Lever Time - Premium

00:02:30:02 - 00:02:56:17
David Sirota
Everyone, welcome to this week's special bonus episode. Today we're doing something extra special for our paid subscribers. We're giving you not one, but two separate interviews, which cover everything you need to know about the private equity industry, an opaque industry that is basically behind almost everything in the American economy. Whether, you know that or not. First is my interview with Brendan Ballou, author of the new book Plunder Private Equity Plan to Pillage America.

00:02:56:18 - 00:03:17:23
David Sirota
Brendan is a federal prosecutor and served as special counsel for private equity in the Justice Department's Antitrust Division. So his approach to private equity is from the enforcement side of things, which is super important. My second interview is with Josh Rosner. He's the coauthor of the new book These Are The Plunderers How Private Equity Runs and Wrecks America.

00:03:18:06 - 00:03:41:00
David Sirota
Josh wrote this book with Pulitzer Prize winning journalist Gretchen Morgenson, and it covers the past 30 years of private equity and how that industry has become such a dominant and destructive force in the American economy. It may seem complicated, but these interviews are designed to bring it all the way down to the regular person level to explain what's actually going on.

00:03:41:11 - 00:03:48:23
David Sirota
Thanks again for being a supporting subscriber and for funding the work we do here at the letter. Now, here are those bonus interviews. Hey, Brendan, how are you doing?

00:03:49:00 - 00:03:50:02
Brendan Ballou
I'm well. How are you, David?

00:03:50:08 - 00:04:16:07
David Sirota
I'm good. You know, I'm a little bit nervous because we're interviewing right now. We're interviewing a cop. Not really, but. But you're actually the kind of cop that we need more of in the United States. I want to start with what you've been patrolling, which is the private equity industry. You you have worked in the antitrust division of the Department of Justice.

00:04:16:12 - 00:04:32:21
David Sirota
Your job has been to look at private equity. How do you describe what private equity is and in describing what private equity is? What are some of the things that you are policing them? You and the Justice Department are policing them around?

00:04:33:03 - 00:04:48:21
Brendan Ballou
It's a great question and one that I don't think I really have the answer to until I was well into this book project. And thank you, by the way, so much for the invitation. And I should say, you know, as a as a cop or at least cop adjacent, I'm speaking in my personal capacity, not necessarily that I'm the department of Justice.

00:04:49:09 - 00:05:07:19
Brendan Ballou
So what is private equity? The basic idea is simple. So a private equity firm uses a little bit of its own money, some money from investors and a whole lot of borrowed money to buy companies. It then uses that money and it uses its time owning the company to try to make financial or operational changes and try to flip it for a profit.

00:05:07:19 - 00:05:29:17
Brendan Ballou
A few years later. The basic problems with the private equity model, and this isn't necessarily something that I or anybody else can police because much, if not all of this is entirely legal. But the basic problem with the business model is threefold. One, these private equity firms tend to buy businesses just for a few years. Two, they tend to load up companies with a lot of debt and extract a lot of fees.

00:05:30:00 - 00:05:44:15
Brendan Ballou
And three, they tend to be insulated legally and financially from the consequences of their own actions. And when you've got those three things together, it tends to lead to a lot of bad outcomes in a range of industries, from nursing homes and prisons to single family rentals and health care.

00:05:44:17 - 00:06:19:01
David Sirota
So they can buy up these industries, they can buy up the these companies. They and as it relates to antitrust, they can roll up whole sectors of the economy under one ownership structure. What does that mean in practice? Give us an example of of what that means in practice. A private equity company owning something where down the chain of its ownership structure, something bad is happening and the guys on top aren't being held accountable or can't be held accountable because of the structure of private equity itself.

00:06:19:02 - 00:06:37:09
Brendan Ballou
I think you get to the core of the problem with that question. So to give you one example, the Carlyle Group is one of the largest private equity firms, and it bought up HCR ManorCare, which was once the second largest nursing home chain in America. And after it did that, it executed a lot of very familiar tactics to observers of private equity.

00:06:37:13 - 00:07:01:05
Brendan Ballou
It sold the underlying assets and required the nursing home chain to lease it back. It executed a dividend recapitalization where it essentially required manor care to borrow money to pay the private equity firm and its investors. As a result, staffing fell. Complaints by residents rose the entire business. It appeared, suffered. But the problem is, when residents tried to hold Carlyle accountable, they failed.

00:07:01:21 - 00:07:28:20
Brendan Ballou
So one family, the mother was in a manner care facility, died when she slipped in the bathroom. They sued for wrongful death because the facility was allegedly understaffed. At that point, Carlyle, the the the private equity firm says, no, no, no, we don't technically own Manor care the nursing home. Instead, we merely advise a series of funds whose limited partners through a series of shell companies ultimately own the nursing home.

00:07:29:11 - 00:07:53:23
Brendan Ballou
And that was enough for the judge to essentially get confused and dismiss the case against Carlyle. And so Carlyle was never held responsible for the consequences of its portfolio company's action. And that's one of the basic problems with the private equity business model, which is private equity firms tend to control the operations of their companies, but they don't tend to be held responsible when those companies do wrong.

00:07:54:00 - 00:08:23:03
David Sirota
What's really fascinating about this is that if you study the history of corporations, the entire theory of a of of limited liability and the corporate structure is to say that there can be essentially a group of people and an entity that can engage in business and and and the shareholders or the investors have some limits on the liability of the behavior of the entity.

00:08:23:08 - 00:08:45:12
David Sirota
The idea being that this frees up capital to be more risky, more innovative. That's what the corporate structure is designed to do. But what it seems like you're saying is, is that private equity has taken that concept of limited liability that has freed up capital. It has taken that, too, to a wild extreme.

00:08:45:15 - 00:09:06:20
Brendan Ballou
I think that's right. You know, the idea of limited liability may make sense for, you know, your mom and pop investor like David. If you've got your Vanguard account and you're invested in an index fund, it doesn't really make sense for somebody to sue you. If one of the thousand companies that you invest in, you know, you've got a quarter of a share and you know, does something wrong, doesn't really make sense to sue you because you didn't really have any say in it.

