Criminalize Private Equity Asset Stripping
Last updated
Last updated
Private equity groups are a staple of late stage vulture capitalism. Vulture capitalism refers to the aggressive and predatory practices often associated with private equity, where firms target struggling or undervalued companies to extract maximum financial gain, often at the expense of the company's long-term health and employees' well-being.
Through leveraged buyouts (LBOs), private equity firms acquire companies by loading them with debt, using the acquired firm's assets as collateral. This strategy frequently leads to cost-cutting, layoffs, asset stripping, and dividend payouts to enrich investors while leaving the company weakened, sometimes to the point of bankruptcy. These practices prioritize short-term profit over sustainable growth, resulting in significant harm to workers, communities, and the broader economy.
Federal prosecutor Brendan Ballou provides the scrutiny that an industry with this much economic and political power should invite in his provocative new book, “Plunder: Private Equity’s Plan To Pillage America.” He reveals how private equity will transform our lives over the next decade in ways as profound as Big Tech did in the last, and not for the better unless we change how it does business.
According to Ballou, modern Private Equity is an industry that has metastasized into a job-killing, business-destroying, community-crushing machine the likes of which we haven’t seen since the money trusts of the nineteenth century. In other words, it’s predatory capitalism on steroids. Most worrisome of all, in Ballou’s view, is the fact that these firms have almost no accountability to the U.S. legal system.
Some liken private equity firms to vultures picking the bones of dying companies, which you could argue is a necessary activity. But Ballou points out that many private equity firms now target healthy companies, leaving them gutted, unproductive, or even bankrupt. Whether it’s Bain, Apollo, or Sun Capital, each firm has its preferred tactics for extracting money from the businesses they buy up, too often hurting the most vulnerable people, like nursing home residents, who can’t fight back. When they buy up rental properties, watch out for evictions. When they target doctors’ offices, expect to pay more for care. They might even be cutting corners at your hospital’s emergency room (the horror stories will make you research your local ER). And they really, really want to get their hands on your 401 (k).
The Heal Earth Institute calls for strict government regulation over private equity and its harmful practices of asset stripping, where private equity firms take over companies and prioritize short-term profits at the expense of long-term sustainability. To address this, a code of criminalization for asset stripping should be established under the framework of fraud. This would entail the following:
Asset stripping occurs when private equity firms buy productive companies, load them with debt, and extract value through dividends, management fees, or asset sales, often leading to the company's decline or bankruptcy. By reclassifying such practices as a form of financial fraud, this approach recognizes that these actions harm employees, creditors, customers, and the broader economy.
The regulation should outline clear criteria for what constitutes illegal asset stripping, including:
Excessive Debt Loading: Criminal penalties for acquiring companies with the intent to finance the purchase through high levels of debt that the acquired company cannot reasonably be expected to service.
Dividends and Management Fees Exceeding Earnings: Penalizing instances where companies are drained of cash through large payouts to owners or management fees that exceed the firm's profitability.
Sale of Essential Assets to Pay Debts: Making it illegal to sell off core assets needed for the ongoing operations and sustainability of the company if it substantially weakens its financial or operational health.
The regulation should establish legal accountability for executives and board members who knowingly engage in or approve asset stripping. Criminal penalties should extend to:
Company Executives and Board Members: Who deliberately participate in or fail to prevent asset stripping practices.
Private Equity Partners: Who initiate or direct asset stripping actions with full knowledge of the detrimental impact on the target company's sustainability.
To ensure enforcement, the regulation could require:
Regular Financial Audits and Transparency: Mandatory disclosure of private equity deals and company finances to regulatory bodies.
Independent Oversight Bodies: Establishment of independent bodies to investigate claims of asset stripping and monitor high-risk sectors where such practices are prevalent.
Whistleblower Protections: Legal safeguards for insiders who expose asset stripping practices.
To complement the criminalization of asset stripping, incentives could be introduced for private equity firms that demonstrate responsible stewardship, such as:
Tax Breaks or Credits for Long-Term Investment: Offering tax incentives for firms that maintain or improve the operational capacity of acquired companies.
Access to Government Contracts: Restricting government business to firms with a track record of sustainable investment practices.
Implementing a strict regulatory framework and criminalizing asset stripping as fraud would protect employees, maintain productive assets, and encourage responsible investment behavior in the private equity industry.
Sen. Edward J. Markey (D-Mass.) released a report detailing what happens when a hospital chain runs out of money: In short, people suffer and die.
The chain in question, Steward Health Care, is headquartered in Dallas but owned more than 30 hospitals throughout the United States and once billed itself as the country’s largest private for-profit hospital chain. Last May, Steward declared bankruptcy, which kicked off congressional hearings and Markey’s investigation. The company announced its intent to sell its hospitals, but finding new owners has not always been easy. That’s triggered massive distress in the communities these hospitals serve.
