless – top antitrust enforcers and they've been systematically reviving these old laws to go after monopolies.

That's long overdue. Markets are machines for eroding our moral values: "In comparison to non-market decisions, moral standards are significantly lower if people participate in markets."

The crimes that monsters commit in the name of ideology pale in comparison to the crimes the wealthy commit for money.

Hey look at this (permalink)

A Wayback Machine banner.

This day in history (permalink)

#20yrsago Theme park of the chariots of the Gods

#20yrsago How is an IRC channel like a Caribbean street-corner?

#20yrsago Can Mozilla live without Netscape?

#20yrsago FCC loosens media concentration, screws America

#20yrsago Kids spend six years recreating Raiders of the Lost Ark

#15yrsago Canada’s DMCA: a guide to the likely talking points

#15yrsago Canadian DMCA will take $500/download from your kids’ college fund

#10yrsago Northern Ireland builds a Potemkin Village for the G8

#10yrsago Usury in the UK

#10yrsago Linda Stone on attention, computers, and education

#10yrsago Gezi protester kicking away teargas cannister

#10yrsago How markets allow people to violate their moral codes

#5yrsago Youtubers with millions of followers are dropping out, citing stress and burnout from algorithm kremlinology

#5yrsago Leaked document shows Trump officials planning to force Americans to spend $311m-$11.8b/year to keep unprofitable coal and nuclear energy plants from shutting wall

#5yrsago Citing bad publicity and internal dissent, Google announces it won’t renew contract to supply AI for US military drones

#5yrsago Tax-funded charter schools textbooks deny evolution, teach human-dinosaur cohabitation, endorse slavery and indigenous genocide

#5yrsago Amid wage stagnation, corporate leaders declare the end of annual raises triggered by increased profitability

#5yrsago Former Tory chancellor takes over newspaper, sells “money-can’t buy” coverage to Uber, Google and others*/

#5yrsago Stanford prof Niall Ferguson conspired with campus Republicans to do oppo research on students who opposed invited eugenicist speaker

#5yrsago Southwest wouldn’t let mixed-race family fly until mom “proved” parenthood

#5yrsago Congresswoman Diane Black [R-TN] blames school shootings on “pornography”

#5yrsago My science fiction story about EFF’s proposed jailbreaking exemption

#5yrsago Tell your parents: Trump is lying to them about Medicare

#5yrsago Leaked memos reveal the deep divisions within Google over Pentagon contract

#5yrsago Governments all over the world buy spy products that let them track and eavesdrop on global cellphones, especially US phones–and-eavesdrop-on-your-calls-and-texts-too/2018/05/30/246bb794-5ec2-11e8-a4a4-c070ef53f315_story.html

#5yrsago Amazon bars Australians from shopping on its non-Aussie sites to put pressure on the government to rescind tax rule

#5yrsago Telegram: ever since Russia’s blocking demand, Apple has prevented us from updating our app

#5yrsago Elon’s Basilisk: why exploitative, egomaniacal rich dudes think AI will destroy humanity

#5yrsago Uganda enacts unenforceable, ridiculous anti-“gossip” internet tax

#5yrsago Count your bees with a Raspberry Pi and machine learning

#5yrsago No, seriously, THIS is the mission patch for Google’s drone warfare AI contract with the Pentagon

#5yrsago Sweden’s notorious copyright troll said they’d sue, but if you ignore them, they just go away

#1yrago How John Deere leverages repair-blocking into gag orders

#1yrago House sales are cratering but inventory is soaring

Colophon (permalink)

Today's top sources:

Currently writing:

  • A Little Brother short story about DIY insulin PLANNING

  • Picks and Shovels, a Martin Hench noir thriller about the heroic era of the PC. FIRST DRAFT COMPLETE, WAITING FOR EDITORIAL REVIEW

  • The Bezzle, a Martin Hench noir thriller novel about the prison-tech industry. FIRST DRAFT COMPLETE, WAITING FOR EDITORIAL REVIEW

  • Vigilant, Little Brother short story about remote invigilation. ON SUBMISSION

  • Moral Hazard, a short story for MIT Tech Review's 12 Tomorrows. FIRST DRAFT COMPLETE, ACCEPTED FOR PUBLICATION

  • Spill, a Little Brother short story about pipeline protests. ON SUBMISSION

Latest podcast: The Swivel-Eyed Loons Have a Point

Upcoming appearances:

Recent appearances:

Latest books:

Upcoming books:

  • The Internet Con: A nonfiction book about interoperability and Big Tech, Verso, September 2023

  • The Lost Cause: a post-Green New Deal eco-topian novel about truth and reconciliation with white nationalist militias, Tor Books, November 2023

This work – excluding any serialized fiction – is licensed under a Creative Commons Attribution 4.0 license. That means you can use it any way you like, including commercially, provided that you attribute it to me, Cory Doctorow, and include a link to

Quotations and images are not included in this license; they are included either under a limitation or exception to copyright, or on the basis of a separate license. Please exercise caution.

How to get Pluralistic:

Blog (no ads, tracking, or data-collection):

Newsletter (no ads, tracking, or data-collection):

Mastodon (no ads, tracking, or data-collection):

Medium (no ads, paywalled):

(Latest Medium column: "Ideas Lying Around: Milton Friedman was a monster, but he wasn't wrong about this"

Twitter (mass-scale, unrestricted, third-party surveillance and advertising):

Tumblr (mass-scale, unrestricted, third-party surveillance and advertising):

"When life gives you SARS, you make sarsaparilla" -Joey "Accordion Guy" DeVilla