00:09:08:08 - 00:09:40:17
Brendan Ballou
It's different with a private equity firm, which often is the sole private owner, hence the term private equity in the company. And they can effectively direct the company's operations by choosing the leadership, by selecting the board, by, you know, setting, you know, setting goals and so forth. A lot of times what happens is these companies set incredibly ambitious requirements for their company's leadership that then the companies have to, you know, lay off people, raise prices, depress the quality care in some circumstances, act illegally.

00:09:41:00 - 00:09:50:12
Brendan Ballou
But whatever happens, the consequences don't redound back to the private equity firm. And that's just a classic sort of principal agent problem that we've essentially created in the law.

00:09:50:20 - 00:10:28:04
David Sirota
And the problem with it, among others, is that there's arguably very little deterrent to the private equity executives, the the guys at the top of the pyramid. There's very little deterrent to them making decisions that would not only hurt people, millions and millions of customers or people relying on services of the portfolio companies, but there's very little deterrents to them putting in place financial policy CEOs at those portfolio companies that encourage unethical or illegal behavior.

00:10:28:04 - 00:10:52:01
David Sirota
There's no. Now, I want to turn to this question of antitrust, because I think it's so important the the relationship between the growth of private equity as a force in our economy and I think, again, I think people may have started hearing about private equity back in the in the eighties when it was called leveraged buyouts and the like, with Gordon Gekko.

00:10:52:01 - 00:11:10:19
David Sirota
I mean, Gordon Gekko, was he a hedge fund guy? Was he a private equity guy? Kind of seem like a private equity guy from the from the rough details of the movie. But but since the 1980s, we've gone from kind of individual Gordon Gekko's to these huge private equity firms that are that some of which are publicly traded.

00:11:10:19 - 00:11:38:03
David Sirota
So we're talking about a private equity expansion into the economy at at the trillions and trillions of dollars level at the same time that we've seen industries consolidate to where there's one, two, three oligopolistic entities at the top of huge industries and all the problems that come with that ability to raise prices without competition, all sorts of problems of monopoly.

00:11:38:12 - 00:11:55:06
David Sirota
What is the relationship between the simultaneous expansion of private equity and the the problem, the growing problem? No pun intended, of bigger and bigger, monopolistic and oligopolistic companies?

00:11:55:12 - 00:12:12:12
Brendan Ballou
It's a great question, and maybe I can take it in two parts. One is to just talk very briefly to your point about the size of a lot of these private equity firms, which is these have very obscure names that most people have not heard of. You know, whether you're talking about Blackstone or Carlyle or KKR, But they are enormous.

00:12:13:00 - 00:12:35:02
Brendan Ballou
You know, Blackstone and Apollo or KKR are both approaching $1,000,000,000,000 in assets under management. You know, for context, the entire U.S. GDP is is $25 trillion. So we're talking about substantial parts of the economy and they touch areas of your life that you maybe don't even realize, you know. David, I'm looking at it looks like you've got a board game in the back of back there, meltdown.

00:12:35:03 - 00:13:00:02
Brendan Ballou
You know, private equity firms are rolling up board game companies. They're rolling up veterinary clinics, nursing home chains. Think you might want to check the font of your graphic, the lever because a private equity portfolio company licenses a lot of the fonts that people use, including the font that we use for the book. So the private equity is really expanding in every direction in a way that's really unique.

00:13:00:12 - 00:13:36:10
Brendan Ballou
To get to the second part of your question, how does that relate to antitrust private equity firms, at least some of them have explicitly engaged in roll up strategies for specific industries. So whether it's I mentioned buying up veterinary practices, there's been a huge roll up there, nursing home chains, rehab clinics, daycare centers and so forth. The basic idea being that, you know, by buying up several small practices, you can consolidate them, either increase efficiencies or sometimes what increasing efficiencies means in laying off workers or using market power to raise prices.

00:13:37:01 - 00:14:15:15
Brendan Ballou
The challenge that we've got is a lot of these roll ups are happening in a lot of different industries and very distributed businesses. So I can't talk about specific cases. But just to give you a sense of sort of how antitrust lawyers think about this. When you talk about a consolidation of one or two big companies in an industry, you know, headed towards a duopoly or something like that, in a sense, they're fairly straightforward cases because you're looking at one national market, two big companies, whatever it happens to be with these sorts of roll ups because they're very small businesses scattered across the entire country can often be very challenging just from a logistical standpoint

00:14:15:15 - 00:14:25:12
Brendan Ballou
to bring those sorts of cases. So private equity is big, it's expanding into ante in into roll ups, and they're the kinds of roll ups that are often very hard to investigate.

00:14:25:17 - 00:14:55:21
David Sirota
And I think that's that's the key here. I mean, it really feels like when you I mean, I've said before to two friends in my reporting in private equity, it's like there's almost no door that you open now in the economy where you will not end up being finding a private equity firm behind it. Right. Like, oh, well, if it's not my laundromat, then the company that owns a laundromat is owned by private equity, right?

00:14:55:21 - 00:15:27:20
David Sirota
I mean, it's it's these industries that are all part of the of the economy that you don't necessarily think are connected to some larger and larger conglomerate. But more and more, it feels like people may not know what Blackstone is or the Carlyle Group or KKR, but the Blackstone Group, KKR and Carlyle certainly know no communities in the sense of business opportunities at the granular level in your communities.

00:15:27:20 - 00:15:52:01
David Sirota
Doctor's offices is a is a great one. I just heard recently private equity is making a play into veterinarian practices. Right. And what's interesting about this is that you think about these things that private equity is is getting into. You think about these things as kind of very local, almost almost immune from the larger big box ification of the economy.

00:15:52:05 - 00:16:14:09
David Sirota
But in fact, private equity is behind more and more pieces of even those seemingly local parts of your economy. And I think a lot of people aren't aware of that because the the big Blackstone name or the big KKR name is not on the front of the veterinarian's office that may be owned by this or that private equity firm.

