More Dangerous to Your Dog Than Kristi Noem? Private Equity

The last time my wife took one of our pets to the vet, there was a cute little dog running around the clinic as if he owned the place. She asked about him, and it turned out that somebody had brought him in for a medical problem but then wasn’t able to pay the vet’s bill; they simply left the dog behind.

The cost of veterinary medicine has been exploding since 2020, in large part because that was the year private equity firms began buying up vet clinics across the country. Once acquired, the clinics and pet hospitals are drained of assets by some of America’s most morbidly rich individuals. The simple result: higher prices for pet care.

Most people think private equity is essentially the same as venture capital, the business/investment model you see on TV shows like Shark Tank. Venture capitalists invest their own (or their company’s) money in startup companies so the recipient company can use that money to bring a new product to market, expand operations, and generally grow the business. The venture capital investors make their return by the company growing and thus increasing the value of its stock.

Private equity, however, is an entirely different animal, borne out of Reagan era deregulation, lowering of capital gains taxes, and lobbying — facilitated by five Republicans on the Supreme Court legalizing billionaires buying legislation from members of Congress — that even created an entirely new income tax loophole called “carried interest” just for private equity managers.

In the truest sense, private equity represents capitalism run amok; what I’ve referred to in several books as “the cancer stage of capitalism.” The business model is somewhat complex, so most Americans have no idea what private equity is or how it works. I’ve tried to make it simpler with a somewhat imperfect but hopefully clarifying analogy.

Imagine this:

— Your next-door neighbor lives in a house worth a half-million dollars.
— Over his objection (in this imagination he can’t refuse), you buy the house for its half-million-dollar value, and then legally force him to borrow an additional half-million dollars.
— You then force him to give you the half-million bucks, so your investment in his house is now entirely paid off, but he is the one who’ll have to pay back the new half-million dollar mortgage.
— You also force him to pay you a “fee” of 20% of the value of the house for the “work” you did buying his house and forcing him to load himself up with debt to give to you.
— And you force him to pay you an annual management fee of, say, $50,000 a year.
— On top of that, you tell him that since you now own the house, he has to start paying you rent of $30,000 a year. But, because his name is still also on the deed, he bears all the responsibility for the place; if somebody is injured, for example, he gets sued, not you.
— As a result of the financial burden he now has (responsibility for a loan, his recurring rent, and the annual fee payments to you), he stops all maintenance on the house, lets the grass grow to weeds, and the electric and water get shut off because he can’t afford to pay them.
— You then use his failure to maintain the house as a legal excuse to force him to declare the kind of bankruptcy (Chapter 11) where all his assets are sold off and the debt is erased.
— He sells the house for a half-million, screws the bank for the $500,000 mortgage (ruining his credit, but not yours), and gives the entire half-million from the sale of the house to you, since you’re technically the owner.
— You’ve now more than doubled your money (while financially ruining him) so Republicans in Congress give you your very own special tax bracket; you don’t have to pay anything close to the capital gains or other taxes that a normal business transaction would generate.

Sounds nuts, right?

Here’s an actual example, documented by Brendan Ballou in The New York Times:

“Consider the case of the Carlyle Group and the nursing home chain HCR ManorCare. In 2007, Carlyle — a private equity firm now with $373 billion in assets under management — bought HCR ManorCare for a little over $6 billion, most of which was borrowed money that ManorCare, not Carlyle, would have to pay back.

“As the new owner, Carlyle sold nearly all of ManorCare’s real estate and quickly recovered its initial investment. This meant, however, that ManorCare was forced to pay nearly half a billion dollars a year in rent to occupy buildings it once owned. Carlyle also extracted over $80 million in transaction and advisory fees from the company it had just bought, draining ManorCare of money.

“ManorCare soon instituted various cost-cutting programs and laid off hundreds of workers. Health code violations spiked. People suffered. The daughter of one resident told The Washington Post that “my mom would call us every day crying when she was in there” and that “it was dirty — like a run-down motel. Roaches and ants all over the place.”

