The New Robber Barons

Private equity's mining of American business, employees, and citizens

Note: This is the full version of the article on private equity published on Anthropocene Dynamics.

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Capitalism is the most effective system for producing economic growth.  One of the downsides of capitalism is recessions or crashes.  When things are going well in the economy, people are optimistic.  Entrepreneurs start businesses, banks lend more credit, investors become more speculative, companies take on more debt, and financiers create more derivatives (financial products whose value is based on the value of something else, like houses, corn, or stocks).  Expecting that things will continue to go up and to the right as they have in near-term history, everyone takes bigger risks in an attempt to maximize returns, and the economy becomes more leveraged.  Speculation inflates the price of everything.  Eventually, the realization hits that the underlying value of things cannot keep up with overexuberance.  A deleveraging and economic crash follows, such as those of 1929, 1987, and 2008. Private equity is a force creating more leverage in our current economy, making it less stable.

Why go into detail about private equity in a publication that explores the dynamics of human civilization and nature?  Because, as you're about to see, private equity is a powerful force that's shaping the American economy and the Anthropocene.  And whether we like it or not, it's a reality we need to acknowledge that contributes to boom-bust cycles, affects credit, raises housing costs, influences product and service quality, disrupts local communities, and takes advantage of citizens with the least ability to do anything about it.  In turn, that all affects our experience of life in modern society, and is linked to energy, resources, and the natural world.  Many of those implications will go unsaid here, but you may see the parallels to natural systems and the history and direction of civilizations.

What is private equity?

Private equity is a system in which a financial firm gathers money from outside investors and uses that money, plus large amounts of borrowed cash, to buy companies and sell them in a few years.  The private equity firm's goal is to make as much money as possible, often through financial engineering.  It's called "private" equity to distinguish it from public companies that trade on the stock market.  Public companies are obligated to publish detailed financial reports, but private equity firms can operate in near secrecy. 

Private equity (PE) firms use a hierarchical structure.  The firm itself is run by general partners (GPs) who have full control.  They create multiple funds that are legally separate entities, which they use to collect capital from investors: pension funds, endowments, sovereign wealth funds, and extremely wealthy individuals.  These investors become limited partners (LPs). They contribute most of the money but have no control over how their money is used.  The general partners contribute only about 1 to 3 percent of the capital, but control every decision the fund makes and are first in line to make profits.

Limited partners make money only when the private equity fund sells a company or forces a dividend recapitalization (more on that later), because those events generate the cash used to pay investors.  Their money is locked up for the entire life of the fund—usually ten years—and they can't withdraw it early or control when the fund decides to sell.  Payouts arrive only when the general partner sells a company or extracts dividends through new borrowing.

How private equity firms make money

Private equity firms claim they make money by buying and selling companies.  While that's one way, they also use a variety of other tactics that they obscure from investors and the public.  Now we'll explore the money-making toolkit of PE firms: leveraged buyouts, fees, carried interest, leasebacks, dividend recapitalizations, strategic bankruptcies, forced partnerships, roll-ups, tax avoidance, and industry-specific strategies.

Leveraged buyouts

When the private equity firm finds a target company to buy, it plans to sell it within 3 to 7 years.  When the firm buys a company, it buys it through a separate fund, not the firm itself.  This legal separation shields the firm from responsibility for the company’s debts, lawsuits, and bankruptcies.  The fund's general partners provide only 1 to 3 percent of the money to purchase the company, and 20 to 30 percent is supplied by the limited partners.  The remaining 70 to 80 percent is financed with debt raised by investment banks (the leverage in "leveraged buyout") and pushed onto the acquired company.

In other words, LPs provide almost all the real cash, GPs put in a token amount, and the company itself is loaded with the bulk of the financial burden through borrowed money.  This leverage flips a typical company's balance sheet.  A stable public company might operate with roughly 30 percent debt and 70 percent equity, but a private-equity-owned company often carries 70 to 80 percent debt.  The debt and risk sit on the company, not on the private equity firm.

Why would the company agree to this debt?  And why would the investment bank loan the money?  Companies accept the heavy debt because their executives often profit personally from selling to a private equity firm, giving them a strong incentive to approve borrowing they would normally avoid.  Investment banks agree to provide the loans because low interest rates push them toward riskier deals, and they can syndicate the debt to others so they don’t carry the full burden.  Basically, they sell off the loans to other banks, investors, mutual funds, etc, where they get spun into collateralized debt obligations.  This creates a system where lenders earn fees, executives get windfalls, and private equity firms risk little yet stand to make enormous gains.

