How Private Equity Firms Are Widening America's Income Gap (2023)

TERRY GROSS, HOST:

This is FRESH AIR. I'm Terry Gross. The place where you buy coffee and donuts, your child's pre-K school, your loved one's nursing home, your dentist or dermatologist's office, the emergency room and ambulance that took you there, and your health care provider. Pet care may be owned or be under the supervision of thieves. That's what my guest Gretchen Morgenson writes in her new book. The looters she refers to are private equity firms, PEFs, which typically buy companies, then lay off employees and cut costs, services and benefits to increase profits. The ultimate goal is to sell the newly acquired company in a few years, which would give PEF a large profit. But it's hard to tell if a company is owned by a private equity firm because FCPs are shrouded in secrecy. His business model, Morgenson says, widens the income gap by extracting wealth from the many to enrich the few.

She is a senior financial reporter for the investigative unit of NBC News. She was previously a columnist for the New York Times and a senior writer in the investigative unit of the Wall Street Journal. She won a Pulitzer Prize in 2002 for her reporting on Wall Street. Morgenson's new book is titled "These Are the Looters: How Private Capital Works - and Wrecks - America." Her co-author, Joshua Rosner, is a financial policy analyst.

Gretchen Morgenson, welcome back to FRESH AIR. It has been a long time. It's a pleasure to have you back.

GRETCHEN MORGENSON: Gracias, Terry.

GROSS: So before we get into things like why so much of the healthcare industry is now owned by private equity firms, let's start with a little more background on how a private equity firm works. How do you win?

MORGENSON: Private equity firms are what used to be called buyout funds and leveraged firms. You may remember them from the '80s and '90s, but they changed names. They basically buy companies, load them up with debt, and then have to pay off those debts and seize the assets. Because of this, employees are often fired. They cut costs to try to improve profitability and then hope to sell the company to another buyer in, say, five years. So it's kind of the idea of ​​capitalism on steroids, as one of my sources told me. It is a kind of intensified capitalism where the results, where the returns to these companies must be immediate. And that means there are a lot of people on the other side of these transactions who are hurt.

GROSS: You know, acquisitions of these companies by private equity firms are often detrimental to the health of the acquired company. And you say that the purchased company is loaded with debts. What does that mean? How debt-laden is the acquired company? They just bought.

MORGENSON: These private equity firms don't use all their money to buy the company outright. What they do is force the company to borrow in the public markets. ALRIGHT? So they'll issue debt to cover the purchase costs, and so...

GROSS: In other words, sell bonds.

MORGENSON: Correct. And so it's not like the private equity firm is paying 100% of the transaction to buy the company. What they end up doing is depositing a very small amount, but borrowing that company to pay for the transaction.

GROSS: For people who don't understand how bonuses work, can you explain a bit more...

MORGENSON: Of course.

GROSS: ...How come the purchased company has bonds issued in its name and why is it in debt?

MORGENSON: A company issues debt, bonds, notes, any type of fixed income, securities. Institutions buy that debt. Debt usually carries a fairly high interest rate. And so the company that issued the debt, in this case the acquired company, now has huge debts. Now you have to pay interest on the bonds you issued to cover the transaction. So right off the bat, there's a huge cost associated with these transactions that doesn't necessarily hurt the private equity firm. That goes directly to the bottom line of the company they just acquired.

GROSS: Why would a company agree to this?

MORGENSON: A lot of times, Terry, corporate executives get rich when a transaction like this happens. Often it is a series of transactions in which directors approve sales because they command a high price for shareholders. So there are reasons for these transactions that do not involve workers, retirees, customers. Those interested in these transactions do not have the right to vote on them. And that's where the problems start.

GROSS: As you point out, it's very difficult to know which companies are owned by PEFs because they are shrouded in secrecy. And, you know, I should mention that the names of some of the biggest PEFs are names that most people don't know. Would you like to name some of them?

MORGENSON: Well, of course, we have Apollo Global Management, which was founded by Leon Black. We have the Blackstone Group, which was founded by Steve Schwarzman. We have the Carlyle Group founded by David Rubenstein. And we have KKR, which is probably the most famous. They were the private equity firm behind the massive purchase of RJR Nabisco in the late 1980s.

GROSS: So what are some of the areas that are the main targets of PEFs?