“In 2018, ManorCare filed for bankruptcy, with over $7 billion in debt. But that was, in a sense, immaterial to Carlyle, which had already recovered the money it invested and made millions more in fees.”

The laws that allow this were created by the very people benefiting from it: they simply bought the legislation, using the legalization of bribery brought to us by five Republicans on the Supreme Court in 1978 and 2010.

The barons of private equity have spent nearly a billion dollars ( over $900 million) buying federal lawmakers since the end of the Reagan administration, when the so-called Reagan Revolution’s deregulation frenzy legalized the practices just described.

Private equity firms have run this same scam hundreds (perhaps thousands) of times in dozens of industries. I saw it up close and personal when Mitt Romney’s Bain Capital bought Clear Channel, the national radio station chain that Air America was leasing stations from in 54 major markets. I was broadcasting my program from a Clear Channel station in Portland, KPOJ, part of a five-station “pod” that included a rightwing talk station, a sports station, and two music stations.

When I first started broadcasting from the KPOJ studios, the pod of stations shared about, as I recall, thirty employees including a robust local news operation with, as I recall, about a dozen reporters and on-air talent. Bain bought Clear Channel and then forced the network to borrow enough money to pay back Bain their investment cost, then put the squeeze on the stations themselves to pay off that new debt.

Clear Channel eventually buckled under the debt load and reinvented itself as iHeartMedia, which then declared a $10 billion bankruptcy: Mitt Romney put millions into his money bin while shutting down Air America stations just in time for the presidential election he was running in.

The Portland pod KPOJ was part of was, by then, down to a handful of employees, the news operation was gutted, and most of the on-air talent had been replaced with national programming, much of it computerized via what’s called in the industry “voice tracking” (pre-recorded DJ’s announcing songs that are then played by a computer: no humans needed).

It’s not, of course, just radio stations. The private equity industry is, as you’re reading this, actively working to buy up and drain dry mobile home parks, healthcare in our prisons, hospital Emergency Rooms, and even apartment buildings. And, of course, those veterinary offices.

The consequences of this business model can be deadly. Private equity acquisitions of nursing homes led to an estimated 20,000 premature deaths (and made private equity managers billions) by bleeding them of resources, leading to deep cuts in patient care and facility upkeep.

Because they’ve been able to buy all the legislation they need to legalize their predatory practices — thanks to five corrupt Republicans on the Supreme Court and Reagan’s initial deregulation of the investment and banking industries — it’s all entirely legal.

In 1996, there were about 8,000 companies listed on the various public stock exchanges; today there are around 4,000. A big part of the reason why that number has shrunk so dramatically is that private equity firms have been buying publicly traded companies, loading them with debt, stripping them for parts, and then bankrupting them when there’s no blood left to squeeze out.

Brendan Ballou’s book Plunder: Private Equity’s Plan to Pillage Americalays out in damning detail how this has come about. He notes that just the three largest US private equity groups now control so many companies they’d collectively be the third largest employer in America behind Walmart and Amazon.

Most of the businesses they own and have saddled with debt and fees probably won’t survive the plunder over the long term, he writes:

“Consider the following: J.Crew. Neiman Marcus. Toys “R” Us. Sears. 24 Hour Fitness. Aeropostale. American Apparel. Brookstone. Charlotte Russe. Claire’s. David’s Bridal. Deadspin. Fairway. Gymboree. Hertz. KB Toys. Linens ’n Things. Mervyn’s. Mattress Firm. Musicland. Nine West. Payless ShoeSource. RadioShack. Shopko. Sports Authority. Rockport. True Religion. Wickes Furniture.
“The list goes on. All these companies went bankrupt after private equity firms bought them. Some were restructured, often by firing workers or abandoning retirees’ pension obligations. Many simply no longer exist.”