Once it owns the company, the general partners collect guaranteed fees.  It charges the fund a yearly management fee equal to about 2 percent of all committed capital and takes 20 percent of any profits above a preset threshold.  It also charges the portfolio company monitoring fees, transaction fees, and consulting fees.  These fees flow to the firm whether the business does well or collapses.

The firm will install its own employees or allies on the company’s board, where they approve decisions that benefit the private equity owners, such as selling real estate through sale-leasebacks, forcing dividend recapitalizations, merging portfolio companies, signing supply contracts with other firms the private equity fund controls, cutting costs, or preparing the company for a fast resale.

Because the companies that private equity firms buy will be loaded up with debt, they seek out companies with strong cash flows that will be able to pay back that debt and interest.  But usually, they'll need to institute other cost-cutting measures to keep the company afloat.  That may entail switching to different suppliers for lower-quality materials and inputs, and often firing employees.  From the perspective of the private equity firm, the goal is to increase EBITDA (earnings before interest, taxes, depreciation, and amortization) so it can sell the company for a higher multiple of that number, regardless of how it affects the stability of the company, employees, or customers long-term.  Remember, they're seeking to sell the company in 3 to 7 years.  They don't care what happens after that. 

Sometimes, private equity firms try to sell the same company multiple times.  This doesn't necessarily create value, but each sale generates large profits for shareholders.  In The Private Equity Playbook, Adam Coffey writes, "This is how I view the process: Why take one bite out of the apple when you can take two, three, or more?  My personal record is five seven-figure paydays for the same company over a 13-year period."

For these leveraged buyouts, the private equity firm uses almost all other people's money while insulating itself from risk. The fund owns the companies, and the companies shoulder the debt.  If things go well, the private equity firm stands to make a ton of money, and if things don't work out, the firm can only lose its initial investment of a percent or two.  But that loss would be made up for by the fees the firm collects from the companies it owns along the way, in addition to other tactics.

Leasebacks

Private equity firms use sale-leasebacks to pull cash out of a company soon after they acquire it.  After the buyout, the firm splits the business into two pieces: the operating company and a separate real estate entity.  The real estate subsidiary then sells the company’s land and buildings to the highest bidder, and the private equity firm pockets the proceeds.  Then the company has to sign a long-term lease so it can continue using the same property it once owned.  This instantly gives the private equity firm owners a large payout while saddling the company with a new, permanent monthly expense.  Leasebacks drain cash flow that could have gone toward improving operations, making the company more fragile.  But if the company does go out of business, the private equity firm has already made a bunch of money from selling off its real estate, plus all the fees it collected.  The firm is also protected from risk if they're sued for negligence or something else because the only party legally liable is the failing business that now doesn't own any assets.

Sale-leasebacks have proved particularly lucrative in industries like retail and healthcare, which generally require many individual parcels of land, as well as in the media business, where local newspapers once owned huge offices on prime downtown real estate.

Brendan Ballou writes in Plunder: Private Equity's Plan to Pillage America:

There's a darker purpose to leasebacks, too.  A few decades ago, private equity firms began buying nursing homes, and today they own between 5% and 11% of all facilities in America.  To save money, these firms often gut homes' quality of care.  Studies have found that after private equity firms buy nursing homes, average nursing and staff hours fall while violations of industry protocols increase.  Hospital remission rates, the pace at which residents are sent back to hospitals within 30 days of discharge, also rise—a sign of declining care.  As a result, more than 20,000 people are estimated to have died due to private equity firms' ownership of such homes.  And this is where leasebacks come in.  After buying nursing homes, private equity firms often sell their underlying assets and separately incorporate each facility in a nursing home chain.  This means that if there is negligence in one facility—if a resident dies needlessly—that resident's family often can only recover assets from that facility.  And because that facility no longer owns its own property, there often aren't many assets to recover.  The result is that nursing home residents are needlessly dying, and families are failing to get damages.

Private equity firms apply the same extraction logic to many types of assets, not just real estate.  They often move a company’s valuable parts, such as its trademarks, patents, brand names, or equipment, into separate shell entities the firm controls.  The operating company must then pay licensing fees or service charges to use the assets it previously owned.  This is not only a method for funneling money to the private equity firm through gutting all the value of the companies that it buys, but it also reduces risk.  If the company gets sued, there are no more assets left for anyone to get.

Dividend recapitalizations

In a normal business, shareholders take dividends only when the company earns real profits and can afford to part with cash.  Private equity flips this logic.  Dividend recapitalizations, or recaps, let private equity firms pull cash out of a company by making the company borrow money and hand it over as a dividend.  The firm often forces a company to take out new loans, even during hard times, and use that borrowed money to pay the firm and its investors.  The company itself never sees the cash; it's left only with the debt.  This is the financial equivalent of using someone else’s credit card to pay yourself, and it frequently harms the company’s credit rating.

