How private equity creates a “circle of pain” in the US economy
How private equity creates a “circle of pain” in the US economy
In 2020, the private equity sector employed 11.7 million workers throughout the U.S., brought in $900 billion in wages and benefits, and generated $1.4 trillion in GDP. These companies now manage more than $6 trillion in assets in the United States alone.
On paper, private equity is a paragon of capitalism. Yet the companies that these firms purchase and the customers they serve do not necessarily reap the same benefits.
Gretchen Morgenson, a senior financial reporter at NBC, and Joshua Rosner, a financial policy analyst, are co-authors of the new book, “These Are the Plunderers: How Private Equity Runs — and Wrecks — America.”
Morgenson joined Marketplace’s Kai Ryssdal to talk about the private equity sector’s outsized influence on the American economy and in our everyday lives. A transcript of their conversation is below and has been edited for clarity.
Kai Ryssdal: The title of this book, “These Are the Plunderers.” I guess we get to the plunderers part in a minute. But I want to go to the subtitle first: “How Private Equity Runs and Wrecks America.” There’s a lot in that sentence, and I want to take the first part first, “private equity runs America.” How involved? How deep? Where do they go?
Gretchen Morgenson: You know, it’s funny. There’s been this sort of stealth takeover. So the donut that you picked up on your way to work this morning, the nursing home where your grandmother resides, the apartment you rent, we are talking about a very pervasive, very deep involvement by private-equity-owned companies.
Ryssdal: Let’s get to the wrecks part, then, because this book is — I don’t think you’ll object to this — it’s an indictment of private equity and what it’s doing to this economy.
Morgenson: I think it is a major driver of the enormous gulf between rich and poor in this country. And as you well know, we’ve long talked about this growing gap. Why does it exist? But no one talks about how private equity has contributed to this gap.
Ryssdal: Seems to me I should have started with this, but we’ll throw it in here now because it’s relevant. How does private equity work? Because not everybody knows.
Morgenson: Private equity is kind of a fancy name for the old leveraged buyouts that everybody recalls — or people who are old enough to recall — from the 1980s. A private equity firm raises money from investors, typically institutions like public pension funds. That money it then deploys by buying companies that it believes it can improve their earnings, improve their operations, and then sell them in a pretty quick amount of time.
Ryssdal: Improve is doing a lot of work in that sentence, because “improving” involves laying people off, usually cuts, lots of debt piled on, right? I mean, there’s a lot going on.
Morgenson: Well, it depends which side of the table you’re on. Of course, they call it improving. If you happen to be on the other side of the table as a worker, as a customer, as a pensioner, it is not improving.
Ryssdal: Let’s do a case study here: the venerable luggage company, Samsonite. You talk about them in this book.
Morgenson: Yep. Samsonite was just an American icon for decades. And unfortunately, it kind of got roped into the leveraged buyout brigade of the 80s and 90s. Long story short, Samsonite became a takeover football sort of thrown from one private equity to another. So Samsonite became one of these companies that was completely depleted through this process.
Ryssdal: The private equity folks will say two things in their defense probably. One is, “We’re making these companies more efficient. Capitalism works this way. We’re just doing what the market wants. And we’re allocating capital. And that’s the way it’s supposed to be.” The other thing they will say is, “We are operating within the law.”
Morgenson: Totally. There is nowhere in this book that we say that this is lawless or illegal. But for years, Kai, we didn’t have the kind of academic research that we now do about this business practice. Ten times the number of bankruptcies occur at companies that are private-equity owned. At nursing homes owned by private equity companies, residents experience a 10% greater mortality rate. Costs of health care rise under private equity-owned companies. And so it does, I think, provide a very interesting contrast to their claims of making these companies more efficient. Now, one of the firms that we talk about is the Blackstone Group which is very powerful and run by Steve Schwarzman. Blackstone told me, “Listen, we have created, over the past 15 years, 200,000 new jobs, and our companies do not go bankrupt at that rate. Only a tiny fraction of 1% of them go bankrupt.” And so I said, “That’s great information. Please, can you provide the data behind that information?” And they declined.
Ryssdal: At the close of the introduction — actually, it’s a note to the readers where you compare the private equity folks to pirates of old as they cruised about — you ask basically, where’s the outrage? Is there enough outrage to change anything? And you know as well as I do — you’ve been doing this longer than I have — capitalism is slow to change. Do you suppose that this will change? Or is this just the state of play?
Morgenson: You know, I do think that there is the capacity for outrage. I don’t know if it will be enough to engender change. I think that there are a couple of fixes that can be done very, very easily, and quickly. Well, “Easily,” she says. Not really. For instance, getting rid of this insane tax loophole where Steve Schwarzman, who made $1.27 billion last year, pays a tax rate that is much lower than, say, a school teacher or a bus driver. Okay, you can change that. They’re able to hide sort of behind the names of the companies that you and I know, like Dunkin Donuts, for instance. But we really need to know exactly their role and whether they have actually got a monopoly in a particular industry, for example.
Ryssdal: You know, it’s funny, I was gonna let you go. But there’s one last thing you mentioned: Steve Schwarzman, David Rubenstein is another one, the folks who run and make billions of dollars a year doing it. These private equity funds are held up as paragons of capitalism in this country.
Morgenson: I think there’s this sense that if you are a billionaire, you must be smart, and you must be doing the right thing. You have a very small group of winners and you have a very large group of losers: you have pensioners, workers, customers. So the circle of pain is large, but the people who are not in the circle of pain is a very small and very elite group. And I just wonder if this is something that we need to really examine.
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