#1669 Private Equity: The worst of capitalism, amplified

Episode Transcript
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JAY TOMLINSON - HOST, BEST OF THE LEFT: Welcome to this episode of the award (00:00):
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(00:01):
winning Best of the Left podcast.
It's easy enough to look into one industryat a time to see what's going wrong.
That's what we usually do.
But today we're looking at what isoften lurking in the background of
higher prices, lower quality goods,and services, and ultimately many

failing businesses (00:17):
private equity.
For those looking for a quick overview,the sources providing our top takes
in about 50 minutes today includesThe Plain Bagel, Wendover, The Chris
Hedges Report, Senator ElizabethWarren, and More Perfect Union.
Then in the additional deeper dives halfof the show, there'll be more in three

sections (00:38):
Section A

RICHARD COFFIN - HOST, THE PLAIN BAGEL: Most people have never heard (00:45):
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of these companies before.
Blackstone, the largest private equitycompany with over 1 trillion in assets
under management, might be a more wellknown part of the group in part because
people just keep mixing it up withthe much larger Blackrock, but other
companies like KKR, Carlyle Group,Apollo, and a number of other large
players in the space have all managedto maintain pretty low public profiles,

(01:07):
despite the fact that many of thesecompanies each individually manage
hundreds of billions of dollars, reallycontributing to this dark, ominous image
of a secret puppet master corporationoperating everything from the shadows.
And with the area having grown over10 fold since the 2008 financial
crisis, they've come to controlsome pretty prominent brands,
including Baskin Robbins, DunkinDonuts, Michaels, and even Ancestry.

(01:31):
com, which raises a number of questions.
Who exactly are these companies?
Are they really as evilas people say they are?
Should I be concerned that they've beencollecting spit samples from over 3.
5 million subscribers?
And most importantly, shouldI invest in private equity?
Because these days there are servicesrolling out that bring private
equity offerings to retail investors.

(01:53):
Well, that's all what I'm going totry to sort out in today's video.
And in the past, I have tackledthe more conspiracy-esque theories
around large asset managerssecretly controlling the world or
trying to destroy given companies.
And indeed private equity does come upoften as a sort of filler villain for
especially meme stock style theories.
But to be clear, that stuff aside,the bad reputation around private

(02:16):
equity is still pretty well deserved,with one National Bureau of Economic
Research paper even arguing thatprivate equity ownership of nursing
homes has contributed to over 22, 000additional deaths over a 12 year period.
So, among other things, I'll also tryto explain why it is that private equity
can't seem to stop getting in trouble.
Now, as you might know, when we talk aboutprivate equity, we're really referring to

(02:39):
private equity firms, or funds, which aregroups that specialize in helping clients
invest in these types of companies.
Private equity itself is justan asset class or type of
investment that encompassesall privately owned businesses.
So basically any company that'snot a publicly traded stock
is technically private equity.
And private equity or PE firmsspecialize in helping their clients

(03:00):
buy these types of companies sincedoing so is a lot more complicated
than just buying a stock in Robinhood.
With PE firms pooling client moneytogether, employing teams of lawyers,
analysts, and operations experts to takeover these companies, and then trying to
employ best practices or what have you tomake the business more profitable, to earn
themselves and their investors a return.

(03:20):
Now within private equity, thereare a bunch of different strategies
that a group might focus on.
For example, there's venture capitalwhere you effectively invest in startups.
But the most popular and controversialstrategy is the leveraged buyout, which
represents roughly 28 percent of allprivate market AUM, inclusive of debt
oriented strategies as of June, 2022.
With this typically involving thePE fund, borrowing a bunch of money,

(03:41):
typically 80 to 90 percent of the companypurchase price, using that to acquire
a usually mature business, saddling thedebt onto the target company, and then
trying to use the higher profits fromthe turnaround to pay down the leverage.
Something that, when successful, canbe very lucrative for investors, given
how little capital is being put upfront to try and own this business.

(04:02):
Which touches on why private equityhas been such a popular asset class.
Because in addition to this sort ofhigh risk, high return strategy, they've
often been presented as being a superiorasset class in terms of return, given
the illiquidity premium, the higherbarrier to entry, which leaves more
opportunities for realizing returns.
And in addition to all of that,they're argued to be less correlated

(04:23):
to public markets, meaning they mightnot fall when everything else does,
which offers diversification benefit.
And they're often presented asbeing less volatile, meaning they
don't swing around in price as much.
I'll be able to get to those points later.
Now, the asset classdoes have its drawbacks.
Some of the strategies are higher risk.
It can be pretty illiquid, meaningthat it can be difficult to get your
money out of the investment, withsome funds being able to gate or

(04:45):
otherwise block investor withdrawals.
And the superior return they offerdoes come at a pretty hefty price,
with most funds charging two and 20,meaning a 2 percent annual fee based
on the value of your investment,plus 20 percent carried interest or a
performance fee that pays out 20 percentof profits above a given threshold.
But despite this private equity hascontinued to be a pretty popular strategy,

(05:07):
which is why the investors who ultimatelyown the 13 trillion dollars being managed
here include the likes of pension plans,endowments, and even country sovereign
funds, which all sounds pretty good.
But then what's the problem?
Well, there are a few, and theytypically involve other stakeholders,
but even investors in PE funds facea number of issues, with one of

(05:28):
the more public problems being thelayoffs that typically follow a PE
acquisition, with this seemingly beinga favorite tool in the arsenal of PE
firms to try and squeeze more profitsout of the companies they acquire.
In fact, one 2021 paper that looked at6, 000 buyouts from 1980 to 2013 found
that employment at target companiesshrunk an average of 4.4 percentage

(05:49):
points in the first two years relativeto a peer group when omitting post
buyout acquisitions and divestitures,with retail sector, in particular,
receiving the short end of the stick here.
With the area expected to have lost600, 000 jobs as a result of PE
firms and hedge funds taking overcompanies over the last 10 years.
Now, layoffs can make sensewhen company is overstaffed and

(06:10):
could use further optimization.
But these layoffs and other cost cuttingmeasures are often blamed for hurting
the quality of products and servicesoffered by these target companies.
Which sucks when your morning honeycruller isn't as fresh as it used to
be, but is particularly concerningwhen it comes to the other, more
critical industries that privateequity has gotten involved with.

(06:30):
Most notably, healthcare.
With private equity having come to own8 percent of private hospitals and 5
percent of total nursing home facilities,with one ASPE study finding that private
equity investment in the latter resultedin a 12 percent relative decline in
RN hours worked per resident day.
And as you'd expect, it's had somenegative impacts, with private equity

(06:50):
owned private hospitals, seeing alower CMS star rating and nursing
facilities seeing a 14 percent increasein their deficiency score index,
lower overall inspection and staffingratings, and even as cited earlier, a
higher mortality rate among residents.
Now, in addition to healthcare, privateequity has also caused a ruckus with
real estate for managing funds thatexclusively go around and buy up single

(07:14):
family properties, with the goal ofrenting them out to tenants, which as
you can imagine during a real estateaffordability crisis is not cool, man.
With advocacy groups arguing that notonly are private equity firms taking
inventory from other buyers, but thatthey also have a tendency to hike rates,
evict tenants, and overall neglect theirproperties more than other ownership
types in the pursuit of profits.

(07:35):
So, already you can see why some peoplearen't all that fond of private equity.
But perhaps the most frustrating aspecthere is that despite the layoffs and
the deterioration of the products andservices they offer, the companies
that these firms promise to turnaround still fail pretty frequently.
Whether it be Toys R Us or, again, themore recent bankruptcy of Red Lobster,

(07:56):
private equity's high risk approach hasa pretty high failure rate with a space
accounting for 16 percent of us bankruptcyfilings in 2023 and the first four months
of 2024, in one study, even suggestingthat companies held by leveraged buyout
firms have a 20 percent bankruptcyrate in their first 10 years, 10 times
higher than that of a control sample.
Which is actually part of what contributesto the high unemployment that seemingly

(08:19):
stemmed from private equity activity.
And as you can imagine, for again,those critical industries, these
sort of bankruptcies and failurescan have pretty severe implications
for many other stakeholders.

Which all brings us to the question: Why are private equity companies (08:30):
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seemingly so reckless and aggressive?
Don't they want to have abetter rate of not failing?
Well, part of it is that privateequity firms tend to have a pretty
short time horizon of anywhere fromthree to seven years, meaning that
they often have an exit strategy thatfocuses on short term profitability,
rather than long term sustainability.

(08:52):
For example, a pretty common strategy forprivate equity firms is to take all of a
company's real estate holdings and sell itto the market only to then rent back those
positions so that the PE firm has accessto a sudden pool of capital, even though
long term that just forces the companyto now pay rent in addition to trying
to pay down their massive debt balance.
But a more controversial aspect hereis that private equity firms don't

(09:13):
inherently need their companies tosucceed to make money, thanks largely
to how their investments are structured.
When a private equity fundcarries out a leveraged buyout, as
mentioned, they often saddle thatdebt onto the acquired business.
Meaning that there's a degree ofseparation between the fund and the
liability for the debt they've taken on.
If that company fails and is unableto pay back the debt, the fund is

(09:35):
not often liable for the amount owed.
So, beyond their initial investment,which again is often only 10 to 20 percent
of the company's whole purchase price,there's not much financial liability
that the funds face for their companiesfailing, with this lack of liability even
sometimes extending to legal matters,with companies often able to dodge
responsibility for the actions of thecompanies they effectively run thanks

(09:56):
to their complex ownership structures.
In fact, according to federal prosecutor,Brendan Ballou, we've even seen examples
of PE firms abusing bankruptcy laws,using the mechanism to extinguish
things like pension liabilities,which, mind you, represents money owed
to employees, only to then reacquirethe business after bankruptcy under
a different arm to ultimately endup in a better financial position.

(10:18):
And while the investors of these PEfirms might lose when the companies they
hold go bankrupt, because the privateequity firms are often charging both
their investors and the companies theymanage fees, they can still benefit and
end up positive while everyone else inthe situation loses, with PE firms often
criticized for benefiting from any ofthe cost cutting actions they've carried
out, regardless of how intense they are,while leaving their portfolio companies

(10:40):
to deal with all the consequences

SAM DENBY - HOST, WENDOVER PRODUCTIONS: Structurally, private equity (10:42):
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firms are not complicated.
Their cores are the general partner.
General partners typicallyknow the right people.
It is not an entry level job.
To take the example of a ratherrandom, rather unremarkable
firm, JW Childs Associates wasfounded by general partner John W.
Childs after a long andsuccessful stint at Thomas H.
Lee Partners, founded by Thomas H.

(11:04):
Lee.
Thomas H.
Lee founded his firm after a long stint atthe First National Bank of Boston, where
he rose to the rank of Vice President.
Other examples of private equitygeneral partners include Mitt Romney
of Bain Capital, who was also the 2012Republican nominee for President, and
Stephen Schwartzerman of Blackstone,the 34th wealthiest person in the world.
These connections are crucial thanks tostep two in the process: raising money.

(11:29):
Typically, general partners startby throwing in a couple million of
their own money to set the stakes,then they'll go around pitching
investors on why they're the bestperson to manage the investors' money.
Often it has something to do withhaving particular experience in a
particular industry that is particularlyattractive for particular reasons.
In the case of J.
W.
Childs, he likely went around arguingthat he had a particular knack for

(11:49):
investing in consumer food and beveragecompanies, since at his prior firm,
he had helped arrange the buyout ofSnapple for $135 million in 1992, which
his firm sold two years later for $1.7billion after massive revenue growth.
And he likely argued that food andbeverage companies are great for
investment since people have to eatand drink, and therefore the sector
is less subject to the cycles ofthe market than something like tech.

(12:13):
This sort of stability isparticularly attractive to the
massive institutions that make upthe core of private equity investors.
In John W.
Childs's case, insurance companieslike Northwestern Mutual or
employee pension funds like theBayer Corporation Master Trust.
Individuals can theoreticallyinvest in PE funds, but only
if they hold enormous wealth.
It varies dramatically, but manyfunds have minimum investments

(12:35):
upwards of $25 million.
Meanwhile, the way privateequity firms themselves make
money is remarkably consistent.
They just take 2% of it.
2% of all money each year is taken asa fee regardless of whether or not the
firm actually grows the investments.
But then to incentivize returns, thefirm also sets a benchmark called a

(12:55):
"hurdle" that they're aiming to beat inyear over year investment growth, say 7%.
Any money earned on top of thathurdle is then subject to a 20%
fee that goes back to the firm.
So, say if a fund was originally worth$100 million but grew to $110 million,
$3 million would be subject to thatperformance fee, and so 20 percent of
it, $600,000, would go back to the firm.

(13:17):
In practice, what's earned from the 2percent base fee is fairly consistent,
since there are generally restrictionsas to when investors can take money
out of the fund, so the sum doesnot generally fluctuate rapidly.
Therefore, firms typically earmarkthis base fee for covering basic
operating costs like officerent and analyst salaries.
But how much is made from that20 percent fee varies enormously.

(13:38):
Some years it could be nothing,others it could be yacht money,
especially since the gains fromthat fee are generally distributed
primarily to the general partner.
This is how general partners like John W.
Childs become billionaires.
And even better, the money from thesefees is not considered traditional
income by the American tax authorities.
It's considered capital gains.
Despite the fact that these earningsdo not truly come from investments

(14:02):
by the general partners themselves,the IRS treats them as if they do,
and therefore only about 20 percentgoes to taxes, versus the 37 percent
they pay on traditional income.
So, considering it's the primarysource of their wealth, the general
partner is massively incentivized tomaximize their firm's gains, and to
supercharge this to the next level, theyalmost all rely on one simple trick.

(14:24):
They don't actually invest theirown money, at least primarily.
Now, if a $100 million fund bought a$100 million company and increased its
value by 25%, they'd gain $25 million.
But if a $100 million fundbought a $400 million company and
increased its value by the samemultiple, they'd gain $100 million.

(14:45):
They'd 2x the fund's value.
And, believe it or not, a $100 millionfund can buy a $400 million company,
as long as they have a friendly banker.
This is what's referredto as a leveraged buyout.
The fund puts in some of their money,but primarily relies on borrowed
money to pay the seller, justlike a homebuyer with a mortgage.

(15:05):
This magnifies the potential earnings, butin turn, of course, the potential losses.
But it's worth considering whatthis does for the general partner.
In a $100 million fund buyinga $400 million company with 75
percent borrowed money, very smallmargins of growth can make all the
difference for this one individual.
With a 7 percent hurdle and 7.5 percentgrowth, 20 percent of the margin above

(15:28):
7 percent on that $400 million companywould earn this individual $400,000.
But if instead, the company reached7.75 percent growth, the general
partner would earn $600,000.
Because of this amplifying effect, everyquarter of a percent growth, a rather
small difference, earns the generalpartner another $200,000 in income.

(15:52):
It's also worth considering thatit really doesn't matter exactly
how this value is created.
For every miraculous Yahoo turnaroundstory, there's a Marsh Supermarkets.
At no point did Marsh reach the sizeor level of national ubiquity as Yahoo.
If you aren't from Indiana orWestern Ohio, you've likely never

(16:13):
heard of Marsh Supermarkets.
Yet, while confined to just twostates, Marsh Supermarkets and its
private equity takeover exemplifiesa pattern that spans all 50.
The first Marsh opened here, a smalllocal grocer catering to specific local
needs in Muncie, Indiana, in 1931.
The simple concept took.
Weathering the Great Depression, thenoutlasting World War II, the budding

(16:36):
Indiana institution began to expand.
By the 1950s, there were 16 Marshlocations across the state, by 1952
there was a Marsh distribution centerin Yorktown, Indiana, and by 1956
the store was expanding into Ohio.
As demands changed in the60s, the company adjusted.
Marsh FoodLiners became MarshSupermarkets, growing in size to

(16:56):
accommodate one stop shopping.
Diversifying as decades progressed,the company also established its own
convenience store, the Village Pantry,its own bargain bin store, Lowville
Foods, and eventually purchasedits own upscale grocers in Omalia
Foods and Arthur's Fresh Market.
Blanketing urban and suburban Indiana andwestern Ohio, Marsh and Marsh properties
were a mainstay through the 90s and 2000s.