For private equity firms, dividend recaps eliminate risk because they allow them to recover their initial investment early while still controlling the company.  Even if the business later collapses, the PE firm has already made money.

After acquiring the office supply chain Staples in 2017 for about $6.9 billion, Sycamore Partners put roughly $5.4 billion of debt onto Staples to enable a $1 billion dividend payout to itself and its investors.  That recap allowed Sycamore to recoup around 80 percent of its original equity within two years, even as Staples took on significantly more debt and faced higher annual interest costs.

Repeated dividend recaps piled debt onto Simmons mattress company, contributing to its bankruptcy.  Private equity harvested a $440 million payout by tacking on roughly $1 billion of debt onto luxury retailer Neiman Marcus' balance sheet.  That debt later limited the company’s flexibility, with the business ultimately entering bankruptcy.  Same story for Toys R Us, Sears, Kmart, and countless more.

These deals don’t help the businesses in any meaningful way.  They only raise the chance of failure. Yet private equity firms find them especially attractive when a company struggles, because a dividend recap can ensure the firm extracts value even if the company never returns to health.

Private equity firms justify dividend recapitalizations by framing them as a normal part of “returning capital to investors” and as a sign that the company is healthy enough to support additional debt.  They claim that paying early dividends helps pension funds and other limited partners realize gains sooner, which improves reported performance and makes the fund more attractive to future investors.  Firms describe recaps as a way to optimize capital structure, meaning they believe the company should carry more debt so that excess cash does not sit idle.

In practice, this rationale hides the real motive.  Recaps allow private equity firms to funnel money to themselves from the businesses they buy, all while leaving the company to deal with the debt and its consequences.  If the firm knows that one of its portfolio companies is struggling financially, it might force a dividend recap so the firm can suck as much money as possible from the dying company before bankruptcy.

Bankruptcies

Not every company bought by private equity is destined to collapse.  Some do grow, and PE firms highlight these wins as proof that the model is sound.  But the odds of a company succeeding plummet once a leveraged buyout occurs.  About one in five large companies purchased through LBOs go bankrupt within ten years, compared with only about two percent of similar companies that aren’t owned by private equity.  That's ten times the bankruptcy rate.  Even when the businesses stay alive, their internal culture often shifts from long-term planning to short-term extraction, replacing investment with cost-cutting and pushing decision-making toward recklessness and, in some cases, outright abuse.

Private equity firms would prefer that the companies they buy grow so they could sell them to another firm for more than they paid.  That's the best-case scenario.  But in the event that the company does go bankrupt, the firm has already extracted all the value from the company and shielded itself from risk.  By the time a company reaches bankruptcy court, the private equity firm has often already pulled out significant cash through management fees, monitoring fees, transaction fees, sale-leaseback deals, and dividend recaps.  These payouts come before any collapse and do not need to be returned, so the firm can walk away having already made money, even if the business dies.  It's usually the very debt that the private equity firm loads the company up with, originally in the leveraged buyout and then through recaps to pay itself, that causes the bankruptcy.  Essentially, it uses other people's money to pay itself and puts all the risk on a separate company.

Bankruptcy itself can create new opportunities for profit.  Private equity firms sometimes position their own affiliates as secured creditors, meaning they stand first in line to receive payment when assets are liquidated.  They also use bankruptcy to shed liabilities the company could not eliminate while operating normally, such as pension obligations, long-term leases, and union contracts.  In some cases, the firm even buys the company back out of bankruptcy through a 363 sale, now stripped of its debts and obligations, allowing the private equity owner to keep the valuable parts while the creditors, workers, suppliers, and taxpayers absorb the losses.

Under Section 363 of the U.S. Bankruptcy Code, a 363 sale allows a business to auction off assets free of past debts, contracts, and obligations.  The company files for Chapter 11 and immediately asks the court to approve the sale of its assets.  A “stalking horse” bidder is lined up in advance—very often a subsidiary or affiliate of the same private equity firm that owned the company before bankruptcy.  The stalking horse sets the minimum bid and gets deal protections that make it hard for anyone else to outbid them.  Once the court approves the process, the assets are auctioned.  The winning bidder, which is frequently the stalking horse, buys the assets on favorable terms and leaves behind the liabilities.

The assets move to the buyer, but the old debts, pensions, leases, and other obligations stay behind in the bankrupt estate.  Creditors receive whatever scraps remain, while the buyer gets a cleaner, cheaper version of the business.  This is why private equity owners can use 363 sales to shed pension obligations, union contracts, and real estate leases, then continue operating the business under a new shell company.  It’s also why they can profit from failures: they often position themselves to reacquire the pieces they want while leaving workers, suppliers, and lenders with the losses.