00:16:14:16 - 00:16:40:19
David Sirota
Now, you also go over in your book about how government policy is impacting this, a situation, whether it's helping accelerate the private equity takeover of bigger and bigger parts of the economy. So I just want to hear your thoughts on what is the government doing to combat this situation or to accelerate it.

00:16:40:22 - 00:17:05:00
Brendan Ballou
Yeah, And you know, the way that we're talking about this as sort of private equity being everywhere can lead, I think, to people that are concerned about the private equity business model to a certain level of sort of hopelessness or nihilism and I think that's counterproductive ultimately. Yeah, Yeah. Because ultimately, private equity is a business model that we created in the last 40 years through a lot of laws.

00:17:05:06 - 00:17:33:05
Brendan Ballou
And if we create it, we can change it back just as we have with other flawed business models in American history. So with that said, I think that there are causes for concern and for optimism about what's happening in the federal government and and state and local government. So the cause for concern is that private equity firms have been enormously successful in advocating for their case in in sort of every every avenue of government.

00:17:33:05 - 00:18:14:19
Brendan Ballou
You know, they've given something like $900 million to federal candidates over the past 30 years. You know, they've employed former secretaries of state, defense, Treasury to speaker of the House, a vice president, any number of senators and elected officials and congresspeople. So they have been astoundingly successful in their lobbying campaign on the specific issues that they care about, whether it's surprise medical billing or the carried interest loophole or something like that in terms of the sort of cause for optimism, I am encouraged and I say this as a government employee, so maybe I'm maybe I'm Pollyanna ish about this, about the seriousness with which people are taking this just at the line level in so

00:18:14:19 - 00:18:41:17
Brendan Ballou
many different departments and agencies, whether it's I can't talk about specific cases in DOJ or the FTC, but you can read public announcements about what the state is doing. And you mentioned veterinary clinics and joined a recent private equity role up in the veterinary space. When you look to the Department of Health and Human Services, private equity has been extremely active in nursing homes, proposing minimum staffing requirements for four nursing facilities.

00:18:42:05 - 00:19:00:16
Brendan Ballou
So, you know, in a world where a lot of attention tends to focus on Congress or literally the White House, the the executive office of the president, there's a whole lot of action happening not just there, but in departments and agencies and in states and localities. And I think that's a reason for optimism.

00:19:00:22 - 00:19:51:20
David Sirota
There's an argument that says that private equity serves an important role in the economy and that in growing it's further serving that role, that the role that it serves in the economy is so called creative destruction, that if you hear Gordon Gekko tell it from Wall Street, you know, greed is good. Greed clarifies, greed causes efficiencies. The idea being that, you know, and again, I'm giving the cartoonish argument here, but the the fat, bloated Fortune 500 company that's got too many people in upper management, not enough workers doing the so-called real work, that private equity comes in and gets rid of that fat, get rich, gets rid of that bloat, and that this is actually

00:19:51:20 - 00:20:04:03
David Sirota
ultimately it's good for an economy because it frees up capital to do things that can be more economically sustainable. What's your argument or your response to that argument? I think that there are.

00:20:04:03 - 00:20:20:15
Brendan Ballou
Two basic challenges here. One is that private equity firms are really investing for the short term, you know, trying to flip a profit in just a couple of years. And I always joke, you know, if I was trying to maximize the revenue from my apartment over 20 years, I'd fix up the kitchen. You know, I'd install a new bookcase, etc., etc..

00:20:20:21 - 00:20:53:13
Brendan Ballou
If I was trying to maximize profit over the next week, I'd burn it down and try to collect the insurance money. You know, and that's a little flip. But you know what the more serious answer is when you are trying to make a profit in 3 to 5 years, more likely than not, you are going to as the as the study you cited suggests, cut employment rather than invest in building a new factory or, you know, hiring more people, you're more likely to raise prices or cut quality of care, even if it angers customers in the long run because it gets you a quick profit.

00:20:53:22 - 00:21:03:05
Brendan Ballou
So because of the short term perspective, private equity firms may make a buck and may make a buck quickly to the detriment of their very companies in the long term.

00:21:03:11 - 00:21:31:11
David Sirota
Is that a problem of private equity or is that a problem of an economy that for many reasons is so focused on short termism that that institutional investors or retail investors, all sorts of investors as corporate CEOs at Fortune 500 companies are having to answer to investors on a quarterly basis rather than on a year to year basis or a decade basis.

00:21:31:11 - 00:21:39:05
David Sirota
I mean, I guess I guess what I'm asking is, is that magnified by private equity or is that an even larger problem in the economy writ large?

00:21:39:06 - 00:21:58:06
Brendan Ballou
So I think the rise of the concept of shareholder supremacy, which, you know, started in the 1970s into the 1980s, is a real legal innovation that raises a lot of the kinds of problems that you're talking about. I would say that I've always tried to keep people focused on private equity as a distinct thing that emerged in the past couple of decades.

00:21:58:12 - 00:22:32:13
Brendan Ballou
That creates distinct problems and is worthy of distinct solutions. I was on a podcast the other day that was hosted by a fairly conservative Republican, and what I said to him and I say to everyone else is you can be on the spectrum from the Democratic socialist to, you know, a Reagan Republican or, you know, a Bush Republican or whatever you happen to be, you should be unified in the concern around the private equity business model, not because it is necessarily an exemplar of, you know, sort of cap capital function and capitalism, but rather a perversion of it because of the legal structures that we've created.

00:22:32:21 - 00:22:35:10
Brendan Ballou
It creates uniquely, uniquely bad outcomes.

00:22:35:15 - 00:22:58:00
David Sirota
I want to ask about that, that legal structure for a second. I mean, you alluded to the fact that we private equity emerged as a product of decisions on how we've shaped our laws. One example comes to mind, actually, two examples come to mind. One is that the private equity industry exists inside an exemption from a I guess it's now 80 year old.