(17:18):
And it was at about this time that SunCapital became interested in the company.
Today, there are zero Marsh locations.
In 2017, unable to keep up with rentpayments and struggling to pay vendors,
the company filed for Chapter 7bankruptcy, closing every last location
and liquidating all remaining assets.

(17:39):
Like an empire spread too thin, Marshhad reached its territorial epoch before
collapsing in on itself within justtwo decades, all on a timeline that
rather neatly lines up with the brand'stime under Sun Capital's ownership.
Now, Sun Capital Partners didn't instigatethe regional grocer's fall from grace.
Prior to the sale, Marsh had expensivelyfailed to expand into Chicago, it

(18:02):
had felt their revenue squeezed fromencroaching box stores, and it watched
Kroger's parade into its grocery market.
In response, the company began to fallbehind, failing to modernize its stores or
products, backing out of sponsorship dealswith the Indiana State Fair, and opening
itself up to the possibility of selling.
In an atmosphere of supermarketconsolidation, though, there wasn't

(18:22):
much interest in the struggling chain.
Not until someone noticed in a footnotein the company's financial report that
the company held a rather robust realestate portfolio, a $325 million purchase
point then became more palatable.
And in early 2006, Sun Capitaljumped, paying $88 million in cash
and assuming $237 million of debt.

(18:44):
To Sun Capital, the deal wasa can't lose proposition.
Either they'd turn around and flipa bloated business, or they'd sell
the assets -- assets which, justin real estate, have been estimated
to be worth $238 to $360 million.
Under new ownership,things changed quickly.
They pared management, they soldthe company jet, and with the money

(19:05):
saved, they renovated storefronts.
Sales went up.
Then came more maneuvering, but lessthe kind that would help bump sales.
Almost immediately after Sun Capitaltook over, store locations went up
for sale; this one for $750,000,this one for $2.15 million.
and this one for $1.2 million.

(19:26):
They'd stay operating as Marsh Stores,but they'd now be paying a lease
while Sun Capital would collect anunspecified commission on the sales.
They even went as far as selling thecompany headquarters for a reported
$28 million before then straddling thegrocer with a 20-year lease increasing
on a 7 percent clip every five years.

(19:46):
This maneuver is called a saleleaseback, and it's quite common in
private equity because, at least onpaper, it makes sense for both parties.
Marsh supermarket properties were noexception, as they could boost dividends
or provide capital for another leveragedbuyout for Sun Capital, while also helping
the grocer to pay down debt and provideinvestment flexibility in the short term.
But as for the consequences accompanyingthat long, escalating lease on company

(20:10):
headquarters, along with cost savingmoves like carrying name brand products,
cutting staff, and contracting out moreand more services, well, Sun Capital just
hoped it wouldn't have to deal with them.
As of early 2009, news bubbledto the surface that they were
trying to sell the grocery chain.
But to the dismay of Sun Capital,the new, leaner, streamlined
Marsh just wouldn't sell.

(20:32):
Ultimately, the new owner businessboost was short lasted, and in 2017,
the grocer would go out of businesswith Sun Capital at the helm until
the very day it filed for bankruptcy.
Tucson Capital, failing to sell wasa missed opportunity in a company
overhaul that they would deem a loss,as the group ultimately came $500,000
short of recouping their investmentinto the chain grocery store.

(20:54):
But even in a loss, theprivate equity firm won.
They still collected their managementfee each year of ownership, after all.
They also collected their commissionon sold assets as the company spun off
its property at seemingly every turn.
Really the only loss was thatthey just didn't win more.
The same couldn't be said aboutthe consumers or employees, though.

(21:15):
Deeply embedded in Indiana and Ohio'surban areas, Marsh locations provided
healthier, fresher alternatives in areasat risk of fading into food deserts.
Beyond nostalgia, residents who losttheir local grocery and pharmacy were mad,
confused, and lost with the disappearanceof a long-time local institution.
Then there were the peoplethat worked for Marsh.

(21:37):
According to Washington Post reporting, atthe onset of Sun Capital's ownership, only
one of three retirement plans was agreedto be fully funded by the new ownership
-- unsurprisingly, the executive's plan.
As for store employees, their pensionwent underfunded by some $32 million,
which fell not on Sun Capital to evenout, but to the government insurer.

(21:57):
As for warehouse workers, Marsh owed some$55 million at the time of bankruptcy
to their pension, which was alreadystruggling to pay out full checks.
Ultimately, Marsh Supermarkets as abusiness and Sun Capital as a private
equity firm are relatively small potatoes,but their ill-fated eleven years speak
to a larger pattern in American life.

CHRIS HEDGES - THE CHRIS HEDGES REPORT: You write that they operate (22:18):
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in secrecy with hidden tiesto companies they control.
The wreckage they leave behind is oftendifficult to track back to its origins.
And I want to raise another point thatyou do in the book and I thought it was

important (22:38):
Many Americans who are being assaulted this way know something’s wrong,
but they don’t quite know what is wrong.
It’s tied to this, almost invisible, hand.
Explain that.
And then I want you to talk about theirpolitical clout because it’s significant.
They get the tax breaks, they corrupt thesystem enough to essentially grease the

(23:05):
skids for them to continue to operate.

GRETCHEN MORGENSON (23:07):
Absolutely.
Absolutely.
So the secrecy is important.
One of the reasons that we wanted towrite this book is to let people know
how pervasive this business model is.

CHRIS HEDGES - THE CHRIS HEDGES REPORT: Well, you write at one point that all (23:20):
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of us, although we don’t know it, areengaging with private equity firms.
So talk about how extensive it isand then talk about that secrecy
too.

I write in the book that the coffee and donut that you pick
up on the way to work, the child careentity where you drop your son or daughter
off, the nursing home where your motheror father lives—it is cradle to grave,
literally, you’re impacted by privateequity, but you don’t know it because

(23:55):
these are just companies that are buyingand selling, but you don’t know who
the real owner is behind the scenes.
And they like it that way, theywant to keep it that way because
they operate best in secrecy.
They’re private companies.
They don’t have to make filings to theSecurities and Exchange Commission,

(24:17):
so a lot of their business and alot of their practices are hidden
from view, and that is by design.
One of the things that I think couldimprove our perception or educate
people about how pervasive privateequity has become is to force these

(24:37):
firms to identify themselves as theowners; So it should be the Carlyle
nursing home or the Blackstone donutshop or whatever, just so you are aware
of who you are dealing with and whosepocket you’re putting your money into.

(25:03):
Now, the secrecy is one thing; thepolitical clout is, as you say, immense,
because they have so much money.
Their tax treatment is an outrage andmany presidents have tried to change

(25:24):
it, but have not been able to do so.

CHRIS HEDGES - THE CHRIS HEDGES REPORT: Explain the tax part. (25:27):
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Their fortunes are enhanced by the fact that they
pay a fraction of what you and I payon our incomes every year because
it’s called carried interest.
It’s not considered ordinary income.
The ordinary income taxrate is, what, up to 35%?

(25:53):
What these people pay is around 21%
on the income that theyreceive from their operations.
That’s something that’s been in thebooks for decades but it really has
created a skewed system where theymake fortunes, billions of dollars.

(26:18):
The government loses because they’renot generating the tax revenues
that they should on those billions.
It’s just, it's nuts.
Now, the last time someone tried to changethis, Kyrsten Sinema was a holdout, the
– CHRIS HEDGES - THE CHRIS HEDGES REPORT: Because it was good for
the people of Arizona.

– GRETCHEN MORGENSON (26:39):
right, the lawmaker from Arizona.
She, I think, received $1.5 millionfrom the private equity world to stand
up and say no, and she scotched it.
So, getting them to pay their fairshare of taxes would be a good thing.

(27:01):
It would help the government, it wouldgenerate more income, and it would take
away this unfair aspect of their business.

CHRIS HEDGES - THE CHRIS HEDGES REPORT: You write, “Routinely lionized (27:10):
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in the financial press for theirdealmaking and lauded for their
‘charitable’ giving, these unbridledcapitalists have mounted expensive
lobbying campaigns to ensure continuedenrichment from favorable tax laws.
Hefty donations have won them positionsof power on museum boards and think tanks.

(27:30):
They’ve published books on leadershipextolling ‘the importance of humility
and humanity’ at the top whileeviscerating those at the bottom.
Their companies arrange for them toavoid paying taxes on the billions in
gains that their stockholdings generate.
And, of course, they rarely mentionthat the companies they own are among
the largest beneficiaries of governmentinvestments in highways, railroads,

(27:54):
and primary education, reaping massiveperks from subsidies and tax policies
that allow them to pay substantiallylower rates on their earnings.
These men are America’smodern-age robber barons.
But unlike many of their predecessors inthe 19th century, who amassed stupefying
riches by extracting a young nation’snatural resources, today’s barons mine

(28:20):
their wealth from the poor and middleclass through complex financial dealings.”
These people, not just controlpoliticians, but they serve in government.
You have several examples of that.
So explain a little bit about howthey dominate the political system.

Jay Powell, our head of the Federal Reserve
Board, he was a Carlyle executive.
They’re really everywhere.
Again, it’s this pervasiveness.
But even if they’re not on the job, say,in the government, they are behind the
scenes absolutely manipulating outcomesso that their businesses will benefit.

(29:11):
They’re so powerful and so wealthy and,you know, Chris, better than anybody,
how money is so central, unfortunately,to how our government works.
You just have not had enough attention to

(29:33):
this wealth grab by these people.
The one thing we did have—the activity,the practices were so outrageous
that it got Congress to act, andthat was on the surprise medical
bills that you mentioned a bit ago.
This was a creation, thebrainchild of a company called

(29:58):
Envision, which is owned by KKR.
And what Envision did was it wentinto emergency departments and
started running many of thoseemergency departments in a hospital.
It wouldn’t own the hospital, butit ran the emergency departments.
Envision decided that what they coulddo is they could make the emergency

(30:20):
department a separate entity outsideof the insurance coverage that the
hospital’s patients would normally have.
So you’re in your town, you go to theemergency department, you’ve broken
your arm or whatever, you naturallyassume that yourinsurance – which covers
your normal hospital stay or treatment– you naturally assume it’s going to

(30:45):
cover your emergency department bill.
Well, Envision carved themselves out ofthat so that you would have to pay more.
And this was something that was so
crazy and impossible to think thatit could happen, that Congress
did something about it andchanged and curbed the practice.

(31:10):
They didn’t eliminatethem, but they curbed it.
And guess what?
Envision went bankrupt afterthat because its business model
required them, … its business modelwas based on ripping people off.

SENATOR ELIZABETH WARREN (31:27):
Mr.
Chairman, and thank you and RankingMember Braun for holding this
hearing on price transparency.
For almost every other type of service,you can look up the price before
deciding whether or not to purchase.
But when it comes to health care, itis virtually impossible, even though
Americans are paying more for health carethen at any other country in the world.

(31:50):
So when patients need health care,they should be able to easily find
out the price of those services.
Here's something else they should be ableto find out easily: who owns the hospital
or the physician practice that you or aloved one may visit to receive that care?
Today, nearly 80 percent of doctorsare employed by corporate entities,

(32:13):
including private equity firms.
And once in control, these firmsraise their prices and cut corners
to line their own pockets, whilethe quality of care suffers.
So let me start with you, Dr.
Whaley.
You are an expert on privateequity in health care.
If a patient wanted to find out whethera neighborhood hospital or a primary

(32:35):
care practice was owned by privateequity, how hard would that be to do?

DR. CHRIS WHALEY (32:41):
Senator Warren, I think it's virtually impossible for a patient to
know whether or not their doctor's officeis owned by a private equity company.

SENATOR ELIZABETH WARREN: Yeah, so virtually impossible. (32:46):
undefined
Because private equity firms don'thave to report ownership, it is
nearly impossible to find out if thedoctor's office you visit is owned
by one of these corporate vultures.
Well, let's ask about the workers.
How hard is it for theworkers to find out?
Ms.
Upsal, you lead the healthfund at Labor Union 32BJ.

(33:09):
If one of your members wanted to findout if a potential employer of any
kind was owned by a private equitycompany, how simple would that be to do?

CORA OPSAHL (33:22):
Similar to what Dr.
Whaley said, next to impossible.
And I would even say as the employeror as the sponsor of the plan,
I don't know who I'm writing myself funded checks to, as well.

Okay, so next to impossible, virtually impossible.
I'm, sensing a trend here.
Patients can't find this information.
Workers can't find this information.
Even antitrust regulators have ahard time finding this information.
These are the agencies that areresponsible for cracking down on
anti-competitive behavior, and theycan't get their hands on these data.

(33:57):
And it matters, because privateequity ownership has real
consequences for the families andthe workers who need help here.
So Dr.
Whaley, once private equity firmstake over health care companies, what
happens to health care cost and quality?

Several studies have shown that when a private equity
company acquires a healthcare practice,whether it be a physician or a hospital
or other type of healthcare provider,prices increase quite substantially.
We've also seen evidence, particularlyin nursing homes, that quality goes
down, again, quite substantially.

I just want to relate this to the earlier line of
questions, where he said, people areusing higher price as a signal that
they're going to get better care.
And yet, the data show us that whenprivate equity takes over, price goes up
and quality of care actually goes down.

(34:54):
Is that right, Dr.
Whaley?

That's what the host of studies that have examined this question.

SENATOR ELIZABETH WARREN: Yeah, so not just one study. (34:58):
undefined
You see it across the board in all ofthe studies that have looked at this.
I saw this first hand in Massachusettsafter private equity drove Steward
Health Care into bankruptcy.
And that is why I introduced theCorporate Crimes Against Health Care
Act, which, among other things, wouldrequire private equity-owned health care

(35:21):
companies to publicly report mergers,acquisitions, changes in ownership
and control, and financial data.
So at least the informationwould be out there.

Let me ask (35:32):
Dr.
Whaley, would these data help stateand federal regulators prevent crises
like the Steward failure in the future?

I think having accurate and transparent data on ownership is
incredibly important, and can helpboth state and federal regulators
monitor healthcare markets and getahead of what's happened in many cases.

Yeah.
It is shameful that these firmscan hide in the shadows while
patients and workers suffer.
My Corporate Crimes Against HealthcareAct would shine a light on private
equity's most parasitic practices.
It would also claw back compensationfrom private equity executives that drive

(36:16):
portfolio companies into bankruptcy.
It would impose criminal penaltieson executives when their failures
result in patient deaths.
And it would empower regulatorsto prevent crises like Steward
from ever happening again.
There's a lot of work we need to do here.

ADREINNE BULLER - HOST, MORE PERFECT UNION: I spoke with Benjamin Braun, a (36:33):
undefined
professor of political economy atthe London School of Economics.
He's written a bunch of studies on assetmanagers' role in our economy and society.

BENJAMIN BRAUN (36:41):
The fees you earn if you're BlackRock increase when the market
value of the assets you manage increases.
You maximize your assets undermanagement by winning over new clients
and by getting the clients that youalready have to give you more money.

ADREINNE BULLER - HOST, MORE PERFECT UNION: When you have 10 trillion dollars, you (36:56):
undefined
have to put them somewhere, and eventuallythat somewhere becomes everywhere.