When the private equity firm Sun Capital drove Marsh Supermarkets into bankruptcy, it owed $62 million to its warehouse workers’ pension fund and several million more to store employees—yet the pension plan for top executives stayed fully funded throughout the process.  Sun Capital shifted the company’s unfunded pension liabilities onto the Pension Benefit Guaranty Corporation, the federal agency that steps in when pension plans collapse.  In effect, Sun Capital used bankruptcy to dump the costs it didn’t want to cover onto the government (taxpayers) and the workers, while continuing to own the company without debt.

There's a long list of well-known American companies that went bankrupt after private equity takeovers. J. Crew, Neiman Marcus, Toys “R” Us, Sears, Aeropostale, American Apparel, Brookstone, Charlotte Russe, Claire’s, David’s Bridal, Fairway, Gymboree, KB Toys, Linens and Things, Mervyn’s, Mattress Firm, MusicLand, Nine West, Payless ShoeSource, RadioShack, Rockport, True Religion, Shopko, Sports Authority, 24 Hour Fitness, Wix Furniture, and many more all filed for bankruptcy after private equity firms acquired them and imposed heavy financial engineering.  Private equity-related bankruptcies in 2024 alone have resulted in at least 65,850 layoffs in the US.

Roll-ups and layoffs

Public companies are usually valued based on their stock price relative to their earnings (P/E ratio), but private equity firms value their portfolio companies using EBITDA (earnings before interest, taxes, depreciation, and amortization).  Each industry has a typical EBITDA multiple, and larger companies command higher multiples than smaller ones.  To estimate a company’s worth, private equity normalizes EBITDA and applies the industry multiple, which produces the enterprise value.  As fund sizes grow, they can buy companies with higher EBITDA, and those larger firms trade at higher multiples because large, high-quality businesses are scarce. 

For managers, this means that decisions about costs and operations are often filtered through how they affect EBITDA.  Because the eventual sale price depends directly on EBITDA, boosting that number becomes the central goal.  Cash flow matters for determining how much debt/leverage can be used to buy the company, but EBITDA is the metric that drives valuation, incentives, and ultimately the private equity firm’s payoff.

Private equity firms use roll-ups to create larger, more valuable-looking companies by buying many smaller businesses in the same industry and combining them under one corporate umbrella.  Small firms can be purchased cheaply, then merged to appear like a single, fast-growing enterprise that commands a higher valuation.  After the acquisitions, the private equity owner centralizes operations, cuts employees, and pushes all the companies onto shared systems to reduce costs.  The firm may also raise prices, squeeze suppliers, or increase fees once it controls a dominant share of a local or niche market.  Because each acquisition adds new revenue streams, the private equity firm can justify taking on more debt, which it then loads onto the combined company.  The goal isn’t to build a better business but to create the illusion of scale and momentum long enough to sell the combined entity at a profit, often to another private equity firm or by taking the company public (IPO).  And since larger companies sell for higher multiples of EBITDA, the bigger the conglomerate company, the bigger the firm's payday.

One way private equity firms increase EBITDA is by replacing employees with consultants and contractors because doing so immediately improves the company’s reported financials without improving the underlying business.  Employees are long-term obligations that show up on both the income statement and the balance sheet: wages, payroll taxes, healthcare, pensions, paid leave, severance, and legal liabilities.  By contrast, contractors appear only as short-term vendor expenses.  On the balance sheet, they show up only as accounts payable if the company hasn’t paid them yet.  This means that replacing employees with contractors shrinks the company’s liabilities and reduces reported operating expenses, making it appear more profitable.

For private equity owners, a company with fewer long-term obligations is easier to leverage with debt, easier to sell, and easier to pitch as “lean” and “efficient.”  Cutting employees also frees up cash that the firm can distribute to itself through fees, dividends, or other extraction strategies. And because private equity firms plan to exit within a few years, they have little incentive to invest in loyalty, skill retention, or the well-being of employees.  Contractors carry none of these expectations.  The trade-off is that replacing employees can erode culture, operations, customer service, and long-term productivity.  But because private equity’s rewards come from short-term financial engineering rather than building enduring organizations, shifting to contractors fits the incentives of the model perfectly.

Most people think of large public companies as the epitome of corporate profit-maximizing machines that care little for their employees.  When I asked a friend who is a former executive at a private equity firm and is now the CEO of a multibillion-dollar public company, what the biggest difference is between those two business types, his answer surprised me: "The biggest difference is that at the public company, you have a lot more room to care about your people.  With private equity, you can't really do that."