MORGENSON: Private equity firms have ravaged the retail industry in recent years. You may remember the Toys"R"Us bankruptcy. That was a perfect example. But there are many, many cases. And in this. In transactions like this, what private equity firms were looking for was perhaps more in the real estate beneath the stores than in the operations themselves. You see, these companies are always looking for company-owned assets that they can strip, strip, and sell and generate income that way. Therefore, retail has been a big focus of attention for private equity firms. And indeed, during the two decades ending in 2020, 542,000 jobs among retail workers were lost because they were bought out by private equity firms.

GROSS: Health care is huge for private equity firms. How much of the health sector is now owned by private companies?

MORGENSON: This, again, is one of those mysteries that's hard to solve because we don't have the ownership numbers, the ownership shares. An estimated 11% of nursing homes are owned and operated by private companies. And that's probably a low number, Terry, due, again, to these hidden properties. We have 40% of the emergency departments in the country run by private equity firms. And by the way, these were the companies that created the amazing billing problems. You go to the emergency department and you think it's your local hospital. You do not know

BRUTUS: Yes. That's what I was going to ask. I always think it's my local hospital.

MORGENSON: And you think your insurance covers it, but actually it's possibly run by KKR or Blackstone, and that could be a situation where your insurance won't cover it. That's what the flash charges were about. A recent study showed that 30% of the country's private hospitals are owned by private capital. So you're talking about huge numbers. Now, we just don't know how many dermatologist, anesthesiology companies, but they're taking over medical offices and bundling them, you know, into big groups. So the acquisition was secret, but it was dramatic.

GROSS: When you choose a doctor, is there a way to find out if PEF has taken over that doctor's practice? We talked about how shrouded in secrecy private equity funds are. But still, is there a way to find out?

MORGENSON: Very difficult. Very difficult.

GROSS: Can you ask the doctor?

MORGENSON: You can ask the doctor, yes.

GROSS: Would the doctor tell you?

MORGENSON: Yes, I would expect the doctor to be honest with you; Definitely someone you know and have been going to for years, yes. Doctors are well aware of this. It really makes this -- these acquisitions really make their lives difficult because with every private acquisition of a medical office, the incentive is greater efficiency, more patients, less time with an existing patient, more, you know, the patient is likely to be cared for. by a nurse instead of a doctor. You know, it's - the desire to make a profit is absolutely huge. So I've talked to a lot of people who were in the middle of those situations and just found it unbearable and eventually left.

GROSS: Let's focus for a moment on nursing homes, because you said: what? - 10 or 11% of residences for the elderly...

MORGENSON: There.

GROSS: ...are owned by private equity firms, and that might be an understatement.

MORGENSON: There.

GROSS: Why are nursing homes such an important target? Where is the money in nursing homes?

MORGENSON: Well, in the book we talked about a specific case, which is the acquisition of ManorCare by the Carlyle Group. And that was a great nursing home company. And again, just like with retailers, these private equity firms are looking at real estate, the land that the nursing home sits on, and that's a potential asset that can be sold, can be foreclosed. So in the case of ManorCare, a perfect example of what happened after private equity took over, bankrupting it along the way. After the settlement, all ManorCare nursing homes were located on property owned by ManorCare. But after the settlement, those properties were sold and now the new owner of the property has collected rent from ManorCare Nursing Homes.

So all of a sudden the costs, the operating costs of all those nursing homes went up. Now, who got the proceeds from the sale of that property? Private equity firm. This is how they collected heavy assets, real estate, land that were part of the company. They succeeded and forced the company, the nursing homes, to pay the rent, which was part of the problem that led to their bankruptcy.

GROSS: Are there certain patterns in the complaints you've heard from both nursing home caregivers and nursing home patients that have been picked up by PEFs?

MORGENSON: I keep hearing that cost is always an issue, that hiring should always be limited. I had an example of a nursing home in California where the roof was not repaired. There was... there was a hole in the ceiling for months, if not years, that was never fixed. The heating system was not working properly and was not repaired. It's all about the costs, Terry, because the lower the costs, the higher the profits for the entities that run these nursing homes.

But yes, I have talked to many patients and loved ones of patients who have told me how they felt that in private nursing homes, their loved ones were just a dollar sign. And the minute that dollar sign was threatened, the worry would go downhill. One example is that the nursing home in question was accepting COVID patients to generate income. And this was during the height of COVID when we weren't sure about it, and, you know, 2020. And it really seemed like taking in these patients was a way of generating revenue for the nursing home, but it really threatened the existing residents of the home. .

GROSS: Well, let's take a break and then we'll talk some more. If you've just joined us, my guest is Gretchen Morgenson, co-author of the new book, "These Are The Plunderers: How Private Equity Runs - And Wrecks - America." We will be back after a short break. This is FRESH AIR.