Universal ownership refers to holding shares in the entire
universe of firms listed on the stockmatket, the big three asset managers:
BlackRock, Vanguard, State Street,hold a sizable, but still relatively
small, stake in all listed corporations.

ADREINNE BULLER - HOST, MORE PERFECT UNION: BlackRock is a 3-10% shareholder (37:22):
undefined
in all of these companies.
This may not sound like a lot, butit's enough that selling all of
it at once would likely crash thatentire stock, locking them into the
whole not selling passive thing.

5 percent in any individual company is actually very
significant because if and whenshareholdership is dispersed, 5 percent
makes you, in all likelihood, the singlelargest shareholder in that company.
That's why, for example, in a lotof academic studies, 5 percent is
taken as a threshold for control.
There's almost no difference betweenVanguard, BlackRock, State Street, and

(37:59):
even a bunch of other asset managersin terms of their business model.
So then you can start and wonder, okay,so if the big three together hold 25% of
the shares in any individual company, thenyou're definitely above the threshold.

ADREINNE BULLER - HOST, MORE PERFECT UNION: Let's zoom in on Amazon. (38:15):
undefined
The big three owns 16% of alloutstanding Amazon shares.
Jeff Bezos only owns 9%.

In theory, universal owners should have an interest
in maximizing profits in the longterm across the entire economy.
And that is not how theyoperate in practice.

ADREINNE BULLER - HOST, MORE PERFECT UNION: The amount of stock you have (38:33):
undefined
determines the number of votes you get.
BlackRock is almost alwaysin the top three, maybe five
if they're feeling broke.
So that is a lot of votes.
And let's not forget, It's notBlackRock's money that's invested.
It's your dad's pension fund and yourinsurer's massive pile of savings.
It sounds crazy, but when youput your money in a pension fund,

(38:54):
you sign away your voting rightsto the pension fund manager.
And then when the pension fund managerputs all their pension funds under an
asset manager's control, they sign awayall those votes to the asset manager.
Kind of pyramid scheme vibes.
And how do they actually use those votes?
A 2017 study found that asset managersalmost always voted with what the

(39:14):
company executives recommended.
And why are they always votingwith company management?
Back in the 80s, company managers usedto spend company money on company things,
like corporate jets, fancy offices, oroccasionally paying their employees.
And this made the investors sad,because they wanted those profits.
So they started offering companymanagers, in addition to bonuses
and benefits, stock options.

(39:36):
Executives' total pay was now forevertied to how much the company made.

They can push managers, corporate managers, to act more in the
interest of shareholders, meaning inthe interest of corporate profits, and
do more to maximize corporate profits.

ADREINNE BULLER - HOST, MORE PERFECT UNION: This funnels money back to investors, (39:51):
undefined
who now include management, and awayfrom any hope of making companies
work better, or including employees inthe profits that their labor created.
Back in the day, like, my grandparents'day, more regular people had stocks, and
the idea was that every shareholder couldvote on things like board elections,
mergers and acquisitions, executivecompensation, and once in a while, wages.

(40:14):
Sort of like democracy forpeople with disposable income.

RONALD REAGAN (40:17):
Government is the people's business.
And every man, woman, and childbecomes a shareholder with
the first penny of tax paid.

ADREINNE BULLER - HOST, MORE PERFECT UNION: In 1945, 94 percent of stocks (40:25):
undefined
were owned by households.
But that's not reallyhow it works anymore.
Today, households have more like 40percent of the stock market, and about
half of that belongs to the top 10%.

(40:47):
Today, the top 1 percent own 50 percentof corporate equity and mutual fund
shares, while the top 10 percent own 86%.
[Referring to chart in video] Did youthink this yellow part was everyone else?
Nope.
The tiny green part on the bottom isthe least wealthy half of Americans.

You often hear this argument that what is good for
shareholders is good for everyonebecause, especially in the U.
S., where retirement assets areoverwhelmingly invested in corporate
equities, everyone is a shareholder.
But that's simply not true.
The bottom 50 percent virtuallyowns no shares at all.

(41:21):
The vast majority of shares areheld by the top 10%, and within
that even, shareholdings are quiteconcentrated within the top 1%.

ADREINNE BULLER - HOST, MORE PERFECT UNION: And while the strategies corporations (41:31):
undefined
choose (because asset managers votefor them) affect everyone, they only
benefit half the population even alittle bit, and frequently hurt the other
half, those without any shares at all.
Take the example of worker pay.
BlackRock and other asset managersplay a huge part in wage stagnation.

If you're a corporation, you can increase profits only in so
many ways, and you can always, inthe short term, increased returns to
shareholders by squeezing workers.

ADREINNE BULLER - HOST, MORE PERFECT UNION: So this kind of uber monopolization (42:01):
undefined
really hurts working people,consumers, and even small businesses.
And this is where it gets interesting.
There's evidence that this typeof universal ownership is in part
responsible for why everythingis so expensive these days.
For example, they have significantstakes in Nike, Adidas,
Lululemon, and Under Armour.
If one outperforms the other, it's thesame from BlackRock's point of view.

(42:24):
And sometimes it can even lose investorsmoney altogether if companies were
to start lowering prices to compete.

That's the universal ownership logic in action, but it's also
an anti competitive logic in action.
The fact that all five airlines, allthe major banks, for example, in the U.
S.
have the same large shareholders,creates a danger and a risk that
these corporations will not engage incompetition in the same way they would

(42:53):
if they each had different shareholders,because in that world, each shareholder
would root for their company andwould help to outperform the market
by the company they waged a bet on.

ADREINNE BULLER - HOST, MORE PERFECT UNION: It's sort of like a neo monopoly where (43:05):
undefined
companies don't even have to merge and buyeach other anymore because they all send
profits to the same guys no matter what.
And their large stakes inbasically every company affords
them friends in high places.
From just 2014 to 2015, BlackRockperformed over 1, 500 private
engagements with the companiesheld in their portfolio.

(43:25):
BlackRock reportedly believes thatmeetings behind closed doors can go
further than votes against management.
And they typically give managementa year before voting against them.
They also have a lot offriends in the government.
There's a sort of revolving doorbetween BlackRock, the government,
and the international bodiesthat create monetary policy.
Things like the U.
S.
Treasury, Federal Reserve, thecentral banks of Canada, some

(43:47):
European countries and Sweden, aswell as the International Monetary
Fund and the World Economic Forum.
Since 2004, BlackRock has hired atleast 84 former government officials,
regulators, and central bankers worldwide.

LARRY FINK (43:59):
The intersection of politics and business has never been more ongoing.

ADREINNE BULLER - HOST, MORE PERFECT UNION: Larry Fink himself is on the (44:05):
undefined
board of the WEF and even triedto get himself selected as Hillary
Clinton's Treasury Secretary in 2016.
And in 2008, they gotthemselves a pretty sweet deal.

ARCHIVE NEWS CLIP (44:15):
Traders say this is the craziest day they
have ever seen in these markets.
Veteran traders say they'venever seen anything like it.

ADREINNE BULLER - HOST, MORE PERFECT UNION: In the aftermath, the government created (44:21):
undefined
the Financial Stability Oversight Councilto oversee entities like BlackRock that
control a lot of money but aren't banks.
The FSOC pointed to BlackRock as anorganization that's so big that its
failure could cause another collapse andtried to put additional oversight on them.
But BlackRock doubled their politicallobbying spending, including running
a super targeted ad campaign on the D.

(44:42):
C.
metro, and managed to dodgethe oversight that other large
financial institutions received.
And let's come back to that loopholethey like to call passivity.
The people who decide if they're passiveenough to continue not to be overseen by
the government is BlackRock themselves.
Basically, BlackRock and other assetmanagers have to submit annual letters to
self certify that they've been compliantwith the terms of passive investment.

(45:03):
That's like being allowed to writewhatever you want on your taxes and
then audit yourself, except if youalso had 10 trillion dollars, which,
unless you're watching this and you'reliterally Larry Fink—hey bestie—I'm
gonna safely assume you don't.
The part that really blows my mind isthat while this one company already has
their eggs in basically every basketand is making money off seemingly

(45:23):
everyone, it goes even deeper than that.
The biggest investors in BlackRockare Vanguard and State Street.
And the biggest investors in Vanguardare BlackRock and State Street.
And the biggest investors inState Street are, you guessed
it, BlackRock and Vanguard.

Asset managers are the shareholders of asset managers.
And this is true for all financial firms.
And not only, in fact, for stockmarket listed firms, but private equity
firms, buying a private insurance.

ADREINNE BULLER - HOST, MORE PERFECT UNION: So the financial sector (45:50):
undefined
effectively owns itself.
The biggest companies that theyown, own them back, creating
this loop that sucks money in andnever seems to spit it back out.
They play all sides of the gamebecause at a certain point, you can't
lose when you play against yourself.
So, going back to our originalquestions: Does BlackRock own everything?
No.

(46:11):
But do they control everything?
Kinda.
They profit off of every bit of your life,while controlling just the minimum amount
they need to make sure they can continueprofiting off of every bit of your life.
And they get paid by teacher'sretirement funds to do it.
And they get away with this byconstantly exchanging money for
power and utilizing legal loopholes.
It's worth being pedantichere for a second.

(46:32):
They don't own everything.
They own shares in everything, whichgives them an outsized amount of control.
So while they're not necessarilythe ones making all the nitty gritty
decisions in every company, it is theirinfluence and this giant structure of
universal ownership that continues tomake their pie bigger and ours smaller.
It's the ultimate endgame of theInvestor Management Alliance.

(46:54):
Regulating them much further is going toprove difficult, and this is a solution
to one part of a much larger problem.
We no longer have the oldsystem of shareholder democracy.
We have something more like a shareholderoligarchy where the people with the most
power over where our money and stuff goesare incentivized to make that stuff worse
and more expensive and not work for us.

(47:14):
But BlackRock didn't create this system,they just used it to their advantage.
And I think we deserve a better one.

JAY TOMLINSON - HOST, BEST OF THE LEFT: We've just heard clips starting (47:20):
undefined
with The Plain Bagel explainingthe basics of private equity.
Wendover highlighted the casestudy of the Marsh grocery chain.
The Chris Hedges Report lookedat the revolving door behind
the scenes of private equity.
Senator Elizabeth Warren looked at theimpact of private equity on healthcare.
And More Perfect Union brokedown our shareholder oligarchy

(47:42):
headed up by BlackRock.
And those were just the top takes.
There's a lot more inthe deeper dives section.
But first a reminder that this show issupported by members who get access to
bonus episodes featuring the productioncrew here, discussing all manner of
important and interesting topics, oftentrying to make each other laugh in the
process, even in these trying times.
To support all of our work and havethose bonus episodes delivered seamlessly

(48:03):
to the new members only podcast feedthat you'll receive, sign up to support
the show at bestoftheleft.com/support.
There's a link in the show notes,through our Patreon page, or from
right inside the Apple podcast app.
Members also get chapter markers in theshow, but depending on the app you use to
listen, you may be able to use the timecodes in the show notes to jump around
the show, similar to chapter markers.

(48:24):
So check that out.
If regular membership isn't in the cardsfor you, shoot me an email requesting a
financial hardship membership, becausewe don't let a lack of funds stand in
the way of hearing more information.
Now, before we continue on to thedeeper dives half of the show, just
a quick comment on the post electionrecovery period we're in right now.
Now, as a straight White guywith full citizenship, I am aware

(48:49):
that I am certainly not nearthe top of Trump's enemies list.
But presumably, because I care about howother people will be impacted, as well
as caring about how my own mental healthwill be affected by the stress that
comes along with President Trump-drivennews alerts, I'm definitely having a
sort of anticipatory anxiety that isimpacting my sleep patterns and appetite.

(49:14):
All of which is to say that I canhardly imagine what others who
will be more directly affectedare going through right now.
And yet, at least to varying degrees,we are all going through this together.
Now, nothing is going to make thecurrent situation feel good, but I hope
that there is at least some comfortin being reminded that the feelings

(49:35):
you're having are not just yours alone.
To that point, I mentioned towardthe end of our post election round
table discussion that I'd beenhaving some thoughts about how to
rework and relaunch our activismsegments we used to do more often.
Before I'd even given more details on it.
Alan, from Connecticut called inand sort of preempted my plan.

VOICEMAILER (49:57):
ALAN FROM CONNECTICUT: Hey Jay, it's Alan from
Connecticut calling in.
I skipped ahead to the last episodehere—and, uh, bonus gone mainstream, if
you will—and in the end you were talkingabout activism and how you wanted to
rethink that because It gives a laundrylist of things that we're not doing.
I have to tell you, I love hearing thatstuff, even if it's not something that

(50:17):
I'm able to do or doing knowing thatit's out there, knowing that somebody's
doing something is really good formy mental health, even if I can't
participate, or even by the time I hearabout it, it's over, knowing that it's
happening is really, really helpful.
So, put the different spin on it ifyou want, but do know that knowing
what's going on out there is helpful.

(50:39):
And if you put it at the endof the show, people can always
speed past it or whatever.
But I find it helpful.
Anyway, thanks, stay awesome, and forwhatever we can do, keep the faith.

JAY TOMLINSON - HOST, BEST OF THE LEFT: Now in all honesty, one of the (50:50):
undefined
major reasons we drift away fromdoing those segments was that we
were very unsure of how effectivethey were on multiple levels.
We were unsure of how effectivethe actions were in general.
And we were even more unsure of howmuch action we were actually driving

(51:10):
from listeners with those segments.
So, we sorta got discouraged inthe sense that we didn't know
if the effort we were putting inwas really amounting to anything.
Now, the rethink I had justafter the election was exactly
what Alan just laid out.
The biggest benefit from thoseactivism segments probably never had
anything to do with driving action.

(51:33):
The biggest benefit waslikely driving inspiration.
So, the hope is to gear back up ina way that incorporates activism
into the show, but with a clearerunderstanding of what it's there
for, and to have that be part of thecommunication in each of those segments.
The idea will be to make people feel goodto help people's mental health and to

(51:54):
potentially spur inspiration, whether totake action on what we're talking about or
something else, it doesn't really matter.
But that is the idea at least.
Give us some time to sort that allout because of course we're still
not eating or sleeping well, soit's not exactly the best time to
stretch ourselves even further.
For now we'll continue todive deeper on three topics.

Next up Section A (52:16):
How it works; followed by Section B:

Power; and Section C (52:20):
Solutions.

ANDRES ACEVEDO - HOST, THE MARKET EXIT: How come the handful of people (52:24):
undefined
who are partners at private equityfirms gets so immensely wealthy?
The answer to that is simple.
As the recipe prescribes, the magicPE sauce must include life changing
incentives, which means that thefees that private equity firms
charge must be out of this world.
First, the private equity firmcharges an annual management fee,

(52:47):
usually 2 percent of the money thatthe investors put into the fund.
This is a fee that they getirrespective of how the fund performs.
Second, the private equity firms Manyprivate equity firms also charge a
performance based fee, which is forsome reason called a carried interest.
This performance based feeis usually 20 percent of the
profits that the funds make.

(53:08):
And in addition to the managementfees and the carried interest, many
private equity firms also charge thetarget companies that they buy various
fees with creative names, such as dealfees, service fees, and advisory fees.
As if all of those fees to the privateequity firm wasn't enough, there's a lot
more that the investors have to pay for.

(53:30):
Leveraged buyouts are really complextransactions, and private equity
firms don't know how to do them.
So they take in hordes ofextremely expensive consultants
to do the transactions for them.
Lawyers, management consultants,bankers, accountants, etc.
All billing handsomely by the hour.