Tax avoidance

Carried interest typically gives the general partners 20 percent of all profits above a minimum return owed to limited partners (the “hurdle,” often around 8 percent).  Once the fund sells companies or generates distributions through dividend recaps, the firm takes its 20 percent cut, called “carry,” before the remaining profits flow to the limited partners.  This means that a private equity firm can earn enormous sums from successful exits while risking only 1 or 2 percent of its own money.

The tax treatment is what makes carried interest especially valuable.  Instead of being taxed like ordinary income—as wages or bonuses—it is taxed as a long-term capital gain, which carries a top federal rate of 20 percent, compared with 37 percent for regular income.  This difference exists because carried interest is historically treated as a share of investment profits rather than as payment for managing the fund, even though most of the GP’s role is labor, not capital.  Multiple administrations have promised to close this “carried interest loophole,” but none have succeeded, in part because the private equity industry lobbies aggressively to protect it.  The system allows private equity partners to earn income that looks like a salary but is taxed at a much lower rate, allowing them to pay less in taxes than even their low-paid employees.

Private equity firms often use “management fee waivers” to waive their 2 percent management fee, which is taxed as ordinary income, in exchange for a priority claim on the profits earned, which is taxed at the lower capital gains rate.  Major firms like KKR, Apollo, and TPG have all used versions of this strategy.  While technically legal, these arrangements often push the boundaries of what the tax code was intended to allow.

But private equity firms take tax avoidance a step further.  They also lower their tax bills by routing income through offshore entities.  Although most corporations must pay US corporate taxes on their earnings, companies that receive most of their income from dividends, interest, or capital gains can qualify for much lower rates.  Private equity firms try to take advantage of this by creating “blocker corporations” in low-tax jurisdictions.  Instead of receiving income directly, the private equity firm has the money flow to the offshore blocker, which pays the minimal local tax.  The blocker then sends the funds back to the firm as dividends or interest, allowing the firm to pay far less in US taxes than it would if the income were treated as regular business profit.  This strategy reduces tax obligations for the firm and its investors but provides no benefit to the companies they own and shifts revenue away from the American economy to foreign tax havens.

In some cases, private equity executives have gone beyond aggressive tax minimization into outright tax evasion.  Robert Smith, co-founder of Vista Equity Partners and one of the richest people in the country, admitted in 2020 to hiding more than $200 million in income over 15 years.  He used undeclared accounts in Belize, Nevis, Switzerland, and the British Virgin Islands and paid a Houston attorney hundreds of thousands of dollars to create a false paper trail.  The attorney committed suicide the day before his trial was set to begin.  Smith ultimately secured a plea deal that allowed him to avoid prison despite the scale of the tax fraud.

Tactics for specific industries

All the techniques we just covered are the general tools in the private equity playbook.  But beyond those, private equity firms have developed tactics for making even more money in specific industries that we'll touch on just briefly.

Housing

Private equity has transformed key parts of the U.S. housing market by turning homes into financial assets rather than places to live.  Fannie Mae and Freddy Mac are government-sponsored enterprises created to make homeownership more affordable.  They buy mortgages from lenders, bundle them into securities, and sell them to investors.  This frees up lenders’ capital so they can issue more home loans at lower, more stable interest rates, helping more Americans purchase homes.

But as you can probably guess, private equity firms figured out how to exploit Fannie and Freddy to buy up a bunch of houses.  After the Great Recession, firms like Blackstone’s Invitation Homes bought tens of thousands of houses.  In one Atlanta ZIP code, Invitation Homes bought 90 percent of all properties sold over eighteen months.  Investors now purchase roughly one in seven homes in many major metro areas.  Private equity owns only a fraction of these properties directly, but it pioneered the model, taking advantage of federal agencies like Fannie Mae.  The very programs designed to make home ownership more affordable for middle- and lower-class American citizens played right into the hands of private equity behemoths who used those programs to make housing, ultimately, unattainable.

This meant bad news for renters, too.  Private equity landlords commonly transferred maintenance responsibilities onto renters, even in “rent-to-own” programs that rarely ended in actual ownership and are illegal in some states.  Firms targeted working-class neighborhoods—places where families had few housing alternatives—allowing them to raise rents or cut services without losing tenants.  When a private equity firm buys up all the housing supply, it controls prices and sets the rules.  Monopolies are lucrative.

Nowhere has private equity’s influence been more damaging than in one of its favorite industries—mobile home parks.  For decades, mobile homes provided some of the last affordable housing in the country.  When family-owned operators sold to private equity firms like Apollo, Carlyle, Blackstone, TPG, Brookfield, and others, lot rents rose sharply.  The average mobile home price climbed 35 percent in five years, and because many homes were cost-prohibitive to move, tenants had little choice but to deal with higher fees.