00:22:58:04 - 00:23:40:06
David Sirota
The Investment Advisers Act that it is it is essentially exempted from the basic regulations about disclosure, about all sorts of rules that mutual funds or bank even, you know, banks and traditional financial companies are subjected to. It is also, of course, there's this private equity tax loophole in which the the private equity invests executives get to pay the lower capital gains tax on income that they receive in making in their investments on behalf of others.

00:23:40:07 - 00:24:09:06
David Sirota
Now, what boggles my mind about the second one, if I could just go off on a little rant here for a second, is that the capital gains tax rate is supposed to the reason it's lower, it's supposed to reward the idea that if you put skin in the game on a bet in the economy, on investment, that the lower tax rate on the money that you make back is supposed to incentivize you to make those risks, because the idea is that those risks are good for investing in the in the economy.

00:24:09:10 - 00:24:38:04
David Sirota
It's good for innovation and the like. What's so perverse about the private equity guys using this is that they are mostly investing other people's money, like pension funds, money and institutional investors money in very rich people's money. They're investing other people's money in investment schemes and then when the returns come back, they get to take a cut of those returns and pretend that they were the ones who put the money in and therefore classify the cut of that returns that they're reaping.

00:24:38:08 - 00:25:07:17
David Sirota
They get to classify that as the lower tax rate. And this is a massive obviously tax loophole for a handful of private equity guys. Now, I've named two examples of things where the law seems to incentivize the private equity industry to exist and to make lots of money. Are there other things that that we should know about where the law has kind of created special conditions for the private equity industry to exist and to grow?

00:25:07:17 - 00:25:28:04
Brendan Ballou
Yeah, and maybe I can just touch on the two that you mentioned, then I'll talk about one. You know, it's really I think what's so maddening about some of these public debates is that private equity firms have managed to make them seem so boring. You know, as soon as you as soon as you talk about the carried interest loophole, you know, my own eyes start to glaze over.

00:25:28:04 - 00:25:29:09
Brendan Ballou
It's a very boring firm.

00:25:30:01 - 00:25:30:15
David Sirota
I know.

00:25:30:17 - 00:25:49:09
Brendan Ballou
But when you get into the specific stories about it, it's it's kind of thrilling. There's a senator who I will not name and probably is not the one that you would expect who, you know, put out a proposal like perhaps a decade ago or maybe five years ago to end the carried interest loophole to pay for a very worthy child child care program.

00:25:49:19 - 00:26:16:08
Brendan Ballou
I believe the senator reversed their position on that in under 48 hours and ultimately received, I believe, at least as it was publicly reported, over $1,000,000 in contributions from from the private equity industry. So there are these stories about private equity success in working on these issues that you're talking about that make it, you know, sort of make this problem come to life, come alive in terms of other things to be thinking about.

00:26:16:09 - 00:26:28:06
Brendan Ballou
One of the one of the areas that I think is a little in the weeds but is so important is private equity's ability to play the bankruptcy code. So if I can tell a very quick story.

00:26:28:06 - 00:26:50:01
David Sirota
Please, please tell us about that. So and just as an aside, I will say the term bankruptcy code makes people's eyes glaze over. But if you talk to people who really follow how power works in in the government and in the American legal system, a lot of people will tell you that the bankruptcy code, while it seems boring, is where the real rubber hits the road.

00:26:50:02 - 00:26:52:14
David Sirota
So I'm really eager to hear here about it's fascinating.

00:26:52:14 - 00:27:00:12
Brendan Ballou
So the story that I keep thinking about is Friendly's Diner, which was a nursing which was a diner chain in the in the Northeast, started in World.

00:27:00:12 - 00:27:10:00
David Sirota
War. Hey, man, I grew up I grew up outside of Philadelphia. You're not to tell me what Friendly's is, although some people who are listening might not. And I know the basic broad strokes of the Friendly's story, but tell us. Yeah.

00:27:10:00 - 00:27:40:07
Brendan Ballou
So they, you know, started by two brothers during the great Depression is ultimately sold to a private equity firm named Sun Capital in 2007. Sun Capital executes a lot of the tactics that we've been talking about, about sale leasebacks and dividend recapitalizations ultimately, the business goes bankrupt. But Sun Capital, the private equity firm, does this really fascinating thing, which is it owns Friendly's, but it was also Friendly's largest lender and normally lenders.

00:27:40:07 - 00:28:01:18
Brendan Ballou
This is simplifying things a lot, sort of take over the company in bankruptcy. And so as the owner and the lender, they were able to sell the company from itself to itself. And why would they do that? They did that so that in the process of bankruptcy, they could slop off the pension obligations that Friendly's had on to a quasi government agency called the PBGC.

00:28:02:06 - 00:28:24:02
Brendan Ballou
And so private equity's ability to sort of play or navigate the bankruptcy code so that it can avoid paying debts to workers and retirees and keep that profit for themselves is a really fascinating story. But because it's so sort of in the weeds, I think the firms have managed to make it seem dull or impenetrable.

00:28:24:05 - 00:28:56:11
David Sirota
Let's talk very quickly about the revolving door and about the influence of campaign money. Your book talks about a number of figures, high government officials who have instantly gone to work for private equity. Timothy Geithner, former Treasury secretary under President Obama during the bank bailouts, now at a major private equity firm, Jack Lew, another former Obama Treasury secretary, now at another private equity firm.

00:28:56:22 - 00:29:23:17
David Sirota
You've got most recently, I think we reported on it at the at the Lever. You had one of private equity biggest allies in the Congress. Former Republican Pennsylvania Senator Pat Toomey got a board seat on one of the biggest private equity firms in in the world after he had led the charge to preserve that carried interest tax loophole, that tax loophole that benefits almost exclusively the private equity industry.

00:29:24:08 - 00:29:47:16
David Sirota
My question for you on this. As people have heard about the revolving door a lot, what do you think the private equity industry is getting out of? It's not only the revolving door, literally hiring former government officials and the like, but its entire political apparatus, its army of lobbyists, its huge campaign spending. I mean, what is this industry?