(53:50):
If you average out all of these fees thatthe investors have to cover, you'll find
that investors have to pay between 6 and7 percent to invest in private equity.
To compare, hedge fund investmentscost around 4 percent, active mutual
funds around 2 percent, and passivemutual funds less than 1 percent.
If you have capital to deploy,private equity is an extremely

(54:12):
expensive way to do it.
So why do investors, such as our pensionfunds, still invest in private equity?
Why do they accept that so much oftheir money goes into the pockets
of a few private equity partnersand all of their consultants when
there are cheaper investment options?
Surely that must be becauseprivate equity clearly outperforms

(54:36):
everything else that is out there.
And for sure, the private equity firmsand their lobby organizations, such
as the AIC and the SVCA, will tellyou that yes, private equity does
outperform other investments and thatthe life changing fees private equity
firms are charging are not only worthit, they are a key reason for why

(54:57):
private equity firms perform so well.
Also the consultants who build by the hourto enable the buyouts, the lawyers, the
bankers, the accountants, the managementconsultants will gladly attest to how much
value private equity firms can create.
But many independent experts are quitecertain that That private equity does not

(55:18):
clearly outperform other asset classes.
The University of Oxford professorof finance, Ludovic Falippu, and
several others, makes the case thatprivate equity funds do not clearly
outperform other asset classes.
Instead, private equity has giveninvestors performance that more or less
matches the public stock market indexes.

(55:39):
And if that is true, then anyone whoinvests in private equity will pay
around 7 percent per year when theycould have paid way below 1 percent
per year for a similar return.
But even if private equity wouldclearly outperform other asset classes,
I still find it difficult to acceptthat these fee levels are necessary.

(55:59):
Should we really believe that privateequity partners wouldn't go to
work unless the investors, in otherwords, our pension funds, are there?
Give them billions of dollars in fees.
Clearly, there is something foulabout the incentive ingredient
in the magic pea sauce.
But unfortunately, also the othertwo ingredients smell a bit funky.

(56:23):
When private equity firm Accel boughtthe Jon Bauer school group, they
loaded it up with a mountain of debt.
Immediately after the acquisition,Jon Bauer had to start
paying huge sums in interest
And as long as John Bauer keptexpanding as much as Excel had expected
and projected, everything was fine.

(56:45):
But when John Bauer no longer was ableto attract as many students and failed
to increase revenues, things got tough.
John Bauer had to start cutting coststo afford its interest payments,
and scandals soon started piling up.
And in 2013, John Bauerhad to file for bankruptcy.
Remember that backbreaking debt is akey ingredient in the magic pea sauce.

(57:08):
The private equity firm borrowsaround 80 percent of what it costs
to buy a company and makes thecompany responsible for that debt.
And why do they do that?
Well, this debt, or leverage,increases the private equity firm's
potential return on investment.
In other words, how muchprofits they can make.
But the debt also serves other purposes.

(57:28):
First, it lowers the targetcompany's tax liability.
Second, it supposedly makes thetarget company more disciplined.
The company must keep itscosts low and revenues high
in order to afford the debts.
Otherwise, it fails.
But this debt that the private equityfirms load onto its target companies
also makes the target companies muchmore vulnerable, increasing the risk

(57:53):
of failure, which is what happenedto the John Bauer school group.
The beautiful thing for private equityfirms is that when that happens, when
their target companies that they've boughtout succumbs to their debt obligations,
it's not the private equity firm'sresponsibility to repay any of that debt.
When their investments do well,the private equity firm reaps

(58:15):
astronomical gains, but when theirtarget companies fail, the true losses
fall mainly on other stakeholders.
The company's employees, itscustomers, its suppliers, its
creditors, and the community at large.
A fate that John Bower's teachers andstudents had to experience firsthand.
The third ingredient in the magic pizzasauce is that the brilliant private

(58:38):
equity partners take full control ofthe target company so it can unlock
value thanks to the private equityfirm's superior management skills.
But it should go without saying that aprivate equity partner with little or
no experience from a particular industrycannot improve the actual products with
actual services of a target company.

(59:01):
All this private equity partner,this glorified financial intermediary
can do for its target company isto deploy the bluntest instruments
that capitalism has to offer.
The private equity firm helps the targetcompany cut costs through layoffs.
Offshoring and asset stripping.
And the private equity firmhelps the target company increase

(59:23):
revenues by deploying state of theart methods for price increases.
In other words, what private equity firmsdo is to help target companies focus more
on financial engineering and consumerexploitation and less on improving
the company's products and services.
Or as the author Matt Stollerhas expressed it, private equity

(59:44):
firms act as disease vectors forprice gouging and legal arbitrage.
But to extract value from the targetcompanies, some private equity
firms are not satisfied with onlyfiring people and raising prices.
Some private equity firms have biggerplans for their target companies.

(01:00:04):
Market domination.
This right here is Ryds Bilglas,a Swedish car glass repair chain.
This chain was founded in the 50sand was in 2016 acquired by the
private equity firm Nordic Capital.
In a leveraged buyout.
Immediately after the acquisition,Rydsbyrglas initiated its

(01:00:27):
strategy of market domination.
When a private equity firm acquires acompany on a fragmented market, in other
words, a market where there is a lotof competition, Then the private equity
firm will inevitably try to destroyas much of that competition as it can,
so that it can start raising prices.
After Nordic Capital took overRydsbyglas, it initiated a wild

(01:00:50):
shopping spree, acquiring, onaverage, one new company per month.
In theory, our competition and antitrustlaws should prevent the private equity
companies from going too far in theirattempts to destroy competition.
But in practice The private equitycompanies can often get around the

(01:01:10):
competition authorities with thehelp of stealth consolidation, as
the University of Chicago professorThomas Woolman has called it.
Stealth consolidation is possiblewhen each separate acquisition
is small enough to fly under thecompetition authority's radar.
Either the authorities are cluelessas to what's going on, or they
lack the weapons to defend.

(01:01:31):
And this is particularlycommon in the retail sector.
The private equity firms have also, withsome help from their lawyers, built a
whole nomenclature to obfuscate the truepurpose of their consolidation strategies.
Private equity firms doesn't monopolize.
It acquires a platform and then makesadd ons and bolt ons and tuck ins.

(01:01:51):
Private equity doesn'tdestroy competition.
It makes the market more efficientand private equity doesn't do price
increases, it does margin expansions.
If, and when the competitionauthorities finally wake up to
what private equity has been doing
below its radar, it'soften already too late.

(01:02:12):
After a few years of extremelyaggressive consolidation, Nordic
Capital last year sold off its controlstake in Rydsbygglas through an IPO.
And in the IPO prospectus, Rydsbygglaseven brags about its successful stealth
consolidation and how it has createdmarket entry barriers that will make
it difficult for small competitorsto stay relevant on the market.

DAN TOOMEY - HOST, GOOD WORK (01:02:33):
Outside of healthcare, you can find lots of
examples of private equity gettingall up in things that are commonly
thought of as public services.
Like when water bills rose 28 percentin Bayonne, New Jersey following KKR's
acquisition of the town's water system.
Or when pandemic relief money foundits way to PE firms despite being
attended for small business support.
Or when the state of Californiahad to evacuate dozens of boys from

(01:02:53):
an abusive Michigan rehab facilityfor troubled youth that was owned
by a Bay Area private equity firm.
But if we look at all of these troublingexamples of private equity's massive
growth and entanglement into publicservices, one thing remains clear.
These guys f ing rock at making money.

PAUL KEIRNAN (01:03:10):
2012, private funds as a whole, a lot of which
is private equity, managed 9.
8 trillion.
Now, 10 years later, it's 27 privatefunds industry, which again includes
hedge funds and VC, is now biggerthan the commercial banking sector.
Sector.
according to Gensler,

indeed, private equity has had an even more
meteoric career rise than euphoria.
Haie Jacob, all lordie.
But what besides Ivy League gradsburning desire to own a helipad
yacht has contributed to thisindustry's startling growth,

GRETCHEN MORGENSON (01:03:40):
low interest rates, zero cost of money.
Big reason.
Huge.
Okay.
Easy.
can borrow at low rates.

a cheap source of debt, w for leveraged buyouts.
Co that private markets havThe industry has been able to
expand pretty much unchecked.

So you've got this really big part of the economy that is
more or less operating in the shadowsbecause there's not really systematic.
There hasn't beensystematic disclosure on it.

DAN TOOMEY - HOST, GOOD WORK: So why does the government (01:04:12):
undefined
ignore these asset managers?
It's not like there's someannoying aspect to it.
public school teacher asking formoney to buy a protractor that works.
The

JEFF HOOKE (01:04:20):
SEC or the government's first response would be, okay, we
supervise the public markets where wehave to protect widows and orphans.
They don't know what they'redoing, so we got to protect them.

DAN TOOMEY - HOST, GOOD WORK: There's also lobbying. (01:04:31):
undefined
Private equity spends moretime in Washington, D.
C., than the worst kidyou went to college with.
For example, the industry spent 70million on lobbying in the run up
to the 2020 presidential election,while they donated 262 million.
Directly to political campaignsand it turns out that private
equity in Washington have a fewmutual linkedin connections as well

Lawyers that work at the sec.
They don't want to work at the secThey want to work on wall street
make triple what they're making nowHow are you going to get a job on
wall street if you're a pain in theass that you prosecute PE firms?
You know, that's not the wayyou get a job on wall street

Looks like the revolving door between washington
and private equity is gonna need somemaintenance Because it revolves a lot.
Jerome Powell, the current Chiefof the Federal Reserve, was a
partner at the Carlyle Group.
And three months after finishinghis stint as Donald Trump's SEC
Chair, Jay Clayton became Apollo'sfirst ever lead independent
director of its board of directors.
And those are just the head honchos.

(01:05:29):
Private equity's money andpolitical influence is so immense
that it's been difficult forregulators to square up with.

The government is reluctant to bring a case against the big name
like Blackstone or Carlyle Private Equitybecause they think they can't win a case.
They just don't think they got thehorsepower to go up against these
gigantic blue chip Wall Street law firms.

So you're saying that the SEC feels less
powerful than some private equity firms?
And as you might imagine, this uncheckedgrowth in private equity has also somehow
correlated with the unchecked growth of P.
E.
Executives bank accounts.
In 2000 and five, there were threemulti billionaires among the P.
E.
Executive class in 2020.

(01:06:12):
It was 22.
22 multi billionaires.
Just think of how ass their group chat is.
You can chalk all of this up tothe way the industry pays itself.
Regardless of how investmentsperform, a private equity firm
will charge a management feeof about 2 percent each year.
So a fund with 2 billion in managementwill baseline make 40 million annually.
But the real clams come from thissecond thing called The performance fee.

(01:06:35):
Unlike the management fee, the performancefee is 20 percent of a firm's annual
profits, and it's taxed as capitalgains, which means it's taxed as an
investment you've held for over a yearinstead of income for your services.
This performance fee is more famouslyknown as carried interest, and it's
one of the biggest tools PE executivesuse to maximize their earnings.
In fact, this carried interesttax rate is so important to the

(01:06:57):
private equity industry that thisspike in lobbying spending in D.
C.
happened the same year that Congressfirst started having hearings about it.

Income tax, if you're really wealthy, might be 35
or 40 percent plus state tax.
And the capital gains taxwould be half of that.
So there's a big, what you callbenefit from having a capital
gain as opposed to income.

But for an industry that generates such an
exceptional amount of wealth for itspractitioners, surely they must get a
great deal for their investors as well.
The answer isn't as obviousa yes as you might think.
In July, the Wall Street Journalreported that for the first time
since the 2008 financial crisis,benchmark private equity returns turned

(01:07:37):
negative for the reported fiscal year.
But since the government can't regulateprivate equity very effectively,
it's pretty difficult to figure outwhat the industry's finances are.
Act actually look like even ifyou're an investor in the fund.

In terms of regulation and I'll contrast this with like mutual
funds You go to vanguard's website andyou look at one of their mutual funds.
You'll see a semi annual Report that'sgot maybe 28 pages and it's got their
expenses and that's required by regulationWhat is currently required by regulation
is basically no disclosure, by funds, byprivate equity funds to their investors.

The investment process would all be hush hush, and for the private
equity industry, you know, that's good.
They can keep a lot of their feeshidden and their returns, which
are mediocre at best, secret.

And while there are studies claiming that private
equity as a whole offers better returnsthan the stock market, there is reason
to be skeptical about their numbers.

WARREN BUFFET (01:08:33):
We have seen a number of proposals from private equity funds where
the returns are really not calculated in amanner that, well, they're not calculated
in a manner that I would regard as honest.

CHARLIE MUNGER (01:08:47):
Warren, all they're doing is lying a little
bit to make the money come in.
Yeah, that sums it up.

Those garbling muppets raise a good point.
One of the reasons why the returnscan be tough to trust is that they're
often calculated by people whoare hired by the firms themselves.
For the most

part, there's no outside party going in and doing a smell test.
To some extent, the auditors might do it,like Pricewaterhouse or Coopers and Libra.
The problem with them is they'regetting paid by the PE fund itself.

DAN TOOMEY - HOST, GOOD WORK: Are you sure? (01:09:16):
undefined
Are you sure?
Okay.
I'm receiving breakingnews against all odds.
The Southeastern FootballConference has announced the most
significant regulations to private
I am sorry.
The Security and Exchange Commission hasannounced the most significant regulations
to the private equity industry in years.
That makes much more sense, Dan.

ARCHIVE NEWS CLIP (01:09:37):
The SEC imposing changes on hedge funds and private
equity firms on fee disclosures.
The move is meant to curb preferentialtreatment of certain investors.
There's the disclosureon a quarterly basis.
of performance in a way thatright now is not required per se.
There's a element thatprevents special deals.

DAN TOOMEY - HOST, GOOD WORK: So, everything's fixed, right? (01:09:56):
undefined

So it's about 15 or 20 years too late.
You know, the train's left the station.
The plutocracies become too powerful.
They'll be able to ride roughshodover these if they don't even try
to get them thrown out in a car.

Well, the new rules have to mean something, right?
Like, how fast could they sue them anyway?

BRYAN CORBETT (01:10:13):
So there are really three reasons why we're suing the SEC.

DAN TOOMEY - HOST, GOOD WORK: Touché, suited egg man. (01:10:16):
undefined
That's Brian Corbett, CEO of the ManagedFunds Association, one of the many
groups that lobby for hedge funds andprivate equity firms and are currently
suing the SEC for its recent regulation.

BRYAN CORBETT (01:10:27):
We think the SEC in this final rule has
exceeded its statutory authority.

So as we stand today, private equity is mobilizing
their cinematic universe of lawyerswhile the SEC tries to rein them in.
for the first time in many years.
So what does this mean for the future?
Not just for private equity, but for us,everyday people whose lives have been, in
one way or another, tied to this industry.

If I was a union employee looking forward to retirement, and
let's say I can pose a few questions tomy union representatives on the board
of trustees of these gigantic funds,I'd ask my representative, Hey, look,
have you taken a closer look at this?

GRETCHEN MORGENSON (01:11:05):
I think it's a moment to really see Okay, what
kind of capitalism do we want?
Do we want the kind that reallybenefits the, a broad array of people?
Or do you want to have a systemthat benefits a tiny, tiny
fraction of people at the expense?
Of a lot, a lot, a lot of people.

What type of capitalism do we really want?
Do we even know the type ofcapitalism we already have?
If investigating private equity teachesus anything, it's that powerful, profit
seeking forces are indeed all around us.
In every part of our lives, in placeswe wouldn't even think to look.
Wait a minute.

(01:11:44):
This YouTube channel isowned by Morning Brew.
Morning Brew was bought byBusiness Insider in 2020.
Business Insider is ownedby Axel Springer, who is 43.
54 percent owned by privateequity megafund KKR, which
means For good work, I'm 43.
54 percent private equity.