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GROSS: This is FRESH AIR. Let's go back to my interview with Gretchen Morgenson, co-author of the new book, These Are the Thieves. These are private equity firms, or PEFs, that buy companies, then lay off employees and cut costs and benefits to increase profits. The ultimate goal is to sell the newly acquired company in a few years, which would generate a large profit for private equity firms.

It's not just private equity firms that buy companies, but there are also public pension plans, you know, public employee pension plans that invest in private equity firms. How do private equity firms affect public funds and 401(k)s?

MORGENSON: Private equity has been a great investment opportunity for public pension funds for decades, beginning in the 1990s. California - Public Employees Retirement System, CalPERS is a major private equity investor. In fact, they took a stake in Apollo as a company, but they're not the only ones. Public pensions across the country have invested heavily in this business model, this private capital business model, which really ends up hurting so many people, workers, retirees, taxpayers. So it's a fascinating case where public pensions, which really need to generate benefits for their former employees, are investing in the kind of business model that hurts employees.

So right off the bat, I think it's an interesting paradox. But these pension funds have invested trillions of dollars with private equity in hopes of earning the returns they need to provide the retirees who depend on them with their monthly paycheck, okay? So, pension funds invest in stocks. They invest in bonds. They invest in real estate. They also invest in private equity.

And they have for years, Terry, because private equity has had better investment returns than some of the other options. That's how it worked for a while. But since 2006 or so, private equity returns have reverted to stock market total returns. At first it made sense because private equity generated higher returns for pensions, but it doesn't make sense anymore because the returns have fallen to reflect more than you could get on the Standard & Poor's 500 stock index.

GROSS: So public employees' money is being invested in private equity firms, which are cutting jobs and cutting benefits for other employees.

MORGENSON: That's right. That's how it is. Now it has, too: Private equity firms are trying really hard to get their hands on your 401(k) money, okay? They understand that it is a huge gold coin for them. And if they can get access to, you know, the vast majority of people's 401(k) plans, they're going to be very happy because their fees are so high and they can actually extract fees from the 401(k) plan. holders They also had very high commissions in the pension funds.

And that was something that people who were looking into the private equity investments of these pension funds were quite concerned about, that the fees were high. There have been real cases where the SEC has brought enforcement actions against private equity firms for basically not telling their pension funds the truth about what they were charging companies they bought and sold. So there have been real questions about the merits of private capital in public pensions, but they're still very, very entrenched.

GROSS: Can you talk about how investing in private equity firms has been counterproductive for teachers in Ohio?

MORGENSON: Yeah. There's a great example of a case in Ohio, which was the state teacher retirement called STRS, Ohio STRS. And that was a very typical situation of a public pension in which a significant investment was made in private capital. And, you know, a lot of public pensions, Terry, they don't have employees who are particularly sophisticated with financial instruments. And so this was a situation where the fund ended, and the teachers that were under it, ended up paying huge sums to private equity firms that, you know, invested on their behalf, even though the retirees themselves had to receive a hit. your cost of living increases. .

The Ohio Teachers Retirement Fund has stopped giving beneficiaries a cost-of-living increase, called a COLA. And then this became a problem. And there were complaints. Teachers went to meetings. I mean, it was kind of an interesting battle that went on between the beneficiaries, I mean retired teachers who spent their lives, you know, teaching children and assuming that, at the end of the line, they would have enough money to live on. where they ended up paying very generous sums to private equity firms, even as their profits were hit hard.

GROSS: Well, let's take a short break and then we'll talk some more. If you've just joined us, my guest is Gretchen Morgenson, Pulitzer Prize-winning journalist and co-author of the new book, "These Are The Plunderers: How Private Equity Runs - And Wrecks - America." She is a senior financial reporter for NBC News' investigative unit. We will be back after a short break. I'm Terry Gross and this is FRESH AIR.

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GROSS: This is FRESH AIR. I'm Terry Gross. Let's go back to my interview with Gretchen Morgenson, co-author of the new book, These Are The Plunderers. These are private equity firms (PEFs) that buy companies, then lay off employees and cut costs to increase profits. The ultimate goal is to sell the newly acquired company in a few years, which would generate a large profit for private equity firms. Morgenson says these PEFs have an adverse effect on almost every sector of the economy, from health care to pension funds to retail, and that affects our lives as consumers. Morgenson is a senior financial reporter for NBC News' investigative unit. She was also a financial columnist for The New York Times and a senior writer in the investigative unit of The Wall Street Journal. She won a Pulitzer Prize in 2002 for her reporting on Wall Street.

