Nonprofits and Government are against greed, right?

Don’t collude with private equity, Part 1

Image description: Close-up of a “closed” sign in a window. Photo by Tim Mossholder on Unsplash.

It’s time to learn about the economy. I suspect that people who aren’t outraged about the state of the financial sector haven’t taken the time to understand it. Unfortunately, even though we may feel we aren’t participating, our financial wellbeing and our community institutions are very much at risk, and our retirement savings are invested in some very unsavory ventures.

It is true that the economy is complex. Traditional economic theory no longer reliably explains what is happening. But there are some basics that everyone can understand. Please don’t stop reading, even if you are one of those people that glaze over when presented with a spreadsheet.

Private equity is bad

I have been following and ranting about the rise of private equity for years now, but I haven’t tried to write about it. It’s easy to ramble as it is pervasive and hard to explain. I’m going to try now because I really believe we need to sound the alarm about it and be on the defense when even greater private equity infiltration of our communities is happening.

Private equity is an investment option where investors pool their wealth in shared funds that are used to invest in companies and manage them for short-term gain, often extracting wealth from them and leaving them for dead. It is also known as vulture capitalism. This area of investing has grown tremendously. Private equity investing is higher risk but has generated greater returns than the stock market, leading to more money being invested this way as investors seek high returns. Unfortunately, the returns are generated at the expense of workers and communities. There are numerous examples documented of the way in which private equity ruthlessly extracts resources from companies and exits leaving them indebted and crippled. I can’t really cover them in a short post, but I highly recommend Bad Company: Private Equity and the Death of the American Dream (very readable descriptions of what happens when private equity firms acquire an apartment complex, a hospital, and more). To better understand how private equity firms were invented and grew, check out These are the Plunderers: How Private Equity Runs—and Wrecks—America.

There are several problems with private equity:

· Ethical concerns – This is the biggest concern. Make no mistake: private equity generates big returns at the expense of average people. Short-term profits are prioritized over long-term health or even survival of acquired businesses. Tactics like shrinking staff, reducing salaries, selling off property and other assets, and saddling companies with unmanageable debt generate immediate, large returns for investors. If the companies taken over by private equity were providing non-essential products and services, this might not be a major concern. However, private equity firms, in an insatiable search for new money-making opportunities, are now heavily invested in care industries like healthcare, childcare, and senior housing.

· They are sneaky – Private equity firms acquire companies but don’t necessary want you to know that your hometown local businesses are now owned by the evil empire. They often maintain the original branding but make changes that are detrimental to affordability and quality of care. Their real estate companies have names like Inspire Housing (Apollo Global Management), YES! Communities (Stockbridge Capital Partners), and Hometown America (Calzada Capital Partners). They depend on your continued patronage until they extract their profits and leave again.

· They target disempowered people – Private equity firms purchase distressed properties and businesses. The invest in rural hospitals because rural residents have no alternatives when care quality declines. They target mobile home parks where low-income residents can’t actually move their homes and are stuck paying escalating land rents (or being evicted).

· High risk, waning return – Private equity has outperformed the stock market for many years, however, it is far riskier, and many believe that the golden era of high returns for private equity is ending. Significant losses are possible and the industry has fewer safeguards than the stock market. This may be why Trump and other ultra-wealthy investors are now “democratizing investing”—encouraging “average people” to invest and pump more money into the now rotten system.

Here are a few statistics that indicate how pervasive private equity is now:

· 25-40% of US hospital emergency rooms are staffed and/or managed by private equity-controlled companies.

· Private equity firms own over 53,000 apartments in the Seattle-Tacoma Metro Area. Nationally, they own approximately 10% of apartment stock, and 25-35% in some Sunbelt cities.

· 25-30% of US veterinary practices are owned and controlled by private equity firms, as well as 75% of specialty and emergency vets (these are more lucrative).

Why should you care

Private equity’s focus on profits over people contributes to job losses, wage stagnation, and rising prices. It hurts us all when doctors have less discretion and less time with patients, or when vet prices skyrocket, or when nursing homes are understaffed. An additional concern is the way in which institutional investors have increasingly staked our future on private equity investments. Last week, the Seattle Times published WA Treasurer warns state to pull back on private equity investments. This is an excellent article that outlines how the Washington State Investment Board has gone deeper and deeper into private equity investments to chase bigger returns to keep the pension fund solvent. Our state now has 28% of the state pension fund invested in private equity firms. This is double the rate of most other states. I find it sad, illogical, and morally indefensible for public sector institutions who are stewarding the funds of workers to invest in the destructive practices of private equity.

On Saturday, Part 2 will zoom in on the ways that private equity presents challenges for nonprofits.