EMMA VIGELAND - HOST, THE MAJORITY REPORT: When did private equity really start to (01:12:05):
undefined
dip its toe into the healthcare industry,which is 20 percent of the United
States economy, something like that?

LAURA KATZ OLSEN (01:12:15):
It's definitely 20, it's not only 20 percent of the U.
S.
economy, but it's a significant,Medicare and Medicaid, for example,
are significant percentages ofthe federal and state budgets.
So, Willie Sutton says,why do you rob banks?

(01:12:35):
Because that's where the money is.
And that's why private equity isgoing into healthcare, because
that's where the money is.

EMMA VIGELAND - HOST, THE MAJORITY REPORT: Lots of money, unfortunately, (01:12:43):
undefined
I mean, on our show, we'reAdvocates for single payer...

Let me answer your question, which I didn't.
They did a little bit in healthcare in the 1990s and a little
bit in the early 21st century.
But since 2015, they've justbeen accelerating dramatically

(01:13:13):
and as they have more and more,what they call a dry powder.
should I explain what that is?
Yeah, go ahead.
Okay.
public pension funds, universityendowments and nonprofit endowments.
So they started to get more andmore dry powder, which is the money

(01:13:35):
that these, investors are givingthem and they have to spend it.
And so this money is growing andgrowing and the money is sitting there.
And they finally decided that,hey, healthcare has a lot of
benefits to it, including thefact, that it's very profitable.

(01:13:57):
So, by about 2015, they started, investingseriously in the healthcare sector.

EMMA VIGELAND - HOST, THE MAJORITY REPORT: And this is, probably around the same time (01:14:06):
undefined
that some of these pension funds begin tomove more into the stock market and into
the investment sphere, is that correct?

Well, these pension funds started moving away from the
stock market to private equity, right?

EMMA VIGELAND - HOST, THE MAJORITY REPORT: Okay. (01:14:33):
undefined
That's yes.
Gotcha

Okay, I do I just read this morning that there's an average of
about 14 percent of their and this isjust an average Of their pension fund
money now is in private equity and theykeep investing more and more money.

EMMA VIGELAND - HOST, THE MAJORITY REPORT: Is it because they (01:14:51):
undefined
perceive it as less risky?

It's definitely more risky.

EMMA VIGELAND - HOST, THE MAJORITY REPORT: Right, but the perception might be that (01:14:57):
undefined
it's less because, but based on yourresearch, it definitely seems more risky.

No, it's definitely more risky.
And another problem, it's illiquid.
You know, the private equity fundkeeps this money for decades.
But the reason they're investing moreand more is because they believe,
and I emphasize the believe thatthey're getting high rates of return.

(01:15:28):
there is growing number of studies nowshowing this may not be the case anymore.
It's very, very hard.
private equity is very secretive.
It's very hard to get anyinformation, including the investors
get very little information.

EMMA VIGELAND - HOST, THE MAJORITY REPORT: Right. (01:15:46):
undefined
Well, you were struggling to, to getanyone to give you, More information
for your research as well On this side.
I know you wrote a bit about how secretsecretive they were and you trying to
get in the process of your research

Well, they make all of the businesses that they buy sign
nondisclosure and nondisparagementclauses and at the risk of losing
the money that they were given.
So, people are very, very reluctant,obvious, obvious reasons to
talk about the, um, the problemsthat they experience that once

(01:16:24):
they've sold their small business.
A lot of these smallbusinesses in health care.
Uh, whether it's autism or eatingdisorders or drug and alcohol rehab
centers, a lot of the original ownersreally care about the issue and
really care about their patients.

(01:16:44):
And they don't understand, there's a lotof naivety among physicians, for example.
They don't really understandwhat they're getting into.
Because they're, they're told that whatthe private equity firm is going to do
is take care of the annoying stuff andthere's lots of annoying stuff with,

(01:17:05):
uh, rules and regulations and, uh,handling, uh, you know, patient, uh,
times that they're coming and all of that.
That's all going to be taken careof the private equity by the private
equity firm, so as to allow the,let's say, physician or provider to

(01:17:26):
practice what they want to practice.
It's a big thing.
They let physicians practice medicine,but the reality is they are totally
controlled by the private equity firm.

EMMA VIGELAND - HOST, THE MAJORITY REPORT: Can you talk, uh, expand a bit on the, (01:17:39):
undefined
the point about how private equityis targeting, uh, places like eating
disorder centers, uh, re, rehabilitationclinics, autism treatment, uh, facilities,
because they're a little bit, there'sa little bit less, uh, government

(01:18:04):
oversight into, uh, Into some of those,those facilities and they've, I think
been, and correct me if I'm wrong, um,targeting them for that particular reason.

Well, one of the reasons that they're targeting,
uh, healthcare obviously isbecause that's where the money is.
Uh, that's where the profits are.
Uh, the aging population, Um, theaffordable care act, which put
more patients on the, but also,uh, healthcare is fragmented.

(01:18:44):
I mean, lots and lots of small agencies,mom and pop shops that they, then
they, they, they, what they'll dois they'll buy, um, what they call a
platform, like a flourishing company.
And then they will add on to that company.

(01:19:07):
By taking on these fragmented, thesesmall mom and pop shops or agencies,
buying those companies and making itlarger and larger, which increases
the value exponentially, but alsogives them local, regional, uh, state

(01:19:28):
and sometimes national monopoliesso that they can control the costs.
Gotcha.
Gotcha.
And, um, can I just, can I just sayone thing, which if I don't get in, it
won't, because this is one of the mostimportant things when they buy a company,
the private equity firm puts in about 2percent of the value, only 2%, the pension

(01:19:57):
funds and endowments put in about 38%.
And the rest of that is paid for by debt.
Now, the debt is paid backby the companies they bought.
So whether it's the large company, whichis the platform, or the add ons that they
buy, it's the companies, not the privateequity firms, that pay back the debt.

EILEEN APPELBAUM (01:20:23):
You have private equity firms, you probably have heard of some
of them, Blackstone, Carlisle, Apollo.
These big firms sponsor investment funds.
What that means is they recruitinvestors for their fund.
The private equity firm looksfor institutional investors.

(01:20:43):
To put money into it.
And so what do I mean byan institutional investor?
This will be a pension fund, auniversity endowment, a foundation of
some sort and sovereign wealth funds.
Those are the main institutional investorsand they recruit them to put up the
equity in the private equity fund.
So that's where the equity comes from.

(01:21:05):
And it's important to know that theprivate equity firm itself puts up
one to two cents for every dollar.
The other, uh, investors inthat fund put up the private
equity firm calls all the shots.
It has something called a generalpartner, which is not a person.
It's a committee made up ofprincipals in the private equity firm.

(01:21:29):
So that's the decisionmaker, the general partner.
And then you have all these other peoplethat they've recruited to put money in.
They're called limited partners.
They are the private, we'll justcall them private equity investors.
Those are the investors.
Okay, so that's the equity andthat's where the down payment
comes for buying a company.

(01:21:50):
So the private equity fund does makea down payment and then it finances
the rest of the acquisition with debt.
And, uh, it's one thing for you toput down 20 percent on your house.
It's 20 percent on a multi million or evenbillion dollar company and raise the rest.

(01:22:12):
In debt.
It's a huge amount of debt.
And now the interesting twist, whichnobody can believe the first time
they hear it is that the privateequity firm owns the portfolio
companies that are being purchasedwith this equity down payment in debt.
But the debt has to all be paidback by the company they acquired.

(01:22:34):
So, to just say it over again,you have this investment fund.
It does have money in it that camefrom the limited partners, and
that becomes the down, that's theprivate equity fund, and that becomes
the down payment on the business.
And all the rest of thefinancing is in the form of debt.
And the interesting and unbelievablefact is that while the private

(01:22:58):
equity Firm owns this company.
The company has to pay back the debt,and if it can't pay back the debt, the
private equity firm and the privateequity fund and the general partner in
the private equity fund who made thedecision about how much debt to put on
that company, they get away scot free.

(01:23:19):
They have no responsibilityfor paying back any part of
this debt goes into distress.
The first thing it does isit squeezes its workers.
It's trying to find money tokeep to keep them business.
So that make the payments on the debt.
And if it can't do that,then it goes into bankruptcy.
Sometimes bankruptcy ends in liquidation,as was the case with Toys R Us.

(01:23:43):
And sometimes bankruptcy, uh, ends withsome sort of restructuring of the company.
It depends on the creditors.
That's the point at whichit depends on the creditors.
So you have, okay, all thisdebt was put on the company.
Somebody loaned them that money.
And the lenders of that money took a lookat Toys R Us and said, we have a better

(01:24:06):
chance of getting some of our money back.
Certainly they're not going to get it allback, but getting some of our money back.
If we have this, we liquidate thecompany, get rid of all the employees,
sell off all the stores for otheruses and take that money and pay
ourselves back for all this debt.
Other cases, they may look at a situationand say, well, if this company just

(01:24:29):
restructures them this way and thatway, we'll take a haircut on the debt.
In bankruptcy, the company alwaysgets to reduce some of its debt.
Uh, so the creditors are goingto lose money on it for sure.
But they look at the situationand say, we have a better chance
if this company keeps operating.
So that's how it turns out thatsometimes they liquidate and

(01:24:50):
sometimes they just restructure.
But the interesting point is thatthe folks who decided to put all
that debt on that company have noresponsibility for paying off that debt.

MATT SEDLAR - HOST, SOCIOLOGY RUINS EVERYTHING: How did you get into this (01:25:05):
undefined
particular line of research?

EILEEN APPELBAUM (01:25:09):
So, I've been studying private equity since, uh, 2010, when
I first became really aware of howmuch what we thought was negotiations
between labor and management really was,management was really not able to speak
for itself, that there was, uh, someonebehind a curtain pulling the strings.

(01:25:31):
And, uh, we wanted to know more about it.
Uh, so this is work I've beendoing with Rosemary Bott, a
professor at Cornell University.
I was at Rutgers when we started.
We had the idea that this wouldjust be something small and
quick and easy to understand.
And so we offered to write a small volume,just a little, a monologue, monograph

(01:25:54):
rather, on private equity for 25, Fouryears later, a few hundred pages later,
we had our book private equity at workwhen Wall Street manages Main Street,
in which we lay out a lot of the privateequity model that came out in 2014.
Of course, there have been manydevelopments since and Rose and I continue

(01:26:18):
to write about private equity and all thenew, all the new bad things it's doing.
So, so just to be clear, there are.
Thousands, probably 8, 000 privateequity funds out there, and
most of them are smallish funds.
And these private equity firms thatsponsor these funds by smallish companies.

(01:26:39):
When you buy a smallish company,one thing you notice is there
are not many assets to mortgage.
And consequently, they don't use excessivedebt, not because they wouldn't like to,
But because they can't, and because theseare small, usually family owned companies
that they take over, uh, there's a lotof room for operational improvement.

(01:27:00):
There's room to put people on their boardof directors who understand business
strategy and can help them make inroadswhere they haven't already done that.
And these are really the success stories.
And so we talk about them in thebook, Private Equity at Work.
We try to be even handedand to say that there are.

(01:27:21):
Many cases among those 8, 000 funds,uh, where this is going on, but this is
not where the bulk of the money goes.
The bulk of the money, overwhelmingly,the money that goes out to private
equity firms that sponsor these funds.
There are 300 private equity firmsworldwide that, that get most of

(01:27:42):
the funds, uh, that have these huge.
investment funds and can't takeon small companies because the
transactions costs are too high.
So they go out and buy big companies.
And the, the size of theseis just growing tremendously.
So Carlisle announced that it was goingto raise a 27 billion fund, 27 billion.

(01:28:03):
It used to be that a 5 billion fund, whichis the definition of a mega fund was rare.
Now 5 billion funds are becoming common.
And we have Carlyle going out for a 27billion fund, and not to be outdone, a
few weeks later, Blackstone just announcedthat it's going out for a 30 billion fund.

(01:28:25):
Well, when you have funds that big,all you can do is invest them in
really Big companies, uh, and thosecompanies have, uh, very, that they
already have modern accounting systems.
It wouldn't be worth a couple of billiondollars if they didn't already have modern
accounting systems, modern IT systems,good business strategy, good operating,

(01:28:47):
uh, the strategies or the policies.
So there's not much left to do tomake money with them beyond some
sort of financial engineering.

JAY TOMLINSON - HOST, BEST OF THE LEFT: Now entering Section B (01:28:56):
Power.

PABLO TORRE - HOST, PTFO (01:28:58):
The NFL, this week, took a vote.
A vote on a subject that we've coveredon this show previously, more generally,
but specifically to them, it's abouttaking private equity investment.
And so, the proposal was 10%, up to 10%,which is not as much as the other leagues,
which we're talking about 30%, uh, butDavid, to you, Private equity money in

(01:29:22):
the NFL, landing in this way, the topline understanding that you have is what?

DAVID SAMSON (01:29:28):
Well, private equity money is very important as a source of capital.
And what that means is when youare putting together money to buy
something, you, uh, Have to find owners.
You have to find individualsto put in money, to buy a team.
Sometimes you run out of individuals.
You have to go to the capitalmarkets, which means you go to a
bank to borrow money, or you find asyndicate of banks to borrow money.

(01:29:49):
Or if that doesn't work becauseyou're tapped out, then there are
these firms that are willing toinvest in your company, except they
require a heightened rate of return.
So when you borrow money from abank, You pay an interest rate.
When you get money from a private equityfirm, it comes in the form of an equity
investment, but it's like a preferredequity investment which means that

(01:30:12):
upon a monetization, upon a sale, theyget back their money and a rate of
return on their money before anyone elsegets a rate of return on their money.
That's how privateequity firms make money.
And it is an amazing thing to bein a private equity firm because
you invest in different companies.
And you make a lot of money.

(01:30:33):
And

JOHN SKIPPER (01:30:33):
With an amazing, favorable taxation rate.

That is also true.
I can't deny that.

Which is a feature of American capitalism.

Which is, which is, well, it's all, it's all in the code.
It's not illegal.
Oh, sure.
I didn't suggest it was illegal.
It may not be moral.

I wouldn't even suggest it's immoral.
I would suggest it's unfair.

It is unfair, it's unfair in the way it is unfair.

A bug, arguably, morally, but a feature financially.
It is a tiny bug.

But what the NFL is doing by having this vote, they're the last league,
and I think we should point that out.
MLB, the reason why MLB allowsprivate equity investment
to end the NBA And the NHL.
Is they want their Value ofthe teams to keep going up.
So if you're buying the commandersfor six billion dollars, Josh Harris
had to come up with six billiondollars between the people he knows

(01:31:23):
and the banks he does business with.
It's hard to do that.

But, but John, just to make this even more
plain English here, what these teamsand these leagues are realizing
is, there aren't enough players.
Super, super, super rich people to keeppace with the idea of a single owner
of a super, super, super rich asset.

Well, and you've also got the realization by owners that
most of the benefits of owning a teamdon't require you to own more than 50.
1%, right?
You get to sit in whatever seats you want.
You get to pick the personnel who runyour team and do things if you choose to.
Uh, And so why should they put 6billion in when they could put 3.

(01:32:03):
1 billion in, get all the benefitsof ownership other than the, they're
giving away half the upward valuation.
And as David pointed out,the private equity guys will
actually get a favorable return.
But that's not why most people own teams.
They own teams because they're thegreatest trophies you can have to
display your importance and your wealth.

But that's changing now, John.
And these PE firms are notdoing it because of the trophy.
They're not.
Well, I know.
And that is where somerub may end up coming in.
Big time.
So what's, what's changing?
Why is this happening?
So the PE firms, if they're going toinvest, what they do is they've got a,
uh, picture you having, uh, A hundredmillion dollars, just for fun, Pablo.
And you're deciding how todiversify Let's take a break
while Pablo and I consider that.