00:29:47:16 - 00:30:04:04
David Sirota
We've talked about a lot of the policies, but but I guess not only what is the industry getting out of it, but how how much does this industry stand out for its political influence above and beyond a typical industry? I mean, lots of industries have power. Like how how powerful are we talking about here?

00:30:04:05 - 00:30:23:06
Brendan Ballou
So a couple of things. One, I think a lot of industries lobby, a lot of industry, spend a lot of money. Very few industries employ a former vice president or former speaker of the House. I think the level of access that private equity firms have gotten is pretty much unparalleled in terms of what they are getting from this.

00:30:23:15 - 00:30:49:03
Brendan Ballou
I think it's one thing that's entirely expected or one that's a little less expected. The less expected thing is, yes, there's there's the lobbying of the government, but there's also the challenge of getting money from investors. And one of the really interesting things about an industry like a firm like Carlyle, is by building a stable of former senior executives, you know, secretaries of state and Treasury and defense and so forth, is investors like to hobnob with these people.

00:30:49:09 - 00:31:10:00
Brendan Ballou
And it's a way for them to sort of excite the sovereign wealth funds and the pension funds of the world and bring money into the private equity firms. So that's one part. There's also sort of the more traditional lobbying aspect of this. And this is not from a specific private equity firm, and I can't get into the details here, but I'm just thinking about my work as a as an A as an attorney.

00:31:10:00 - 00:31:27:10
Brendan Ballou
I remember being in a meeting with a couple of lawyers for some companies and, you know, some of them were you know, they're all partners. Some of them came from came from government. And it was a long meeting as it was me and a couple of other government attorneys. I was sort of thinking in my head like, how much did this cost?

00:31:27:20 - 00:31:57:03
Brendan Ballou
And I was thinking, okay, each partner's billion about a thousand an hour. You know, there are about five partners there probably took about 10 hours to do this. Some of them had to come down from New York. And I was thinking, you know, this was a meeting that probably cost about $50,000, you know, and I think private equity firms are unique in their ability to bring the gravitas of former government officials and to spend the kind of money that's necessary to sort of be effective in the sort of minutia of moving government forward in the direction that they want.

00:31:57:07 - 00:32:15:19
David Sirota
I'm so glad you bring up the hobnobbing and relationship part of this. I mean, I remember I've been reporting on private equity at this point for about a decade. And I remember one of the eye opening stories I came upon was learning that a former Phillies pitcher, I was a big Phillies fan growing up, Philadelphia Phillies. I grew up outside of Philadelphia.

00:32:15:23 - 00:32:43:14
David Sirota
Larry Christiansen is a guy who is, if I'm not mistaken, a placement agent, which a placement agent for those who don't know is is essentially they go out and they convince pension officials to put pension money into various investments, certainly including private equity. Larry Christiansen was a placement agent and a placement agent. Lynn Swann, the former Pittsburgh Steelers great, a place manager.

00:32:43:14 - 00:33:21:01
David Sirota
I only bring them up to say that that hiring very well connected to big names to go hobnob with the people making giant investment decisions is a huge part of this industry. And I would be remiss in not asking you about that because we cover that extensively at the lever. This not well understood among the general public relationship between institutional investors that represent the savings of lots and lots and lots, millions and millions and millions of regular people.

00:33:21:05 - 00:34:00:07
David Sirota
The relationship between that money and the private equity world. I know you know this, but but for folks who don't know anything about this, just explain the scale of how financially connected and not I'm not talking through people's companies that they're working for small businesses that they're working for, even small businesses, that they're they're patronizing. I'm talking about millions and millions of people who may not even know that their retirement savings provide aid, a huge portion of, if not the bulk of the money that the private equity industry is using to do all of the things that we've just discussed, like tell us, how would you explain that to somebody who knows nothing about.

00:34:00:07 - 00:34:18:06
Brendan Ballou
Of course. So, you know, it goes back to how these companies, how private equity firms buy businesses. So, you know, they use a little bit of their own money, but a lot of the money is coming from other investors. Now, who are those other investors? Oftentimes, it's sovereign wealth funds, you know, foreign governments. But a lot of times it's pension funds.

00:34:18:06 - 00:34:52:13
Brendan Ballou
You know, whether it's the teachers fund, you know, the police and fire fund, you know, all of these all these pension funds are shoveling enormous amounts of money to private equity firms to buy companies, often companies often executing strategies that might run directly contrary to the values of the pension funds or the people that contribute to them. I think it's you know, it's a really potentially concerning story for people that are pro-union, but it's also a story for hope, or at least a little bit of optimism here, which is because private equity firms need money from pension funds.

00:34:52:19 - 00:35:20:13
Brendan Ballou
Pension funds have unique leverage here. And there are really interesting successful cases of activist pushing pension funds not to invest in private equity firms that are invested in particularly problematic businesses. And I think here about the work of Worth Rises in other organizations that have pushed to stop investments in the prison phone industry and have really screwed gambled the entire private equity business model around prisons.

00:35:20:22 - 00:35:35:03
Brendan Ballou
I think that they have been phenomenal. These activists have been phenomenally successful, and it's a thing that is a sort of lever of power on private equity that doesn't necessarily exist on public corporations. So there is some cause for optimism.

00:35:36:00 - 00:36:06:20
David Sirota
I completely agree. I mean, that's part of the reason why we do that, reporting on the relationship between pensions and private equity. Because if private equity is such a giant force in the economy and public pensions are such a huge investor in private equity, then public pensions, which are ultimately more accountable to the public because public officials are overseeing them, then public pensions can actually play can be a leverage point to better the behavior of private equity.

00:36:06:20 - 00:36:29:12
David Sirota
At least at least that's the theory. So I guess my final question for you on all of this is and it's a question I like to ask people like you on this show, which is that if right now, all of a sudden you could wave a wand and you could put in place two, three, four policies, you were the king of the world, or at least king of the economy, four for a day.