Mobile home residents pay both a mortgage and lot rent, and when private equity firms raise the latter, they directly reduce the value of residents’ homes.  Every $100 increase in monthly rent cuts a home's resale value by roughly $10,000.  This means private equity extracts both income and wealth from vulnerable families.  Government financing helps fuel the trend.  Fannie Mae provided over a billion dollars in loans to private equity–owned park operators like YES Communities and TPG, even though the financing comes with no limits on rent hikes.  George McCarthy, an affordable housing advocate, says, "What's ironic about it is that one of the missions of Fannie Mae and Freddie Mac is to help preserve affordable housing, and they're doing exactly the opposite by helping investors come in and make the most affordable housing in the United States less affordable all the time."

Insurance

Private equity firms have moved aggressively into the insurance business as a way to fund their expanding operations.  In the past few years, Carlyle bought Fortitude, Blackstone bought Allstate Life Insurance, KKR bought Global Atlantic, and Apollo bought Athene.  Altogether, private equity firms have spent nearly $40 billion buying US insurance companies and now control more than 7 percent of all assets in the industry—about $376 billion, double their share from 2015.  This consolidation increases the financial power of private equity, but it also increases systemic risk, because the same firms that load operating companies with debt are now gaining control of the money people rely on for their future.

Insurance companies became targets because they generate a steady cash flow.  Policyholders pay premiums every month, and insurers invest that money until claims come due.  Private equity firms saw an opportunity to redirect those investment pools into higher-risk, higher-yield strategies such as leveraged buyouts and private credit, along with charging the insurers new layers of management and investment fees.  Industry insiders admit that this benefits the firms, not consumers.  As Larry Ripka, the CEO of private insurance company Valmar Financial, told CNBC, "there is nothing good in this for the policyholder."

Private equity also uses the insurance sector to access even more money by reducing the reserves insurers are required to hold.  State regulators set capital requirements to ensure insurers can pay claims, but private equity firms have skirted these rules by moving policies to reinsurance companies they own in Bermuda, where taxes and capital requirements are far lower.  This allows the firms to invest more of policyholders’ money while keeping less in reserve.  The result is greater upside for private equity and greater downside for everyone who holds a life insurance or retirement policy.

Suing customers

Some private equity firms buy companies not to improve their products or services but to profit from suing their own customers.  Wait, what?  In industries like payday lending, medical billing, and rental housing, firms have discovered a business model that targets people with few resources, using favorable legal rules where they exist and spending heavily to shape them where they do not.  Meanwhile, consumers face a legal landscape that blocks their ability to fight back.  Arbitration clauses prevent them from suing in court, and decades of rulings that weaken class actions make it nearly impossible for groups of harmed customers to band together.  The system serves the interests of private equity well.

The payday and installment loan industry shows this dynamic clearly.  Private equity–owned lenders like Mariner Finance provide short-term loans, sometimes unsolicited, then trap borrowers in cycles of refinancing.  The Consumer Financial Protection Bureau found that more than 80 percent of payday loans are renewed or rolled over within two weeks, with the principal the same or higher, meaning borrowers pay only interest and fees while sinking deeper into inescapable debt.  When customers like Leticia Castellanos try to challenge these practices, lenders force them into arbitration but freely sue borrowers in court.  Mariner even required some of their customers to cover the company’s own legal fees.

Medical billing offers another example.  After Blackstone acquired South Eastern Emergency Physicians, the company’s lawsuits against patients surged.  Between 2017 and 2019, SEEP filed nearly 4,800 suits in the Memphis area—more than three typical major hospitals combined in the first half of 2019 alone.  Private equity firms use litigation as a revenue stream while insulating themselves from liability.  Combined with the decline of class actions and the rise of forced arbitration, ordinary citizens are easy prey.

Emergency services

Concerningly, private equity firms have made emergency services more expensive by acquiring ambulance companies and reshaping them around short-term profit rather than public service.  For most of the twentieth century, ambulances were free or low-cost and operated by local governments.  But starting in the 1990s, as cities faced budget cuts and embraced privatization, private equity firms moved in aggressively.  By 2012, nearly 40 percent of US cities had privatized ambulance services, and major firms, including KKR, Warburg Pincus, Clayton Dubilier & Rice, American Securities, and Patriarch Partners, bought ground and air ambulance companies.  Once private equity took over, prices spiked, and the average ground ambulance ride now costs nearly $1,300. Almost half of privately insured patients receive surprise bills because many private equity–owned ambulance companies choose to remain out of network to charge higher rates.  Private equity–owned air ambulance providers charge about $48,000 per flight, which is roughly $20,000 more than non-PE providers.  But when you have a medical emergency and need an airlift, you don't have time to explore your options.