Yeah, yeah, I'm gonna recline here for a second.

Oh, thank you.
That was really great for the audience.
For YouTube on the DraftKings

PABLO TORRE - HOST, PTFO: Network, I was chewing on a pen (01:32:58):
undefined
like a guy with nine figures.

So
Come on, buddy, you can do it.
I was gonna use a different amount.
I was gonna use like a billiondollars, but I decided to bring
it down to a number that I thoughtthat you would be okay with.
Oh,

I'm sorry, David is unimpressed.
I'm impressed by the hypothetical.

Right, the hypothetical doesn't even make sense.
This is why, this is Rich Guys Only fans.
It's not, it's math.
But we're good.
Back to a hundred million.
You've got a hundred million to invest.
You want to find different sectors.
You want to diversify your investments.
What these firms have said is, you know,sports teams keep going up in value.
We keep buying corner grocerystores and widget stores.

(01:33:39):
I think we ought to be investing insports teams because they do well.
We don't need good seats.
We don't need to stand on thestage when we win a Super Bowl.
But man, it seems like when youbuy a team and sell a team, that's
one hell of a return on investment.

So this is quite different from
previous minority owners, right?
Big time.
So previously, what is itlike to be a minority owner

of a team?
Previously, because the numberswere lower, it's called a CPI.
That is a Cocktail Party Investor.
That is someone who puts in a littleshtuple of money into the team.

This is an industry term, the CPI.
This is, this is.
I thought that was Consumer
Price Index.

I always say that it's the Cocktail Party Investor
because they get to go to cocktailparties and say, Hey, I own.
The Marlins.
Oh, I've never heard of you.
Yeah, no, I'm one of theowners of the Marlins.
And they put in 250, 000bucks, and they get to tell
everybody that they're an owner.
The numbers have changed significantly.
To be a CPI, it's not an ordinaryCP that we would be invited to.

(01:34:38):
It is now for the super,super wealthy individuals.
And we're pretty much out of thoseparties, which is why you start with PE.

So, John was explaining the upside of being
an owner Uh, an owner in any formof these teams as, as essentially,
yes, the CPI dynamic, the court side.
I get to be, uh, the owner of thisprecious piece of art, a single, a
symbol and a signal of exclusivity.
Um, the NFL, of course.
Is the apex predator of allof these leagues, right?

(01:35:08):
And so here are the numbers overthe past 20 years, the NFL's
total value has risen from 23.
46 billion to 190 billion, 710%.
The S& P 500 by contrast has risen about660 percent during the same time span.

Which does kind of prove the fact that all for almost any ordinary
human being, the best way to investyour money is to put it in the S& P 500.

If people are out there asking what do I do with my thousand
dollars or ten thousand dollars or ahundred thousand dollars Put it in an
index fund and then forget about itlike revisit in 50 years But it's funny
that that is the difference but in anycase the NFL as the apex predator what's
interesting is is what they're talkingabout in the NFL, however, is totally

(01:35:57):
different than what the other leagues do.
The other leagues took voteswith owners, and they approved
private equity investments inorder to keep valuations rising.
But for the NFL, it wasn't good enough.

Right.
So the NFL doesn't have the sameproblems of other leagues because
the Cowboys, the Dallas Cowboys, uh,their valuation in 2019, John, was 5.
5 billion.
Now, as of August 2024, from Sportico, 10.
32 billion.
Uh, you go down the list, the Rams 7.
79, Giants 7.

(01:36:29):
65, Patriots 7.
31, you can go It's These areall, all, uh, so much richer, so
much more expensive, valuable thantheir equivalents in other sports.
And so the NFL, what do they want here?
What's, what's the, what's the,what's the reason why they're
approving to do this vote?

They want those numbers to be real for starters, and I'm
not yucking on Sportacus Yum or onForbes, but those valuations were
never really looked at within baseball.
We never could go to a bank for that.
And bring out the Forbesarticle and say, Hey, lend us
money, our team is worth blank.
We never were able to use that.
How did you get the 1.
2 billion, David Sampson, thatyou got for the Florida Marlins?

(01:37:09):
Having nothing to do with Forbes, clearly,the way we got it is when supply demand.
It's when you have two people whowant the same trophy, they're going
to bid up the price of that trophy.
It's really that simple.
And I love the fact that I get credit forthat transaction, but I feel as though
that my Beagle could have done that.
Well, it's, it is not my fault.
You can't blame a seller whena buyer overpays for an asset.

(01:37:30):
I don't believe.

Yeah, and you could question even the overpaid,
if they are happy to pay 1.
2, and they get to sit in theseats they want, and it makes
them happy, they didn't overpay.

They're despondent beyond repair, and they're losing money hand
over fist, and they'd sell it for 1.
2 in a heartbeat ifyou want to buy a team.
You can buy the Marlins today.
All you have to do is givethem their money back, plus
the losses they've incurred.
But getting back to a broadersubject, the NFL wasn't satisfied with
just being like the other leagues.
And that's what fascinates me.

GOLDY - HOST, PITCHFORK ECONOMICS: Recently, you took a bullet for (01:38:02):
undefined
the rest of us in that you’renot just looking at the type of
policy that you want to do, but youactually went through the Republican
proposals, including the HeritageFoundation’s infamous Project 2025.
If you could just, I don’t know, broadlydescribe what the Republican agenda

(01:38:26):
would be if they had complete control.

PEGGY BAILEY (01:38:30):
Sure.
So right, in addition to making surewe’re four things, we need to make sure
to point out the things that peoplereally need to fight against, especially
those of us who are interested inhelping people with the lowest incomes
be able to live lives that are notjust stable, but to be able to thrive.

(01:38:52):
And so the overriding thing to understandis exactly where you were headed, that
Project 2025 is part of a suite ofRepublican proposals that all have the
same themes, have the same policies,and are moving in a direction that
really benefits the wealthy and wealthycorporations and shifts a lot of the

(01:39:15):
burden to low and middle income families.
Big picture, there are a fewways that we’ve kind of organized
the elements of Project 2025.
The first thing to know is that theseproposals would cut benefits, benefits
that people have right now and benefitsthat they rely on, whether it’s cutting

(01:39:38):
access to health insurance, cutting accessto food, housing, blocking people who
are immigrants from being able to come tothis country and live the American dream.
There are ways that the proposals wouldseriously undermine people’s ability to
keep benefits that they already have.

(01:40:01):
The second thing that these proposalswould do is shift costs from the federal
government to state’s governments.
We know that when the federalgovernment doesn’t live up to its
responsibilities, it’s states andlocalities that then bear the burden.
One example of this is in the homelessnessspace, where the federal government

(01:40:23):
doesn’t provide universal rentalassistance and therefore many people
are living on the streets becausethey can’t afford a place to live.
It’s states and localities that are tryingto address that problem when the federal
government really does need to step upto put its resources behind that problem.

(01:40:44):
The third thing that it would do is shiftthe tax burden from wealthy corporations
and wealthy people to middle and lowincome people by continuing and making
deeper the tax cuts to the wealthy thatwere included in the 2017 tax bill while
not providing any positive tax reliefto low and middle income families.

(01:41:09):
The fourth thing that the proposalswould uniformly do is simply undermine
the federal government in totality,getting rid of agency’s wholesale,
hurting our ability to provide safe food,safe water, healthcare, protect fair
housing rights, things like that would beundermined with the lack of investment.

(01:41:31):
One thing that’s overarching everythingthat you can’t shy away from is the
racism and discrimination that isinherent in all of these proposals.
They may look colorblind, but theirimpact is most definitely not and would
disproportionately impact people of color.

PAUL - HOST, PITFORK ECONOMICS (01:41:49):
One of the rebuttals I’ve heard to conversations
about Project 2025 is that everypresidential candidate makes promises
and they don’t follow through on them.
Do we have confidence that theseare policies that Trump would pass
in a hypothetical second term, orif Trump wins the presidency and

(01:42:10):
there’s a Democratic House, wouldthat offer a check to the proposals?

Well, that’s why it’s important to understand that Project
2025 is just one data point in theoverall extreme Republican agenda.
In our report, we highlight theRepublican Study Committee’s budget
proposals, we highlight the HouseBudget Committee’s recent resolution.
Those three things put together alongwith evidence of recent legislative

(01:42:40):
activity, show that this isn’t aboutthe current presidential election
so much as part of a steady strategythat extreme Republicans have.
If you think about the Dobbs decision andthe reversal of Roe, that was a 50-year
march to get to the place we are today.

(01:43:02):
We should think about these proposalsthat would punish people with low and
middle incomes and benefit the wealthyand wealthy corporations as part of
that same sort of consistent steadymarch that we need to work against.

GOLDY - HOST, PITCHFORK ECONOMICS: And to be clear, this isn’t (01:43:18):
undefined
about fiscal responsibility.
It’s not like, “Oh, we’ve got to makethe tough choices in order to balance
the budget and get our books in order.”It creates massive deficits at the
same time that it defunds the federalgovernment, disinvests in the American

(01:43:40):
people and just makes cuts, and we’llgo into some of the details, cuts to
programs that people just take forgranted, but it’s just huge deficits
come out of this due to the tax cuts forwealthy and corporation side of this.

Exactly.
Another piece that has to beconsidered is the lack of raising
revenue in any of these strategies.
The three proposals that I highlightedwould repeal parts of the Inflation
Reduction Act that call for increasedspending in the IRS as an example.

(01:44:18):
So it’s not only cutting taxesfor the wealthy and wealthy
corporations, but cutting the federalgovernment’s ability to enforce the
tax rules that are on the books.
And that’s just one way that theseagendas don’t think about the need
to raise revenue because it’s justunfathomable to think that in the

(01:44:41):
wealthiest country in the world, we can’ttake care of people with low incomes.
We know that it isn’t their faultnecessarily that they have low incomes.
They’re working, they’re not getting paidwages that allow them to afford to meet

(01:45:03):
their basic needs or they face inabilitiesto be able to work and federal benefits
like Social Security don’t pay high enoughfor them to afford their basic needs.
Therefore, it is the government’s role tofill in that gap until we do create the
structures to have living wages in eitherthrough work or through public benefits.

(01:45:27):
And so that mindset of the pie is onlyso big so we can’t afford to do this.
Just really when you think aboutthe wealth in this country and
the disproportionate way thateconomic justice shows up, we can
make the changes if we want to.

MATT STOLLER (01:45:48):
So, you know, the Reagan quote, you know, the nine most
dangerous words in the English language.
Um, today, if he were saying that hesaid the nine most dangerous words
in the English language, or I'mfrom Comcast and I'm here to help.
I got a whole conference oflibertarians to laugh at that.
So, They know what's going on.
Like, they might think, Oh, yeah, yeah.
But like, in their bones, you know, ifyou if you laugh at that joke, it means

(01:46:12):
you know, that the corporate bureaucraciesare just massively problematic.
And I don't want to like let it's notthat the government bureaucracy isn't a
problem, because it is it in fact, theyare linked, because what you have with it.
You know, the, the, a lot of thebureaucracies in DC is that they are,

(01:46:32):
they have this kind of symbiosis with big,big corporate, uh, big corporate actors.
And when you, you know, it'slike, it's pretty easy to
regulate small banks, right?
Cause small bankers are, they'refocused on just their communities.
And when a regulator comes the,they hand over what they need,
they fix things, whatever.
But when you go to regulate a bigbank, You don't even get to really deal

(01:46:54):
with the bankers is what I'm told byregulators, like you get, you have to
deal with a special group, which is, youknow, we'll give you maybe PowerPoints
on what they're thinking of doing andthey will fight you and they will go
to, you know, up a political level.
And so you never really getto see have any visibility
into what the bank is doing.
And it's just easier not to fight that.

(01:47:15):
And that's a function of scale.
And you see that across the economy.
It's safe.
I guarantee you that, like, you know,Pfizer gets a better hearing at the
FDA than some, like, random companythat's, you know, making something
that might be competitive, like,it's true kind of across the board.
You have this, like, youknow, it's a club, um, at, at
every one of these agencies.

(01:47:35):
And the reason that it's got so badis, you know, is because We have
these concentrations of private power.
If you broke up these companies, if youhad, then you wouldn't like, they wouldn't
have to, they wouldn't spend their timethinking about how to capture politics.
They would spend their timetrying to beat their competition
and providing better products.
Like that's what, that's why like,fundamentally, the reason you don't want

(01:47:57):
concentrations of private economic poweris because that becomes That's just power.
That's not it's notprivate economic power.
That's just an accumulation of power.
It becomes political power and itfundamentally becomes authoritarian power.
And when you're dealing with CBS, right,and you're trying to deal with with
them, um, effectively threatening yourhealth, right, and putting stress on you,

(01:48:20):
you're dealing with an authoritarian,government in that sphere, right?
That's what, that's authoritarianism.
It's just in this very narrow sphere.
So yeah, you have democracy, you can goto the voting booth, you can do all these
things, you have free speech, right?
We can complain about this, but inthat particular area, in terms of
the access to medicine that you need,you are dealing with a dictator and
that like with very limited rights.

(01:48:42):
And that's a very, verysignificant political problem
as more parts of our society.
Get consolidated under thehands of these mini dictators.
We start to look around and westart saying, wait, are we actually
a free living in a free society?
And we sort of we mostly are right.
We're not.
We're not in a dictatorship.
I don't want to overstate it.

RJ ESKOW - HOST, THE ZERO HOUR (01:49:03):
Right.

Speaker 17 (01:49:03):
But, you know, corporatism is not a totally free society, and the more
corporatist you get, the more you kind ofbleed over, um, into what we're seeing.

RJ ESKOW - HOST, THE ZERO HOUR: And it's certainly not democratic (01:49:15):
undefined
in the sense that, I mean, takemy medication, for example.
If it had been a policy decision of,uh, you know, the Centers for the
CMS or whomever that, uh, uh, thatthis should not be a covert drug, I
could, you know, write my congressrepresentative, I could write, uh, the

(01:49:36):
White House and say, look, you know,this is a autocratic unfair decision
and, you know, maybe they won't listen,but if a hundred thousand of us did,
maybe they would, et cetera, et cetera.
The government had nothingto do with this issue.

Speaker 17 (01:49:50):
There would be public debates about it, too.
There would

be public

Speaker 17 (01:49:52):
debates?
It's like, like, Congress, like,argues a lot about Obamacare, right?
But when CVS bought, or Aetna,CVS bought Silverscripts, right?
That was just a, the decision, thedebate happened in two boardrooms.
And the public had no access to it at all.

And the decision not to cover this drug,
which effectively means to deprivepeople of it, was made in boardrooms.
It was not, you know, and there'sno recourse, you can't, you know,
write your congressman aboutit because the government has
outsourced this very importantpolicy decision to a corporation.

Speaker 17 (01:50:31):
Right into a monopoly, right?
Because you had a lot of insurancecompanies and a lot of, you know, and,
and they, if there were alternatives,it would be different, but they know
that, that, um, that there aren't, right?
And all of it's based in, you know,and I mean, that's where the network
of commercial bribery and kickbackscomes in because that helps, you know,

(01:50:53):
The reason they're, they're using,um, these kinds of, of tactics, um,
is to exclude competitors, right?
That that's the other thing is, is that,you know, that's why like Aetna says pony
up if you want to be on our formulary.
Right,

right.
And you know, there's a last thingon the health care maybe is, uh, of
course, they, they keep the systemafloat with the mythology of being
a smart health care consumer, right?
This is the mythology as if, asif, you know, one individual up

against a monopolistic https (01:51:26):
otter.
ai Uh, situation is goingto have any difference.
Well, you know, first of all, youcan't know what conditions you're
going to develop in the next year.
So you don't know your needs, butsecondly, you know, in fairness to
me, I was a smart shopper on this one.
I looked, I checked, they coveredit, but you can't be a smart shopper

(01:51:48):
if they get to change the producthalfway through, which is also to me, a
characteristic of monopolies, isn't it?