The problems at Steward began long before the bankruptcy. Over the years, the company has closed some half a dozen hospitals, leaving patients without health care and providers without jobs. As chronicled in Markey’s report, patients at Steward hospitals were left without care at “vastly” higher rates than the national average; death rates for conditions like heart failure at Steward-owned hospitals increased even as they decreased nationwide. Then, there were the bat infestations, the sewage seeping from broken pipes, the lack of essential supplies like linens and IV tubing, and the barrage of lawsuits from vendors over unpaid bills.
Markey’s report notes that at Steward-owned Carney Hospital in Dorchester, Mass., the quality of care fell so steeply that some workers began referring to the hospital as “Carnage” Hospital. A Boston Globe investigation found that Steward’s hospitals have been among the most troubled in the country, receiving a disproportionate share of warnings for dangerous safety lapses from federal authorities.
Part of Steward’s financial distress can be traced to a series of deals it made starting in 2016 to sell all of the real estate once owned by its hospitals to a real estate investment trust called Medical Properties Trust, or MPT. From 2016 to 2022, according to a company report, MPT acquired a net $3.3 billion of real estate underlying 34 Steward facilities. MPT then leased the real estate back to Steward. This forced the hospitals to pay rent on land they’d previously owned. As a result, Steward had an annual rent burden of almost $400 million, according to Rob Simone, an analyst at Hedgeye Research who has followed the MPT and Steward saga for years.
That deal was orchestrated by Cerberus, the private equity firm that formed Steward in 2010. Cerberus made its original investment — in Carney and five other Boston nonprofits — amid widespread investor enthusiasm for the profit gusher many thought would come from patients newly insured by the Affordable Care Act. But the expected gusher didn’t materialize, and the hospitals struggled. Selling the real estate allowed Cerberus to pay one of its funds a $484 million dividend, according to an investor document obtained by Bloomberg, thereby extracting a win from an investment that otherwise would have failed.
Of course, saddling already struggling hospitals with new rent did not help matters. Or, as Markey’s report put it, the hospitals were “gutted”: “These decisions to extract maximum short-term profits caused such financial insecurity for the hospitals that they crumbled.”
Cerberus has argued that both its original investment and this deal enabled Steward to invest money in the hospitals that it otherwise wouldn’t have had. But one contemporaneous account suggests the deal was designed to serve Cerberus’s financial interests, not Steward’s patients. Cerberus had considered selling Steward, a publication called the Deal Pipeline wrote in 2016, but “in light of there being no logical buyout scenario,” the deal with MPT was a “means to give Cerberus some liquidity, lighten its capital burden and recover the original investment it made almost six years ago.”
Cerberus finally extricated itself from Steward in 2021, when MPT loaned Steward’s operating team $335 million to buy out Cerberus. In total, Cerberus has said it made roughly $800 million on its investment in Steward, more than tripling its original investment, even as the hospitals themselves were hemorrhaging cash.
Consider the case of the Carlyle Group and the nursing home chain HCR ManorCare. In 2007, Carlyle — a private equity firm now with $373 billion in assets under management — bought HCR ManorCare for a little over $6 billion, most of which was borrowed money that ManorCare, not Carlyle, would have to pay back. As the new owner, Carlyle sold nearly all of ManorCare’s real estate and quickly recovered its initial investment. This meant, however, that ManorCare was forced to pay nearly half a billion dollars a year in rent to occupy buildings it once owned. Carlyle also extracted over $80 million in transaction and advisory fees from the company it had just bought, draining ManorCare of money.
ManorCare soon instituted various cost-cutting programs and laid off hundreds of workers. Health code violations spiked. People suffered. The daughter of one resident told The Washington Post that “my mom would call us every day crying when she was in there” and that “it was dirty — like a run-down motel. Roaches and ants all over the place.”
In 2018, ManorCare filed for bankruptcy, with over $7 billion in debt. But that was, in a sense, immaterial to Carlyle, which had already recovered the money it invested and made millions more in fees. (In statements to The Washington Post, ManorCare denied that the quality of its care had declined, while Carlyle claimed that changes in how Medicare paid nursing homes, not its own actions, caused the chain’s bankruptcy.)
Carlyle managed to avoid any legal liability for its actions. How it did so explains why this industry often has such poor outcomes for the businesses it buys.
The family of one ManorCare resident, Annie Salley, sued Carlyle after she died in a facility that the family said was understaffed. According to the lawsuit, despite needing assistance walking to the bathroom, Ms. Salley was forced to do so alone, and hit her head on a bathroom fixture. Afterward, nursing home staff reportedly failed to order a head scan or refer her to a doctor, even though she exhibited confusion, vomited and thrashed around. Ms. Salley eventually died from bleeding around her brain.