So let's talk about Donald Trump when he was president and his association with private equity firms. First, he put Jay Powell in charge of the Federal Reserve. What does Jay Powell have to do with PEFs?

MORGENSON: Jay Powell was an executive, a senior executive at the Carlyle Group in Washington for a number of years. So he definitely has, you know, a private equity mindset. Donald Trump also had Steve Schwarzman, who co-founded the Blackstone Group, as a very high-level adviser. You would often see Steve at Donald Trump's house, you know, to the right or to the left when they had business meetings. So, you know, these companies have a lot of influence and power in Washington.

And unfortunately, regardless of who is in power, it is clear that Donald Trump has been more interested in promoting what private equity firms want to do. For example, he made it easy for private equity firms to access his 401(k), to make it an option. And under Donald Trump, the Department of Labor has changed its orientation on private capital. Previously, this was prohibited for 401(k). It was too risky, too expensive, too opaque. You know, it's really hard to know what they're buying. And that's why it was forbidden. You couldn't invest in that in your 401(k). But that changed when the Department of Labor, under the leadership of Donald Trump, released a letter that effectively opened the door.

GROSS: So the Federal Reserve, under Jay Powell, who was appointed by Trump and remains Fed Chairman, created policies that intentionally or unintentionally favored private equity funds?

MORGENSON: Absolutely, Terry. In fact, there was an interesting change that the Fed made. They've never done this before. When COVID just hit and everyone was extremely insecure and the stock market was crashing, so this is March 2020, Apollo went to Washington and talked about how the government needs to make sure that the debt markets, I mean, the markets bonds, corporate bonds, where they raise money to buy their portfolio companies, right? - these markets should have continued to function. And they were kind of in a free fall because everyone was worried and upset and nobody knew what, what was COVID and what was it going to do to the markets. And what the Federal Reserve did in an incredibly unusual policy change never before, they decided to offer support for corporate bond purchases to stabilize the market in which private equity firms operate. It was a great change and a great gift to the industry.

GROSS: So do you think the Biden administration has done something to benefit consumers and workers when it comes to private equity firms?

MORGENSON: Well, actually, the Federal Trade Commission and the Justice Department have announced that they're going to monitor private equity acquisitions a lot more. So the companies that are bought by private capital, these government entities want to look at them to make sure that they are not anti-competitive, that they are not monopolistic. So that's a change. And it's a big change because, as I said before, these redemptions were kind of hidden. Since they're not advertised and they're not under the umbrella of a company name that you recognize, you really don't know how much private equity controls the industry, okay? And finally, the government, through the FTC and DOJ, is watching these types of acquisitions, looking at these deals to make sure they don't result in antitrust or antitrust activities. That's big and it's a change for the better.

GROSS: Your book is, if it's not already clear, very critical of private equity firms. I mean, just look at the title. "These Are Crooks: How Private Capital Works, And Wolves, America". So, has he been able to get any response from the companies he wrote about to defend himself?

MORGENSON: Well, for starters, they disagree. Let's start there. They disagree that their business model is unsustainable, that their business model hurts the vast majority of the people it touches and helps the few people who run those companies. But what was interesting was his answer to a certain question. One of the academic studies we cite in the book is the number of bankruptcies that private companies go through. That's actually 10 times more than the number of non-private companies that filed for bankruptcy. So you're much, you know, more likely to go bankrupt with a private equity firm. And they also claim that they are creating jobs, that they are not cutting jobs, that they are job creators and, you know, innovators.

Blackstone specifically told me that the company has created 200,000 new jobs in the last 15 years and that its bankruptcy rates are much, much, much lower than the numbers we just discussed. They said that a fraction of 1% of their companies go bankrupt. So I was very intrigued and I said I really wish I could report on this. Please provide the information so that I can check. They rejected. So, you know, I'm a little lost. I'm not just going to report that they said that without providing the background information I needed to verify it.

GROSS: Well, let's take another break. If you've just joined us, my guest is Gretchen Morgenson, co-author of the new book, "These Are The Plunderers: How Private Equity Runs - And Wrecks - America." We'll be right back. This is FRESH AIR.

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GROSS: This is FRESH AIR. Let's go back to my interview with Gretchen Morgenson, co-author of the new book, These Are the Thieves. These are private equity firms, PEFs, that buy companies, then lay off employees and cut costs and services to increase profits. The ultimate goal is to sell the newly acquired company in a few years, which would give PEF a large profit. You write that private equity firms have bought public companies that have come under pressure to divest from companies that destroy ecosystems or pollute the planet. You can regulate public companies, but private equity firms are more difficult to regulate. So what is the connection between private equity firms buying public companies and then becoming more opaque and harder to regulate?