Speaker 17 (01:51:55):
Yeah.
Um, Yeah, I mean it that it'sa it's a version of dominance
and you know, it kind of loose.
It's a loose, loose type of fraud.
And You know, look, fraud happens in everybusiness, uh, and every line of business.
It doesn't, it's not unique to monopolies,but the difference is that when you,
when somebody cheats you and they're amonopoly, you have to go back to them.

(01:52:20):
Right.
So it's like, it humiliates you and sheeats you, but you don't have a choice,
but to go back and fight with them for,

RJ ESKOW - HOST, THE ZERO HOUR: you know, if (01:52:29):
undefined

Speaker 17 (01:52:29):
I get, if I buy something, you know, and it's not a good product and
I can, I can, you know, find a different.
Version of that from adifferent manufacturer.
I will, but that's, that'snot a, um, an option here.
So, yeah.

Right, it's like, you know, if I buy a shampoo
and it's terrible, I can say, yourshampoo sucks, I'm gonna buy a different
one, but, you know, maybe not the bestexample in my case, but, you know, no,
it's, you gotta use this shampoo forever.
So, that, that to me.
Is the essence of all of this, andI guess we may never get to the

(01:53:06):
Cantillon effect, Matt Stoller, but I

Speaker 17 (01:53:09):
can do a really short version of that.

Do a short version, and then maybe I'll
have a last, ask you for a last thoughton conservatism, but okay, go ahead.

Speaker 17 (01:53:18):
All

right, so

Speaker 17 (01:53:18):
the Cantillon effect is based on a 17th century or 18th
century French economist, sortof one of the first economists.
Um, and he, what he said,his name is Cantillon.
And what he said is that when, youknow, when you have a gold mine, right,
if then the people near the gold mineget money first, and then people far

(01:53:39):
away from the gold mine get accessto that money because money was gold.
Later on.
And that has a distortionary effecton inequality and on inflation.
Um, to bring it forward to today thatwe don't have, we don't use gold,
but the, the fed is Prince money.
And so whenever we have a bailout andI wrote the piece on the country on
fact, during the March, 2020 bailouts,although we'd saw bailouts much earlier

(01:54:03):
than that as well, 2008, nine, thecloser you are to wall street and the
fed, the faster that money reaches you.
So this was a way of explaining.
Why, uh, you know, private equity, why thebig banks got money very quickly, why rich
people got money very quickly, becausethey are very close to Wall Street.
They have accounts with The peoplethat deal directly with the Fed, um,

(01:54:24):
and why small businesses who haveto work through a rickety system of
small banks that have a very poorlystaffed agency, the Small Business
Administration, why it took them muchlonger to get access to that safety net.
And then why individuals also had problemsas well, because our main connection
to the government is through the IRS.
And that is also underfunded and rickety.

(01:54:45):
So it's about, you know, it's aboutthe institutions of money creation.
And we have traditionallyassumed that money is what's.
called neutral, which is that ifyou put some money into the economy,
it hits everyone equally at once.
In fact, that's not true.
The money is, is not a neutral commodity.
If you want it to be neutral,it flows along the institutional
frameworks of our society.

(01:55:05):
Right now, the institutional linksbetween the fed and the, the, the
wealthy and dominant firms are muchstronger than the institutional.
Additional links to everyone else.
Um, so money is is not neutral.
It didn't used to be this way fromthe thirties to the seventies.
We actually had a prettyneutral set of systems.
You had a whole bunch of differentfinancial institutions that did
connect people to the Fed intoour centers of monetary power.

(01:55:28):
So money was more neutral, but we sortof have systematically taken Apart.
So that's the continual effect why WallStreet gets a bailout and why you don't.

MADIS KABASH - HOST, BLOOMBERG ORIGINALS: To understand what's been going on (01:55:37):
undefined
here, we're going to look at Morrisons.
For much of its existence,it was family owned.
And until recently, it was one ofthe big four supermarket chains.

Speaker 61 (01:55:47):
Well look and you'll know, our prices are low,
whenever you shop at Morrison's.

MADIS KABASH - HOST, BLOOMBERG ORIGINALS: Look at this chart. (01:55:51):
undefined
It shows how Morrison's valuationcompares to US retailers as
a multiple of their earnings.
That's just a way of comparingcompanies on a like to like basis,
even if the firms aren't the same size.
And in the years immediately afterBrexit, the valuations were pretty
comparable, until the pandemic came along.
Then look what happened.
The US retailers recoveredwith the post pandemic spending

(01:56:13):
bump, Morrison's did not.

ABHINAV RAMNARAYAN (01:56:15):
Morrison's valuation was cheaper compared to U.
S.
payers, making it quiteattractive for an external buyer.

ELEANOR DUNCAN (01:56:23):
So in 2021, we're just coming out of COVID lockdown, and
there is a bidding war for Morrison'sbetween private equity firms.

MADIS KABASH - HOST, BLOOMBERG ORIGINALS: The American firm Clayton DuBillier (01:56:32):
undefined
Rice emerged victorious, payingabout 7bn in October 2021.
Just a few months earlier,Morrisons had been valued at
four and a half billion pounds.
But even that inflated priceseemed worthwhile because low
interest rates meant it waseasy to borrow a lot of money.
And Morrison's wasn't alone.
Private equity piled into Britain ina big way in the years after Brexit.

Post Brexit, there was a lot of uncertainty, um, in the UK economy.
Um, I think that was compoundedby the effects of COVID.

And suddenly these American private equity
companies were looking at Britishassets that were valued far less
than they were just a few months ago.
Between 2016 and 2023, privateequity companies spent nearly 200
billion buying British companies.
That compares to about 81 billionin Germany and 36 billion in France.

(01:57:27):
Essentially, you walk down any UKhigh street and the chances are
you're going to be looking at privateequity owned firms on either side.

The Body Shop, Pizza Express, Wagamamas.

MADIS KABASH - HOST, BLOOMBERG ORIGINALS: In fact, there are scores of high (01:57:38):
undefined
street brands that are now controlledby private equity and similar investors.
And that was because British companiesin general became a lot cheaper.
You can see that in this chart.
Publicly traded American companiessimply became a lot more valuable
than British ones after Brexit.
A British firm that makes a dollar ofprofit is, on average, given 11 of value.

(01:58:03):
American firms get 20.
So remember that little shop we talkedabout earlier and how its purchase
was financed with a lot of debt?

In the case of Morrison's, it was something like 6.
6 billion.

MADIS KABASH - HOST, BLOOMBERG ORIGINALS: Here's the important bit. (01:58:17):
undefined
When CDNR bought Morrison's,interest rates were low.
But since then, they have increased.

Around half of Morrison's debt, that's around 3 billion, is
affected by interest rates going up.
So that debt is now much more expensive.

MADIS KABASH - HOST, BLOOMBERG ORIGINALS: The reason that's a problem is (01:58:33):
undefined
that Morrisons competes withother supermarkets on price.
And now it has to pay hundredsof millions of pounds more
each year in interest payments.

They were just about making enough money to pay their
debt, which meant that when Aldi andLidl came in during a cost of living
crisis and cut prices, Morrisonssimply couldn't keep up with them.

MADIS KABASH - HOST, BLOOMBERG ORIGINALS: That's helped Aldi overtake Morrisons (01:58:53):
undefined
as the UK's fourth biggest supermarket.
To deal with the suffocating debt load,Morrison's has sold assets, including a 2.
5 billion deal for itspetrol stations in January.
It's hoping that will let itoffer lower prices to shoppers.
These problems are besetting a lot of thebusinesses that private equity has bought.

All of this really matters because private
equity backed companies employ 1.
9 million people in the UK.
And their suppliers employ another 1.
3 million people.

So when these deals go wrong, it can have real world impacts.
So it can mean higher costsof goods for consumers.
And we can also see jobs lost.
This is something that anumber of politicians are
already quite concerned about.

CHARLOTTE NICHOLS (01:59:37):
How could you ensure the increase?
Cost of borrowing won'tbe passed on to consumers.

MOHSIN ISSA (01:59:42):
We are not about sweating assets at all.
Our customer experience, CSI,is improving as we speak today.
And we are absolutely focused indelivering value for our customers.

We've seen the owners of Asda, which are
the billionaire Issa brothers.
And TDR being hauled in front of aparliamentary committee recently,
where they were questioned about, youknow, kind of so called price gouging.

The Bank of England has been worried about increased private
equity ownership of British companies.
They're worried aboutincreased debt levels.
And they're worried about the impactit will have on the British economy.

MADIS KABASH - HOST, BLOOMBERG ORIGINALS: But with a general election on (02:00:18):
undefined
the horizon, the solution may notbe as simple as imposing higher
taxes on private equity deals.

It's difficult for politicians to really crack down on
private equity companies because afterBrexit, Britain has been searching for
external investment and options arethinning on the ground a little bit.

Proponents of private equity firms say that The money that
they bring into the UK economy issuper important because there's just
not that much foreign investmentcoming into the country right now.
And I think that's the line that theLabour Party, if they do come into power,
is going to have to tread very carefully.

JAY TOMLINSON - HOST, BEST OF THE LEFT: And finally Section C (02:00:57):
Solutions.

MATT SEDLAR - HOST, SOCIOLOGY RUINS EVERYTHING: You're working on a project right (02:01:00):
undefined
now, the Private Equity Employmentand Earning Inequality Project.
What is your research question?

DYLAN NELSON (02:01:07):
The research question is, How do private equity leveraged
buyouts affect workers in differentpositions within the firm?

MATT SEDLAR - HOST, SOCIOLOGY RUINS EVERYTHING: Obviously you can't speak about (02:01:16):
undefined
your results yet, but are youtesting a particular hypothesis?

Yes, I'm looking at four hypotheses right now, and
This is comparing education on theone hand and the leverage in the
buyout deal on the other and theninteracting those two factors.
So education is giving you workersas a proxy in different positions
within the firm and the cost of debt.

(02:01:45):
In the general economy is giving youthe proxy for the leverage in the deal
and what I'm hypothesizing as I bringthese together is that private equity
buyouts of public firms mostly arenegatively affecting non college educated
workers while actually benefiting.

(02:02:06):
College educated workers, butthat this difference disappears
somewhat when you look at these veryhigh leverage deals, which mostly
happened in the lead up to the greatrecession and to the 2000 recession.
And what you see there is the effecton the higher educated workers actually
moves negative and the effect on the lowereducated workers moves even more negative.

MATT SEDLAR - HOST, SOCIOLOGY RUINS EVERYTHING: Sorry. (02:02:27):
undefined
So I'm trying to understand.
It's this idea that as the debtratio changes, there's a different
effect among workers and education.

Yeah, so the theory gets back to this idea of the conception
of the firm and the conceptionof the restructuring process.
When we have normal private equitybuyouts, when the cost of high yield
debt is very high, These are morefocused on operational engineering
and operational engineering bringsskill bias, technological change,

(02:02:57):
outsourcing, other factors that increaseearnings inequality based on education.
One of the things I'm showing in thepaper is that when the cost of debt
falls low and the leverage increasesin the deals, the conception of the
restructuring is more focused onfinancial engineering, and this ends up.

(02:03:18):
Leading to a greater likelihoodof bankruptcy and it leads
to more job cutting and otherIntermediate factors that reduce
worker earnings after the buyout.

MATT SEDLAR - HOST, SOCIOLOGY RUINS EVERYTHING: So what is your methodology? (02:03:29):
undefined
I know that private equity datasets can be hard to obtain.
So what are you using?

This is a big question and it's one of the reasons that we haven't
made a ton of progress on private equity.
We know it's this important macroorganizational phenomenon, and I know
you've talked with Eileen about theamazing effects that private equity is
happening, yet we often are not ableto observe companies prior to and post

(02:03:59):
being bought out by private equitycompanies, and especially the workers
under those different conditions.
So I'm using quantitative methods.
To study these earnings effectsof private equity buyouts.
I'm using census data, which arecollected by states and aggregated
in the census department.

(02:04:21):
And this allows you to do a coupleof really interesting things.
One, you can follow companies throughrestructuring and you can follow
workers over time, because it's alllinked through the social security
number to you can see companies.
even when they're not public.
A lot of the quantitativeresearch in economic sociology

(02:04:42):
uses the Compustat data, whichis SEC filings for public firms.
And three, you can look at workersactually moving between firms over time.
You can use that for identificationand also to ask research questions,
including on the classic labor mobilityquestions of the 70s and 80s, for which
we didn't have actually a lot of evidence.

MATT SEDLAR - HOST, SOCIOLOGY RUINS EVERYTHING: For sociologists starting work in (02:05:03):
undefined
this area, what is a good jumpingoff point in terms of literature?
Like, where do you start?

I would start first with the Private Equity
at Work book by Eileen and Rose.
It explains basically the way thatprivate equity works, it gives
interesting case studies, and it reviewssome of the literature on employment.
In terms of the broader private equityliterature, it's mostly in finance.
And I would recommend sociologistsinterested in these topics to look into

(02:05:35):
those papers, because ultimately financeis a very sociological, uh, domain of
the economy in terms of the institutions,uh, the relationship with government.
The flows of workers and change in thefinancial sector over the last 30 years.

(02:05:55):
So some of those would be the StevenDavis project, which has a number of
papers over the years using censusdata to look at employment effects.
And there are some other kind ofnewer research using administrative
data from different companies.
Lily Fang at INSEAD.
Olsen and Tagg are economists.
They have some work on,uh, Nordic countries.

(02:06:19):
In terms of sociology, Neely andCarmichael have a short article in
the American Behavioral Scientistabout Shadow banking, which they
include private equity under that andthe Oxford handbook of sociology of
finance, which is useful to get started.

ISMAEL VON DER GATHEN - HOST, JUST ANOTHER MINDSET: Why are monopolies the biggest threat (02:06:37):
undefined
we have in our economic system?

Yeah, so if you want to, you know, people look at, at
inequality or, um, as kind of a, um,You know, on the left, people look
at inequality and they say, Oh, mygosh, there's so much inequality.
Look at so and so has worth 100 billionand there's a lot of people in poverty.
Um, and you can see that between,you know, rich countries in the
global South, there's like lots ofways to understand that problem.

(02:07:03):
You can also look at, you know, corruptionand say, Oh, there's all this corporate
influence over how our governments work.
And, um, and you can lookat it the other way as well.
The, you know, conservativeswould say, Oh, there's this
collusion with government.
Right.
controlling corporations.
All of that are, is a description ofthe consequences of what's happened.
Not, it's like you're describingthe symptoms of the disease,

(02:07:24):
not the disease itself.
The disease itself is theconsolidation of private power
in the hands of the few, right?
So the reason that someone is wortha hundred billion dollars, say, is
because they have a over a vitalTrade or service, and then they can

(02:07:45):
charge effectively a private tax.
They own a important, um, uh, tollbooth over a vital part of the economy.
So you could look at like someonelike bill Gates, you know, Microsoft
controlled access to the personalcomputer through Microsoft windows.
Um, Google controls.

(02:08:05):
access to the internet, right?
When you're searching, um, and,and so on and so forth, right?
You can look at any industry and,and, uh, and if there's a tremendous
inequality, it's because there is oneEntity that's controlling the terms
and the pricing in labor conditions.