00:36:29:12 - 00:36:39:12
David Sirota
And you could put in place any policies that you wanted on this specific set of issues, private equity and its takeover of the American economy. What would those policies be?

00:36:39:20 - 00:37:11:14
Brendan Ballou
Ultimately, we need to hold private equity responsible for the consequences of its own actions and the actions of their portfolio companies. That is not rocket science. It's something that we can do. It can be done in Congress. It can be done by states, it can be done by localities. But unless you hold private equity firms responsible when their portfolio companies result in, you know, wrongful deaths, you know, cause mass layoffs, you know, raise prices for consumers in a way that's anti-competitive unless you hold the private equity firms responsible.

00:37:11:23 - 00:37:31:01
Brendan Ballou
This kind of problem is not just going to happen. It needs to happen based on the private equity business model. So we need to change that. We also need to get private equity firms to be thinking longer term, and we need to it less likely for them to load up companies with debt and to extract onerous fees. And again, at the risk of being repetitive here.

00:37:31:12 - 00:37:53:10
Brendan Ballou
Congress can act here, but there are a lot of other levers of power, whether we're talking about federal agencies like SEC, Treasury, Federal Reserve and so forth, whether we're talking about state and local action, whether we're talking about private litigants. There are a lot of ways that we can actually constrain the private equity business model. All we need is sort of the coalition and the energy to act.

00:37:53:15 - 00:38:16:18
David Sirota
The book is called Plunder Private Equity's Plan to Pillage America. The author is Brendan Ballou. Brendan is a currently at the Justice Department in the Antitrust Division, obviously an expert in this. I encourage everybody to check out this book. If you want to understand something that you've probably heard about private equity, but that you may not know exactly how it works.

00:38:17:00 - 00:38:35:12
David Sirota
This is the book. To do that, to really understand why, why you should know about private equity and what can be done. As Brendan just said, what can be done to limit it and constrain it so that it doesn't run roughshod over the rest of society. Brendan, thanks so much for taking the time to.

00:38:35:12 - 00:38:36:06
Brendan Ballou
Thank you so much.

00:38:38:00 - 00:38:39:11
David Sirota
Hey, Matthew. Hey, Josh, how you doing?

00:38:39:23 - 00:38:40:22
Joshua Rosner
Very well. How are you?

00:38:41:04 - 00:39:12:19
David Sirota
Good. Thank you so much for, for joining. Matthew and I today, as we talk about the book that you've co-written, these are the Plunderers. It details the last 30 years of private equity industry and how it's totally reshaped the American economy. So why don't we start there? Was there some kind of inciting incident that took place 30 years ago around then that that created the modern private equity industry or the opportunity to create the modern private equity industry?

00:39:13:08 - 00:39:17:03
David Sirota
And if so, what? What what were those conditions? What was that event?

00:39:17:21 - 00:40:04:16
Joshua Rosner
Yeah. So. So the answer is yes. There really was a moment in time. It was a significant moment in time. It was a confluence of of events that gave us the sort of greed is good ethos of what we look back on as the IP generation and the deregulation under the Reagan administration and the junk bond kings of Drexel Burnham and loading up a specific insurance company as a client of Drexel Burnham called executive life with junk bonds, which ultimately helped accelerate the failure of executive life and took it down because it had invested insurance customer assets in really risky corporate debt.

00:40:05:03 - 00:40:26:00
Joshua Rosner
And once it was taken over by the California Department of Insurance, that created the opportunity for one of the same folks who helped stuff executive life with all of that junk paper, the opportunity to buy all of that portfolio and turn it into what then became Apollo Global Management.

00:40:26:05 - 00:40:47:03
Matthew Cunningham-Cook
Private equity is one of those esoteric industries that regular folks don't really have an opinion on, as opposed to the fossil fuel industry or the health care industry. Why, in your opinion, Josh, should regular folks be concerned about private equity? Be worried about private equity, whose role in structuring our economy in the U.S. today?

00:40:47:09 - 00:41:12:07
Joshua Rosner
Yeah. So it's interesting that you you talk about private equity and juxtapose it with health care and with fossil fuels, energy, etc., because at the end of the day, private equity has become one of the dominant players in those industries. So the reason that we need to think about private equity and you're right, it lurks below the surface of almost every business, every industry that we live with.

00:41:12:15 - 00:41:52:15
Joshua Rosner
It really is the aggregation, consolidation, rapacious stripping of assets out of these industries. Ultimately passing on cost and risk to the consumer, to the public, and quite often leaving the public with worse services, higher costs and higher unemployment, higher pension obligations that are left unmet. And that really is part of what has become the model. So, you know, if you think about what capitalism at its best is supposed to be, it's supposed to be the aggregation and allocation of private capital for productive societal purposes.

00:41:53:04 - 00:42:45:18
Joshua Rosner
And that really is stakeholders are considered customers, employees, retirees who are tied to the business, the public in these businesses. This is taking that capitalist model, turning it on its head and essentially using debt to finance the acquisition of a company, piling that debt not onto the acquirer or the private equity firm, but onto the acquired company, making it harder for the company to survive, operate, benefit and stripping out assets in the in the the process so that the private equity players, their investors and the partners end up with a definite gain while all of the other stakeholders are likely to end up with a loss or at least a greatly diminished asset.

00:42:46:15 - 00:43:03:18
Matthew Cunningham-Cook
If you could really tell us, you know, what are the biggest names in private equity, you focus a lot of Apollo in the book, but there are some other huge private equity firms. What do they operate and how have they impacted the ordinary lives of Americans?

00:43:03:20 - 00:43:38:07
Joshua Rosner
Of course. So. So, I mean, when we talk about it, the big names, the sort of thousand pound gorillas in the industry are Apollo, KKR, Carlyle, Blackstone. There's a handful of others. But those are really the four that we think of as the largest, you know, historically. And it was. When I say historically, I'm talking earlier in the model, the business was really about seeing a company within an industry that may not be getting the market valuation that other players within that industry were.