Within three years of acquisition, a quarter of the twelve private equity–owned ambulance companies examined by the New York Times had gone bankrupt, while none of more than 1,000 non-PE companies tracked failed during the same period.  Heavy debt loads, fee extraction, and cost-cutting—the usual PE tactics—degraded the service while pushing prices higher.  Essential emergency care has been transformed into an increasingly unaffordable service, and some private equity firms are applying the same model to fire departments and 9-1-1 dispatch services, threatening to make yet another public necessity worse and more expensive.

These are just a few examples of how private equity firms operate.  Firms tend to target companies that generate steady cash flow, can take on large amounts of debt, and have assets that can be sold or monetized, such as retail stores, hospitals, and private universities.  They especially favor businesses with captive or vulnerable customers who have limited alternatives, such as nursing homes, ambulance companies, mobile home parks, prison services, payday lenders, veterinary chains, dental practices, and rental housing.  "Why target people with the least?  Because poor and working-class people often lack alternatives to what they buy, and this gives private equity firms the chance to raise prices or cut quantity with impunity, knowing that their customers have few alternatives," writes Brendan Ballou.

They also look for fragmented industries they can consolidate through roll-ups, as well as distressed companies whose real estate, brand value, or other intellectual property can be stripped and sold for quick returns.  Private equity firms are even buying up oil and gas distributors, electric vehicle charging stations, power plants, municipal water utilities, roads, airports, and cell phone towers in an effort to diversify their portfolio to loot.

Congress

How do private equity firms get away with profiting from financial engineering tactics that make everyone else worse off?  They exploit loopholes, and they have a lot of allies in government.  Private equity firms and Congress collaborate in a variety of ways.  Campaign donations, lobbying, personal relationships, and career pipelines tie the industry to both political parties.

Private equity firms spend tens of millions of dollars each election cycle on campaign donations and lobbying to keep laws working in their favor.  In 2020 alone, private equity and investment firms spent about $42 million on congressional races.  Senior lawmakers receive the largest shares.  Senate Majority Leader Chuck Schumer accepted more than $1.2 million from private equity donors in one cycle, while Senator Kyrsten Sinema received over $500,000 before killing a proposal that would have closed the carried-interest tax loophole.  These donations are reinforced by a powerful lobbying arm, the American Investment Council, which spends up to $3 million a year to defend favorable tax treatment and resist new regulations.  Many state and federal regulators later take lucrative jobs in the firms they once oversaw.  Former private equity executives themselves also move into government and influence policy from the inside.  Private equity gets light oversight, generous tax benefits, and favorable bankruptcy rules, while Congress benefits from a steady stream of cash and elite support.

As one of private equity's biggest opponents, Elizabeth Warren, puts it:

"There is a part of Wall Street that has figured out that they can make millions of dollars, billions of dollars, by going into businesses that are already established, that are up and running, suck all the value out of them, sell the pieces off for parts, leave the employees behind, leave the pensioners behind, leave the communities behind, line their own pockets, and roll on out of town and go to the next business and the next business and the next business... Washington keeps helping them! They give them special tax breaks, loopholes, multiple ways that they can take more value out of these corporations, put it in their own pockets, and leave everyone else behind."

How they present themselves

Private equity firms present themselves as disciplined builders of businesses, sophisticated partners who step into troubled companies with expertise, capital, and long-term vision.  They describe their mission as creating value by strengthening operations through their expertise and helping companies “thrive,” even though they typically own businesses for only three to seven years.  They cultivate the image of bold risk-takers with real skin in the game, financial swashbucklers willing to take on challenges that weaker business owners avoid.  They highlight supposed job creation and economic growth, pointing to the rare success story while omitting the far more common pattern of layoffs and bankruptcies after leveraged buyouts.  To reassure the public, they emphasize their ties to pension funds, university endowments, and nonprofits, framing themselves as guardians of retiree security rather than fee collectors who charge those same pensions hundreds of millions of dollars per year.  They talk endlessly about operational experience and downplay the financial engineering that actually drives their profits: heavy debt loads, sale-leaseback schemes, dividend recaps, and captive partnerships with their own subsidiaries.  General partners polish their reputations through philanthropy, attaching their names to museums, libraries, hospitals, and universities to cast themselves as civic benefactors rather than architects of economic extraction.