MORGENSON: This is a great example of how this happens in environmental damage to the planet. So public companies were under pressure and/or just wanted to do it themselves, reduce their carbon footprint, reduce the damage they cause to the planet through their business. They closed or sold parts of their businesses that were under the scrutiny of the Environmental Protection Agency, people who care about the planet. Well, often these operations are bought by private equity firms that don't have the same accountability to public shareholders as a public company.

So a private equity firm that owns some kind of fossil fuel company, for example, probably won't feel the same pressure to divest that company from its portfolio as a public company that has shareholders who vote every year on issues related to fossil fuels. company. So again, it's a situation one step away. The fact that it is owned by private capital puts it one step away from being able to hold them accountable. And the other thing about the environmental issue is that private equity firms have a short-term horizon, five to seven years. So if they can extract the last bit of, you know, profit from the polluters, they will. Therefore, they are not in some ways the long-term managers of the company that others might be. And that is why it has been a source of irritation and questioning among people who care about what is happening to the planet.

GROSS: One example you write about shows how when a private equity firm takes over a particular company or a particular sector, it can affect so many people in so many different ways. And the example I'm thinking of is when a private equity firm bought an aluminum smelter in a small town. Tell us what happened in that case.

MORGENSON: It was such a sad situation. What is so interesting and significant in the Norand case is that the employees are not the only ones who perished. It was a company, an aluminum smelter in New Madrid, Mo., which is in, you know, the southeastern part of the state, on the Mississippi River. It was a melting pot that was the immense pride of the local population. He got great jobs, a good pension. And he was, you know, a solid member of the community.

Apollo jumped in and bought the foundry, immediately went into debt, immediately cashed out of the company. And over a period of several years, not many years, but over a period of, say, five years or so, he drove the company into the ground, partly because he was repeatedly getting paid. The company declared bankruptcy. Because the company was such a big part of the community, it was a big taxpayer in New Madrid. So, there was a situation where the school district couldn't provide books to students because Noranda didn't pay what it owed to the school district, tax-wise.

So there was a situation where Noranda, under the command of Apollo, wanted to try to lower the price of electricity, the rate that the local utility company charged for electricity. It is obvious that the aluminum smelter will consume a lot of electricity. Well, when the company went downhill, Apollo wanted lower electricity prices. So they had to go through, you know, the public utility commission. It was a great battle. People argued about that because if Apollo got a lower price for utilities, a lower price for electricity, other taxpayers would have to make up for it.

BRUTUS: Oh, I see. They wanted it just for themselves.

MORGENSON: That's right. They wanted it just for themselves. And other taxpayers in Missouri had to make up for it. So you had a situation where Apollo wanted a lower price and other people had to pay for transportation. It was kind of the perfect example of what I call the 360 ​​degrees of pain that can occur when a private equity firm comes to town.

GROSS: Has all this research on private equity firms changed your behavior as a consumer?

MORGENSON: Well, I certainly look and see who runs the hospital emergency department...

GROSS: (laughs) Yes.

MORGENSON: ...In a city where he could be.

GROSS: How do you look and see? What do you think? What are you looking at up there?

MORGENSON: It's so crazy what you have to do. So they will contract with Envision, which is a KKR company, or they will contract with TeamHealth, which is a Blackstone company. And they will say to these companies, okay, run my emergency department for me. The only way I can say it is that you don't want to broadcast this because it's really boring. But the only way I can tell is by looking at the job listings for Envision and TeamHealth, they're two big, you know, staffing companies, hospital job listings, right? If they have a job listing at that hospital, then I know they manage the staff at that hospital. That's the only way I can find out.

GROSS: And how do you get the list of jobs?

MORGENSON: You go to their website.

BRUTUS: I see.

MORGENSON: Come on, we're hiring.

BRUTUS: I see.

MORGENSON: It's a roundabout way, anyway. They don't make it easy.

BRUTUS: No, no. Well, you had a hard job writing this book.

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GROSS: I want to thank you for telling us what you learned.

MORGENSON: Well, thanks for having me.

GROSS: Gretchen Morgenson's new book is called "These Are the Robbers." She is a senior financial reporter for NBC News' Investigative Unit. After a short break, jazz critic Kevin Whitehead will reflect on the career of pianist Ahmad Jamal, who has influenced many musicians, including Miles Davis, Herbie Hancock, and Keith Jarrett. Jamal died last week at the age of 92. This is FRESH AIR.

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