Democrats in Congress are beginning to pay attention to these modern-day pirates, and several proposals are in the works to deal with them. The first, proposed in 2019 but yet to pass either the House or Senate, is the Stop Wall Street Looting Act, put forward by Senators Elizabeth Warren (D-Mass.), Tammy Baldwin (D-Wisc.), and Sherrod Brown (D-Ohio), along with Representatives Mark Pocan (D-Wisc.), and Pramila Jayapal (D-Wash.).

In a press release, they noted that the Act is:

“[A] comprehensive bill to fundamentally reform the private equity industry and level the playing field by forcing private equity firms to take responsibility for the outcomes of companies they take over, empowering workers, and protecting investors.”

In Ballou’s book, he suggests that the Securities and Exchange Commission (SEC), Treasury Department, and Federal Reserve all have significant abilities to regulate private equity but have all failed to exercise those powers.

The Biden administration has taken some tentative steps (the first to do so in 40 years), but even a weak proposal to end the carried interest passthrough loophole that private equity owners use to cut their own taxes was diluted to the point where it vanished in the last budget Congress passed. The provision ending that tax loophole was, instead, replaced with a new and larger tax loophole for small and medium-sized businesses owned by private equity companies, giving them a whole new range of targets for acquisitions.

The last area being targeted by progressives in a few states and discussed at the federal level is to end the immunity private equity firms have from liability for actions the companies they’ve stripped take because of budget and staffing cuts.

When a group of nursing home patients tried to sue private equity managers for the death of their relatives caused by neglect in facilities that had been looted by those private equity firms, federal courts killed the lawsuits because technically the private equity firms didn’t “own and operate” the facilities. This obscenity also reflects post-Reagan changes in federal liability law put into place by on-the-take (mostly Republican) legislators.

Back in 1966 there was a hit song by Dr. West’s Medicine Show titled The Eggplant that Ate Chicago. The opening verse lays out exactly where America is today with private equity:

“You’d better watch out for the eggplant that ate Chicago,
“For he may eat your city soon.
“You’d better watch out for the eggplant that ate Chicago,
“If he gets hungry, the whole damn country’s doomed.”

Fully one-fifth of the entire American business landscape is now largely or entirely controlled by private equity, which is draining billions out of our economy every week to stash in the money bins of its morbidly rich owners. The CEO of Blackstone, the country’s largest at over $900 billion in assets, is Stephen Schwartzman, who took home $896.7 million in pay and dividends last year and $1.26 billion in 2022. Just one guy.

And, predictably, he's a GOP mega-donor and willing to repeat Trump lies (“We’ve got open borders with 8 million people coming over!”) while trash-talking President Biden.

Because of Citizens United, he’ll be able to help Republican candidates, including Trump, in ways that are almost as unlimited as the cash he drains from the companies he oversees. Generally, the industry loves Republicans (who take their millions and love them back) and hates Democrats (who want to regulate them to protect American companies and workers).

A recent analysis found that private equity acquisitions have led to over a million job losses in America during the past decade. More come day by day.

This has gone way beyond just making it more expensive to get your dog’s rabies shot, although private equity’s role in buying up and bleeding dry vet clinics is now one of the most in-our-faces examples of how private equity screws consumers to make its owners richer than a pharaoh.

Seventy percent of Americans are pet owners, so the echoes of private equity’s latest raids are now bouncing around the US media landscape with headlines like “ Vets fret as private equity snaps up clinics, pet care,” “Why Your Vet Bill Is So High,” and “Private Equity Vets Are Coming for Your Kitten.” One could argue that the industry has caused more puppy deaths than Kristi Noem.

Private equity has grown to become one of the major forces driving income and wealth inequality in America; they are actively making it harder for small and medium sized business to start, grow, and prosper; and they corrupt our tax code via legalized bribes to mostly-Republican members of Congress.

It’s beyond time their abuses are ended.