(02:08:28):
And if you want to address that,the obvious way to, to, to deal.
So if you, if you want to addressit on the backend and say, we need
to deal with inequality, you mightsay, Oh, tax and redistribute or,
um, or various other mechanismsto do something along those lines.
But if you want to address the heartof the disease, what you will say is.

(02:08:49):
Let's not just have one, let'shave two, or three, or four.
Let's break their power.
And if you can't do that becauseit's something like an electric
utility when you're not going to layMultiple wires, you know, two wires
to a house doesn't make any sense.
Then you just either have public ownershipor just pricing rules from the government
that says you're not going to be ableto exploit this monopoly infrastructure,

(02:09:12):
but either way, the symptom, uh,the, the disease is a consolidation
of power in the hands of a few.
That is essentially unregulatedby any democratic system.
So that's, that's where we are.
And, um, uh, yeah, I mean, there's alot that we can talk about, but that's
the, the fundamental, um, social, like,and this problem also caused a lot of,

(02:09:38):
um, like a lot of the social concernsthat I think we have, uh, the, the, the
feeling that people don't have controlover their, um, Over their, their
community, their political system, the,the, the really really deep inequities
between urban areas and rural areas.
The, um,
General sense that that there's alot of speech that is kind of like

(02:10:02):
incendiary and sort of out of control.
All of these things are a functionof this consolidation of power.
And if you just look at the symptoms,then you'll go for things like
censorship, you know, or you'll gofor things like subsidies to maybe to
rural areas or instead of what's reallyhappening, which is there's this.

(02:10:27):
Massive appropriation ofproperty by monopolists.
And all you really haveto do is stop that.
And then you'll have a much morehealthier, egalitarian, what's not going
to be a perfectly equal society, butit'll be a society where everybody has
the same political rights and peoplecan control their, you know, have some
control over their own communities andpolitics will be able to function in

(02:10:48):
terms of being able to craft a societyas opposed to sort of the weird, out
of sense that everyone has today.

ISMAEL VON DER GATHEN - HOST, JUST ANOTHER MINDSET: We talk about addressing the disease, (02:10:56):
undefined
and one factor I really like aboutyour book is that you talk about
monopolies and the consolidation ofpower over the past 100 or so years.
Another question that I want toask you is who was Wright Pettman?
And why should everybody know about him?

Yeah, right.
Pat, that's a good question.
So, so the book is about, Goliathis about, um, you know, the
fights over a hundred years.
It's not a sad story.
It's a story about, it iscertainly a story about why
things are so screwed up today.
And I, the reason I wrote it isbecause I was working in Congress
during the financial crisis andI wanted to understand why I'm a
Democrat, why my party engineered aforeclosure crisis and facilitated

(02:11:40):
massive wealth redistribution upward.
Cause that's not why most, whatmost Democrats think of themselves.
And we didn't do that like when we hadsimilar crises like we did in the 19 late
1920s that foster the Great Depression.
We didn't do that in theUS, we did the opposite.
We broke the monopolist.
That's what Franklin DelanoRoosevelt did in the New Deal.

(02:12:01):
It's a book that's focused on the U.
S.
It does have some implicationsglobally, because the U.
S.
is sort of a very powerful countryand structured a lot of what happened.
But, um, uh, but I was sort of, like,trying to figure out why did the U.
S.
do that?
Why did we do what we did under Obama?
And it's not really about Obama at all,but I was just trying to figure that out.
That's why I wrote the book.

(02:12:22):
And what I found is, is this,there's, there is a series of fights.
And one of the main charactersis this guy that we've, we
don't really know about today.
His name is Wright Patman,who was a congressman who was
elected first in 1929, 1929.
And he was in Congress until 1976.
In 1975.
And in 1929, he was elected and heimmediately started fighting The kind of

(02:12:45):
then monopolists who were very powerfulthat the secretary of the treasury was
a guy named Andrew Mellon, who, um,was basically a billionaire back then
when a billion dollars was a lot ofmoney, uh, obviously it's a lot of money
today, but it's a massive amount ofmoney in, in the 1929 and, uh, owned, I
think he was on the board of 99 banks.

(02:13:06):
He was also the treasurysecretary of the United States.
So this is like a very powerful guy.
Um, or at least he had been on the boardof 99 banks before he took that job.
And he and Patman got into a fight overhow to handle the Great Depression.
And eventually Patman filedarticles of impeachment.
Mellon resigned.
And then over the next 45 years or so,Patman went after bankers and monopolists.

(02:13:32):
Those were the two things that he,those were his two kind of main goals.
And he was very successful.
He also helped build theadministrative state.
And then, and he was from a ruralarea in Texas, which is today very
Republican, but he was a very partisanDemocrat, very kind of left wing
guy, but a populist, not a socialist.
And, um, and that tradition of populism,which in Europe, I think is considered a

(02:13:55):
bad word, but is in fact, Not bad at all.
It's just like, if you meanfascism, you should say fascism.
The reason people in Europe and in the U.
S.
say that populism is a bad word isbecause they don't like democracy
and they're afraid of democracy.
And so they've misconstrued populismto mean fascism, but it's not, it's
just normal people saying we don'tlike how bankers are running things.

(02:14:18):
And that's what Patman was.
And he eventually became thechair of the banking committee.
And then in 1975, Uh, so in the, inthat, you know, the, that period of
time, like from really from the 30s untilthe 1970s, there was kind of like this
period where the middle class in the U.
S.
expanded dramatically, and then afterWorld War II, that was global phenomenon.

(02:14:41):
Um, and that was because ofthese anti monopoly policies.
And then a new generation of leaders, thisis kind of the Bill Clinton generation.
emerged and they had a differentintellectual tradition.
And in 1975, theyactually overthrew Patman.
So they kicked him out ofhis banking committee chair.
And these were Democrats.
This was not a DemocraticRepublican thing.
This was a fight in the Democratic party.

(02:15:01):
And it was an intellectual fightover how do you build a good society?
And the Democrats who emerged inthe 1970s and afterwards thought the
way you build a good society is Youtrust technocrats and experts and
billionaires, and that's what they did.
And so since really the mid 70s, we'veseen the emergence of, um, the growth, uh,

(02:15:21):
massive, uh, massive growth of, of largemultinationals and the domination of every
one of our industries by monopolists.
And I think you've seen similar trenddriven by the same ideas, in some cases,
the same people all over the world.
Um, And so Pabman, Pabman waskind of written out of history,
even though he was very important.

(02:15:41):
He was written out of history because theidea that you'd have A populist who has
modern views of the economy was very, avery impressive thinker and, you know,
not, not at an authoritarian at all, butjust very, you know, democratic and the
method of addressing inequality was toaddress, regulate wall street, break up

(02:16:04):
wall street, and also break up large firmsand constraint constrained chain stores.
That's a very threatening, uh, idea.
Uh, Because it gives the publica way to actually do things that
doesn't sound crazy, but soundsvery normal, because it is, right?
And that, and Patman, I think, some of thelaws, he wrote a law that constrains chain

(02:16:26):
stores in 1936, it was called the RobinsonPatman Act, which says that you're not
allowed to sell goods and services,actually just goods, to large stores at
better prices than to smaller stores.
You're not allowed to price discriminateif you're, if that would facilitate
consolidation or monopolization.
And this protected local storesand it protected the local, local

(02:16:49):
economies all over the, the, the US.
And that law, they just stoppedenforcing it in the 1970s.
They say roughly the same time thatthey overthrew Patman because they
thought, Oh, chain stores are good.
Local stores are bad.
And today.
The, uh, we're reversing the choicesthat we've been making since the 1970s.
So the sort of Patman idea,Patman's philosophy is coming back.

(02:17:14):
So the current chair of the federaltrade commission, her name is Lena Kahn.
She's bringing back and trying to enforcewhat's called the Robinson Patman act,
which was written by Wright patman.
Um, and this is going to have significantchanges in the economy in general, but
that idea that we want to constrainlarge firms who are engaged in, you
know, Anti competitive or, um, unfairconduct is a, you know, it's coming back,

(02:17:39):
um, pretty aggressively in the UnitedStates and somewhat in Europe as well.
And that's, I think, a reversionto the ideas that Patman had.
And those ideas go back to, youknow, you could take, take it
back to the 1600s if you want to.

MERIDITH LYNCH - HOST, ODDLY SPECIFIC: What motivated you to take a (02:17:52):
undefined
stand against private equity?

SENATOR ELIZABETH WARREN: Well, think of it this way. (02:17:56):
undefined
Look, if somebody wants to come inand invest in a business and grow that
business, triple yoo hoo for them.
I'm happy about that.
That is not a problem.
What I'm concerned about is the businessmodel that much of private equity is used.
where they pay what sounds like somefabulous amount of money, let's just

(02:18:19):
say 100 million to buy this businessor this chain of stores or whatever.
And then instead of that money goinginto the business to make the business
stronger, to expand it, to clean it up,to freshen it, to do all those things.
Instead, That money goes only to theinvestors who had owned the business and

(02:18:41):
the new investors who are going to runit and suck value out of the business.
I, I think of it kind of like an old car.
You've got a car, it's running, it'sgoing on down the highway and what
private equity does is it looks at itand says, Hmm, I think we could make
money off the tires and the engine.

(02:19:02):
So they buy it, They pull out theengine and sell it to one group.
They take off the tires,sell it to someone else.
And then they just leave what's leftto rust by the side of the road.
But they don't care, because theygot their money back out of it.
And the executives who originally ownedthat car got their money out of it.
And you know who's left behind?

(02:19:24):
Who's left behind are the employees,the retirees, the customers, the
communities that counted on that business.
They're all gone.
And this is just one more exampleof the The guys who understand
financialization come in and theyfigured out how to make the rich richer

(02:19:49):
and leave everybody else sucking air.
And that's what I'm fighting here.

MERIDITH LYNCH - HOST, ODDLY SPECIFIC: Senator Warren, what specific (02:19:55):
undefined
concerns do you have about privateequities involvement in healthcare,
especially as exemplified by thesituation with steward healthcare?

SENATOR ELIZABETH WARREN (02:20:06):
Yeah, boy, that's the right question.
Hospitals are super duper important.
Important to patients, important toemployees, important to communities.
Think of it this way.
When private equity comes in and hollowsout and destroys Toys R Us, I admit,
I'm still pretty bummed about that.

(02:20:26):
When they do that toSears, oh, no, really?
When they do it to Kmart, darn.
But when they do it to a chain of ninehospitals in Massachusetts, where that's
the closest hospital for people whohave a heart attack, for, you know, a
mama who's trying to get a kid who'sgashed her head on the playground

(02:20:50):
and needs to get in and get stitches.
Shorter.
All those things where people need accessto their hospital immediately, private
equity, when they destroy these hospitals,that has the potential to go away.
And there's the special twist, becausewhen private equity comes in and hollows

(02:21:13):
out a hospital, They know that there'sa good chance that the local folks will
not let the hospital close, so it willend up costing taxpayers money because
they will have to infuse the cash backinto the hospital to keep the hospital
up and running, and that's what makes itparticularly dangerous when private equity

(02:21:39):
starts diving into the healthcare space.

MERIDITH LYNCH - HOST, ODDLY SPECIFIC: Yes, and you know, I have read that (02:21:43):
undefined
the mortality outcomes of privateequity backed hospitals are actually
lower than publicly owned hospitals.

One of the things we know is, for example, uh, back
during COVID, There were nursing homes,some were private equity owned nursing
homes, and some were privately owned,some were for profit, some were not for
profit, but when you make that comparison,private equity, non private equity,
the private equity owned nursing homeshad a 40 percent higher mortality rate.

(02:22:20):
Just just absorb that for a minute.
People literally diebecause of private equity.
And why does that happen?
Because private equity cutsstaffing, because private equity
cuts access to expensive medications,because private equity, as much
as this one is going to shock you.
I talked to some of the nurses.

(02:22:41):
Hospitals that have been taken over fromprivate equity, and they talked about
things like linens, whether or not therewere enough clean linens to go around
in the hospital, whether or not thehospital had continued paying so that
it had access to the To the databasethat tells you if a patient is taking

(02:23:06):
drug A and drug B and you prescribedrug C, what is the likely interaction?
I mean, these are things.
that directly affect the healthand the health care of the people
who come to these hospitals.
And nobody hangs a giant sign outfront that says, Private equity
has taken over this hospital.

(02:23:28):
So you better understand they maynot have the equipment they need.
They don't have the staffing they need.
And that's just fundamentally wrong.
You know, this is a time you when wehave to change the underlying laws and
say that private equity cannot come inand just hollow out these businesses,

(02:23:49):
suck up all the value for themselves,and leave behind a disaster for the
employees, for the patients, for thecustomers, and for the communities.

MERIDITH LYNCH - HOST, ODDLY SPECIFIC: Thank you for saying that. (02:24:01):
undefined
I tell people all the time whenthey say, Why are you, why do
you care so much, Meredith?
And I say, at the end of theday, It's truly a safety thing.
If it isn't affecting you, it'sgoing to affect your grandmother.
It's going to affect your mother.
So thank you for even bringingthese conversations to light.
Cause they've been living in the dark.
And so my next question for you isyou have advocated for legislation

(02:24:23):
that would claw back the compensationfrom the healthcare executives
and wall street investors.
How exactly would this work and whatoutcomes do you hope to achieve with that?

So you'll figure out much of the answer from the
name of the bill in Wall Street looting.
It's what we've named this thing.
And the idea is just to put inplace some curbs on private equity.
Doesn't say that nobody can evermake any investments in these
businesses or in these hospitals, butit says specifically, for example.

(02:24:56):
If you are one of the investors who comesinto one of these hospitals and sucks
all this value out and then the hospitalimplodes, you have to give back the money.
And that money can be usedto rebuild the hospital.
And, and I want to be clear, andsame thing for Toys R Us, if you

(02:25:17):
come in and suck the money outand then the business implodes,
then you didn't buy this business.
To help it.
You didn't buy this business to expand it.
You didn't buy thisbusiness to keep it going.
You bought this business to takethe value out, sell it for parts,
and leave the rusted shell behind.

(02:25:38):
And that is not a business practice.
That we want to advance.
So partly it's about the executivesand their own incentives.
And by the way, I hope everybodyunderstands right now, now that
you and I are talking aboutprivate equity, that private equity
actually gets special tax breaks.
that are not available to anybody else.

(02:25:59):
So you start your own smallbusiness, good for you, but
you pay your taxes straight up.
You go in under private equityand suck out that value.
Right now you get special tax breaks,you get taxed at a much lower tax rate,
and that means in fact all the rest ofus are subsidizing private equity, the

(02:26:24):
very entity that is hollowing out ourhospitals, for example, and leaving
the rest of us to pay to try to keepthose hospitals back up and going.
So from my point of view, the Stop WallStreet Looting Act is just some common
sense restrictions that say you wantto invest in a business, good for you.
But we're not going tohelp you hollow them out.

JAY TOMLINSON - HOST, BEST OF THE LEFT: That's going to be it for today. (02:26:46):
undefined
As always keep the comments coming in.
I would love to hear yourthoughts or questions about
today's topic or anything else.
You can leave a voicemail or sendus a text at 202-999-3991, or simply
email me to jay@bestoftheleft.com.
The additional sections of the showincluded clips from The Market Exit,
Good Work, The Majority Report, SociologyRuins Everything, Pablo Torre Finds

(02:27:12):
Out, Pitchfork Economics, The ZeroHour, Bloomberg Originals, Just Another
Mindset Podcast, and Oddly Specific.
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and participation in our bonus episodes.
Thanks to our TranscriptionistQuartet—Ken, Brian, Ben, and

(02:27:33):
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.css-14f5ked{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:2;overflow:hidden;}#1669 Private Equity: The worst of capitalism, amplified