00:43:38:14 - 00:44:01:17
Joshua Rosner
So the private equity folks would come in, they buy the company through a combination of debt and small amounts of equity. They'd streamline the operations with the hope of re IPO and get bringing it public again to public shareholders. That was sort of an arbitrage game and that that frankly didn't pose the same risks that this later model has posed as they've run out of targets.

00:44:01:18 - 00:44:38:03
Joshua Rosner
Now think about all the big box stores, that private equity zone that we've watched go belly up and, you know, that's wiped out Main Street or it's wiped out labor. It's wiped out retirements. That's that's bad enough. But now we're at a point where the industry has started to really ramp up, starting in the early 20 tens, late to early 2000, early 20 tens, ramping up targeting industries that were historically seen as socially important, socially sensitive social goods businesses.

00:44:38:08 - 00:45:00:20
Joshua Rosner
So think health care is a perfect example or education is a perfect example. These are industries that we all recognize are sort of special, and they're sort of special because they shouldn't be run with profit as the sole motivation. There is a public duty there, right? You go to the doctor, you hope that the doctor's primary interest is your health outcome, not his pocket.

00:45:01:09 - 00:45:21:15
David Sirota
We're talking a lot about the downsides of private equity ownership. I want to take a moment to just to just look at the investor side of this. Where does private equity get all of the money to buy up and stripped down businesses across the country? That's one thing I think listeners want to want to understand.

00:45:22:01 - 00:45:59:01
Joshua Rosner
First is the sort of perverse reality that most of the funding for private equity comes from pension funds. In other words, the firms that manage your retirement plan, that manage your insurance plan, that manage large public and private endowments. That's where the money comes from. And so in some sense, it's a little bit ironic that you have the folks managing your retirement money, almost betting against you, because the stripping of the assets, the leaving of the carcass may provide returns for you in the short term, i.e., for your pension funding.

00:45:59:16 - 00:46:07:01
Joshua Rosner
But ultimately your employment may well be tied to that as well. And so there's a there's a there's an ironic tension there.

00:46:07:07 - 00:46:32:06
Matthew Cunningham-Cook
One of the things that I think is interesting is when these pension funds started investing in private equity in the early nineties, they benchmarked it against the S&P 500 plus 3% annually. And now that private equity is not meeting that benchmark that they established because it was so much higher risk and so much higher cost, they've now changed it to all these new benchmarks that don't make any sense at all.

00:46:32:21 - 00:46:36:20
Matthew Cunningham-Cook
And even the S&P 500, nobody can make heads or tails of them.

00:46:36:21 - 00:46:50:05
David Sirota
So, Matthew, just to ask you a question about that, I think what you're saying is, is that if private equity is not delivering the returns that it has promised lately, we've seen them play around with how we judge them. Right. I mean, that's basically what's going on, right?

00:46:50:11 - 00:47:29:14
Joshua Rosner
There's a there's an ironic tension there in terms of the performance. While the industry may have at one point had, you know, somewhat stronger performance than you would get in public markets over time through a combination of fees and the declining number of targets and the cost of debt. If you were to net out fees, it really starts looking like the pension funds are investing in very high cost funds for what net of fees ends up looking like the basic stock index fund.

00:47:29:23 - 00:48:00:00
Joshua Rosner
And and it's worth also noting that in some ways the separation between the pension fund and the pensioner by putting private equity in the middle creates this further sort of moral abdication. Right. Because at the end of the day, when we watch, you know, large public companies, banks get rid of fossil fuels, recognizing that, you know, it's become socially unacceptable to be a big polluter.

00:48:00:21 - 00:48:23:06
Joshua Rosner
Private equity doesn't really have those moral constraints because they don't have to answer to public shareholders. Right. And so they become the buyer of last resort of a lot of the most polluting most dangerous, most socially unacceptable industries milking them of their final profits. And the pension funds are the enablers of those behaviors.

00:48:23:22 - 00:48:47:10
David Sirota
Okay. So then then there's a follow up question to all of this, Matthew. You just mentioned the kind of rigging of of how private equity investment and we're still talking about on the investment returns side here, that how the rigging of how we judge whether private equity returns are good, how that's been going on as private equity companies have not been returning what they seem to have promised.

00:48:47:21 - 00:49:16:19
David Sirota
Now you're talking about them being the buyer of last resort and pension funds using their resources to be effectively to finance being the buyer of last resort. Then the question becomes, well, why would the pension funds still be investing in private equity? And your book goes into some of the role of pay to play activities in fostering those investments that there is a political influence side of this that doesn't get talked about very much?

00:49:17:00 - 00:49:54:14
Joshua Rosner
Well, you know, it's funny. I think that there's something a little bit more fundamental at play here in why private equity continues to be there. So we had through accounting games, through actuarial assumptions for a very long time, allowed our pension funds to be broadly underfunded. And so we ended up with a system where the pension funds able to make assumptions about the future speed at which their employees would need their retirement money and set hurdle the target investment return goals based upon those.

00:49:54:21 - 00:50:38:17
Joshua Rosner
So they were artificially low, what they expected the expenses to be, and they were artificially high in what they expected the returns to be. And that was part of sort of the driver of the private equity model afford. Generally, what we ended up seeing is we still have large amounts of unfunded pensions. And so now you've got the game going two ways, which is one in a rare company that continues to have a defined benefit pension program and goes belly up because private equity bankrupts it, much of that gets thrown onto the Pension Benefit Guaranty Corporation, the government, while other parts of it end up with.

00:50:38:17 - 00:51:09:09
Joshua Rosner
Right now, the private equity companies who have been buying insurance companies as affiliated businesses, buying those defined benefit programs, converting the retiree pension obligations from traditional retirement plans into annuities, and that gives them a new place to load up an insurance business with their paper of their private equity investments. Potentially quite risky and hope that it works out.

00:51:10:06 - 00:51:20:08
David Sirota
So before we get to what can be done, why don't you paint a picture for us about how powerful this industry is in Washington and where it particularly exerts that.