Many business owners, including myself, are contacted regularly by private equity firms and their recruiting agencies seeking to buy.  If you're considering dealing with private equity, keep in mind that they're aware of their bad reputation.  They will tell you that they're different from other private equity firms and that they have your business's best interest in mind.  Of course, they're not like those other firms.  But, as many business owners have found out after having sold their businesses, those private equity firms are no different.  The founders of these businesses made the ultimate Faustian bargain: they sold their company culture, the livelihoods of their employees, the quality of service to their customers, the health of their communities—all for the promise of a quick payday.

Private equity is larger now than at almost any point in history.  Global private markets, including private equity, have expanded dramatically in recent decades, and the industry continues to grow in size and influence.  In 2024, the US had 8,000 private equity firms with a total of over $6 trillion in assets under management.  Private equity controls about 7 percent of the US economy.

Who wins and who loses

The big winners of private equity are the guys at the top, the general partners.  They stand to make obscene amounts of money and carry almost no risk.

The limited partners (investors) often win, earning a rate of return higher than in public markets, although they carry more risk than the general partners.

Lenders, the banks putting up the cash for leveraged buyouts, may win or lose depending on whether or not the acquired companies are able to pay back the debt, or if they sell those debts to other suckers.

Private equity-installed executives at acquired companies usually win.  They get pre-arranged pay packages contingent on making decisions beneficial to the general partners, not necessarily on whether or not the company succeeds.

Founders who sell their companies or partner usually win in the short term, but may have regrets later upon seeing what becomes of their business and employees.  In his book The Private Equity Playbook, Adam Coffey offers the following advice to former business owners being acquired: "Remember, PE firms are in the game to make money. The sooner you create the conditions that will lead to a good exit for them, the sooner they'll get out and sell you to a bigger firm.  So when things are tough, do your job, make smart plays, and let growth take care of the problem for you. Of course, even though you can't fire your PE partners, they can fire you. It happens all the time. Only 27% of CEOs of companies acquired by private equity last for an entire hold period of 5 years."

Employees often feel the worst effects of private equity ownership because the business model depends on cutting costs and exiting within a few years.  Company culture crumbles.  Research from economists Steven Davis and others shows that employment at acquired companies typically shrinks after a leveraged buyout, with job losses averaging 10 to 12 percent within two years.  Because payroll is the largest expense and therefore the fastest way to boost EBITDA, layoffs are a standard PE tool.  In many companies, employees report that private equity owners eliminate training, replace full-time staff with contractors, freeze wages, or close facilities entirely if the underlying real estate can be sold for cash.

Customers often lose too.  Because private equity firms prioritize short-term returns, they often raise prices, cut quality, or both.  In health care, studies of private-equity-owned nursing homes show declines in staffing levels, increased health violations, and higher mortality.  In emergency medicine and ambulances, private equity ownership correlates with surprise billing, higher fees, and aggressive debt collection.  In housing, PE landlords often raise rents rapidly, defer maintenance, and use lease structures that shift repair obligations onto tenants.  Even in consumer sectors like retail, hospitality, and veterinary services, customers have longer wait times, worse service, and higher prices.

Communities also lose.  "When we talk about how private equity affects communities, we're really talking about how it affects people—the individuals who have no choice but to rely on firms for their jobs, their homes, or essential services," writes Megan Greenwell in Bad Company.  Local communities rely on businesses for places to work, earn a living, and buy products and services.  When these businesses are strained by private equity's extraction tactics, the community suffers.

Conditions for locusts

Private equity is harmful for the companies it buys, employees, customers, communities, and the broader economy because it buys companies for the short term, loads them up with debt, extracts excessive fees, and insulates the firms from financial risk and legal consequences.

In a way, private equity can be seen as a product of late-stage capitalism.  Grasshoppers exist in nature peacefully with their environment, taking what they need to survive and serving an ecological function.  But when they encounter a huge surplus of food from industrial monocultures, they undergo epigenetic changes that turn them into hungry, rapacious locusts.  It's the same species, same insect, but its nature can only be expressed in relation to its environment.

Just as locusts need the right conditions to emerge, so too does private equity.  Our economy, government, and institutions have created the necessary conditions for these rapacious firms to thrive—even at the expense of their hosts.  In nature, when there is a surplus of food, pests swoop in to get their fill.  When there's a surplus of businesses with capital and the regulatory loopholes to exploit them, private equity firms seize the opportunity to parasitize them.

Private equity is growing an empire on debt, opacity, and a definition of value that excludes everyone except its investors.  While sucking the life out of American businesses, private equity firms harm employees, customers, local communities, and the greater economy and culture.  Understanding their tactics is the first step towards reducing the harm they cause.  If we want capitalism to serve the public rather than hollow it out, we must decide whether this model remains acceptable or whether it marks the line where we finally say no.

What's your experience with private equity?

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Disclaimer: No portion of this work may be used for training artificial intelligence systems without written permission from the author.

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