‘Bad Company: Private Equity and the Death of the American Dream’

Private equity (PE) is everybody’s problem now.

PE refers to groups of investors who purchase companies, private or publicly traded, with the stated goal of improving profitability through more skilled management. If the company is saved, the PE managers then sell it. When this happens, even if it takes years, extraordinary profits flow to the PE firm and its investors, but little or nothing to the company itself. Some PE deals lose money. To avoid that, PE reaches into its bag of tricks and fires the employees and sells all the real estate the company owns.

“Bad Company” describes how PE works in detail: where it gets money (typically large banks or pension funds), what happens to the employees of the companies acquired (many are terminated), how the PE firm moves those large loans needed to buy the company onto the books of the acquired company, and how the PE firms have lobbied Congress for egregious tax preferences over the years.

Since successes are often so profitable, PE firms are exploring new fields where no one anticipated their influence, and where public good has been an assumed priority. They are now investing in hospitals, daycares, supermarkets, voting machine manufacturers, local newspapers, nursing homes, fertility clinics, and lumberyards. PE firms manage “highways, municipal water systems, fire departments, and emergency medical services,” according to Greenwell, and are purchasing “commercial and residential real estate.” As a result, PE executives are some of the wealthiest people in the world.

“Bad Company” describes the process and consequences through the eyes of employees when PE took over companies in four industries: retail business, rural hospitals, small newspapers, and public housing. Here are two examples.

Liz Martin worked at Toys R Us for six years as an hourly employee with regular promotions up to the level of floor manager. By 1974, Toys R Us was the largest toy retailer in the U.S. The company was highly profitable, but competition in the toy business from Walmart, Target, and Amazon became a serious challenge.

In March 2005, PE investors Kohlberg Kravis Roberts & Company, along with Bain Capital (where Mitt Romney worked) and Vornado (a real estate specialist), teamed up and bought the company for over $6 billion. The PE groups realized that the real estate owned by the company was worth far more than they paid. Eighty percent of the “purchase price was funded not by the firms themselves, nor by investors who entrusted those firms with their money, but by (investment bank) loans” to the PE group, according to Greenwell.

Toys R Us suddenly had to pay rent for all the property it once owned. Worse, all the debt arranged by the PE firms, as in any leveraged buyout, belonged to Toys R Us and not the PE firms that orchestrated the deal. It was a crushing financial burden. The company limped along, but interest on the loans was “between 80% and 120% of earnings.”

To spread information about the fate of the company, Liz organized an informal employee group called The Dead Giraffe Society (remember the mascot, Geoffrey the giraffe?) shortly before all employees were fired, and the real estate, more than 700 stores across the U.S., was sold off. The Society organized an appeal to the pension funds that invested in the PE takeover, since the large funds that serve teachers, nurses, firefighters, and other public employees do listen to their investors. This caused the PE firm to provide severance pay to the Toys R Us employees.

Roger, a primary care physician, worked at a small rural hospital in Riverton, Wyoming. The Riverton hospital and a similar small hospital located 28 miles away in Lander were both purchased by a series of out-of-state for-profit owners, and ultimately by Apollo Global Management, a PE firm based in New York City. PE owners applied all of their strategies to generate profits: “Consolidating and outsourcing whenever possible, increasing costs to patients and insurers, cutting staff and entire departments.”

Roger thought this was antithetical to the purpose of a rural hospital, which is “family practice, pediatrics, OB, general surgery, and orthopedics.” Roger worked with a small but capable group of Riverton residents to build a new hospital, from scratch, since its PE owners were destroying it. “We have tried working with them ... we have tried to buy the existing hospital … we are done trying to negotiate with people who don’t care about our community.”

Roger’s group went to work. Crucially, they received a U.S. Department of Agriculture low-interest loan for $37 million and a $1 million grant. They raised $22 million more from grants and loans from the state, along with contributions from businesses, foundations, and individuals, and secured a donation of land from a local Indiana tribe. Knowledgeable, motivated citizens built their own hospital and now manage it themselves. It is reminiscent of The Mustard Seed Project and Village right here on the Key Peninsula.

“Bad Company” reveals the scope and mechanics of the PE machine and how hard it is to pass meaningful regulations. “The (PE) industry is the prom queen. That’s because of its generosity to members of Congress on both sides of the aisle,” Greenwell writes. “Private equity and other investment firms spent $42 million on congressional races in the 2020 election cycle, two-thirds of which went to Democrats. … Just four senators and 62 representatives didn’t get any private equity donations.”

Each year, regulatory bills die in committee, like one on the carried-interest loophole permitting PE managers to pay low tax rates on their interest income. “If (PE) doesn’t play a role in your life yet, just wait. Private equity is everybody’s problem now,” according to Greenwell.

The author, a journalist, writes accessibly, almost passionately. As her subjects gained her trust, they held nothing back and treated her as if she were family.

The book includes over 230 links to her sources and a 14-page index.