00:51:20:08 - 00:51:50:23
Joshua Rosner
Power not only in Washington, but that I would say globally. And that's sort of part of the problem, is it's the beast that is eating our our public sector at this point. We've got former presidents, former prime ministers, former heads of the Federal Reserve Bank, former secretaries of Treasury. We can go on and former senators and congressmen all employed, all on the player payroll, either as executives at these firms or as advisors to these firms.

00:51:51:10 - 00:52:36:07
Joshua Rosner
And that power partially occurs because there are revolving door prohibitions in Washington from being able to lobby from the outside into Washington on an issue in which you were directly involved. Certainly there's two years that you can't lobby your own executive agency. There's a lifetime ban. If you were involved specifically as a government official in a particular matter affecting particular parties, because private equity, unlike banks, don't really have the same regulatory apparatus and oversight, it's a safer area for all of these former officials to go and still have the ability to exert their influence into Washington.

00:52:37:01 - 00:53:02:08
Joshua Rosner
They are among the largest lobbying firms every year and lobbying industry every year in Washington, and they're an equal opportunity donor. So they're not really, you know, Democrat or Republican. They're both. And and I'm talking the same firms will make sure that they are giving large amounts to both sides so that they really own the structure at this point.

00:53:02:08 - 00:53:36:03
Joshua Rosner
And it's part of the perversion of the system. One of the things that caused Gretchen and I say we have to write this was in the early days of the pandemic when we started hearing various industry say we need a government bailout, we need a government backstop, we need a Fed program to backstop and protect us. It was this industry, through its lobbying, through its industry trade associations that was one of the largest and first with hands outstretched to go to Washington and ask for protection and bailouts of their portfolios.

00:53:36:10 - 00:54:05:17
Matthew Cunningham-Cook
I mean, John Cusack was that's one example. But then there's John Snow went to Cerberus, as did Dan Quayle. John Snow, who was the treasury secretary. Hedge funds tightly related to private equity. Alan Greenspan went to work at Paulson and Co as a consultant. Bill Clinton wasn't fundraiser for the Yucaipa companies. And I think that that's, you know, with this whole industry is the way that they're able to deploy star power.

00:54:06:07 - 00:54:07:04
Matthew Cunningham-Cook
AT Yeah.

00:54:07:07 - 00:54:31:16
Joshua Rosner
But but you can go and you can talk about George Bush's involvement in one of the PR firms. You could talk about Jay Powell having come from one of the PR firms. Yeah, you could talk about Tim Geithner having gone to a private equity firm. You could talk about Steve Manoogian having started a private equity firm. You know, the list, the John Major of the UK having been a partner at one of the private equity firms.

00:54:31:22 - 00:54:45:20
Joshua Rosner
The list does go on and on and on and, you know, and oh, by the way, many of them are at the Milken Institute this week, which was right. One of the Drexel players who kicked off this whole industry.

00:54:46:02 - 00:55:08:17
David Sirota
Okay. So understanding all of that, understanding the political power, understanding the social destruction, understanding the not great returns for rank and file folks like pension retirees and the like, what can be done? What should be done? What do you think, if anything, will be done? Understanding the political power of this industry.

00:55:09:13 - 00:55:36:02
Joshua Rosner
So at this point, though, you are starting to see, you know, the far left progressives, the far right conservatives start recognizing this isn't good for Main Street, this isn't good for working families, this isn't good for the public. There are smaller private equity firms that actually do do it right, that do actually focus correctly. The problem partially is, again, the pension funds, because the pension funds make a lot of excuses for the industry.

00:55:36:15 - 00:55:58:04
Joshua Rosner
And that's that's a big piece of the problem here. So now we're watching private equity and I'm talking about as example, the big four that we're talking about wrap themselves in terms like TCI and ESG and claiming that they're environmentally focused. And that sounds great because that's the marketing message that their pension investors get to take back to their members.

00:55:59:03 - 00:56:25:16
Joshua Rosner
But the reality is, it's fine to say that you're investing in sustainable, renewable energy, but you got to check the fact that but you're actually still buying businesses that are increasing your overall carbon footprint as a business. And that is part what needs to be checked is the pension funds ultimately are the gatekeepers. And I think you need to hold your pension manager to account.

00:56:26:12 - 00:56:51:12
Joshua Rosner
And that's really a big piece of it. Capitalism only works with stakeholder engagement. Whether that's a proxy form on a public company, whether that is use making loud noises to your pension manager. We do need not an absentee landlord of of of their own money. We need we need individuals to actually start demanding accountability with their money.

00:56:51:20 - 00:57:18:12
David Sirota
I completely agree. I have always thought that millions and millions of pensioners, teachers, firefighters, public sector workers have such an enormous amount of actual leverage over this industry, leverage that has not been used, leverage that I actually don't think a lot of these folks even know that they potentially have. And it's it's such an enormous asymmetry here, but it is so important.

00:57:18:12 - 00:57:43:06
David Sirota
And I'm really glad that you you stressed this at the end. So if anybody's listening to this, who is a a retiree or a public sector worker who has a pension system, this is the kind of thing you need to be talking to your pension board members about and putting pressure on them about. The book is called These Are the Plunders How Private Equity Runs and Wrecks America.

00:57:43:14 - 00:57:53:08
David Sirota
Josh Rosner is the coauthor of the book Run Out. Go get this book, Educate Yourself. Josh, thanks so much for your time today. Matthew, thank you for helping out on the interview.

00:57:53:09 - 00:57:55:14
Joshua Rosner
Thank you so much for having me. It was a pleasure.

00:57:56:00 - 00:58:16:16
David Sirota
Wow. That's it for today's show. Thanks a ton for being a paid subscriber to the lever. We really could not do this work without you. If you like this episode, please pitch in to our tip jar. You can find that link in the episodes description or at Lever News.com slash tip jar. Every little bit helps us do the independent journalism that we do.

00:58:16:20 - 00:58:26:08
David Sirota
Oh, one more thing. Be sure to like, subscribe and write a review for lever time on your favorite podcast app. Until next time. I'm David Sirota. Rock the Boat.