It is everywhere.
They own businesses that you have no idea they own.
There is this kind of narrative that the private equity firms are corporate raider.
What is private?
What are you talking about? Industry creates jobs.
Ours, the economy and strengthens the retirements of millions of Americans.
We're talking about a big circle of pain that enriches
a very small, elite group of people.
Money talks in Washington, and they spend a lot of it.
I just said someone asked to expose it.
It's just not true.
Hello.
Any time you spend money, there's a decent chance that private equity is involved.
For example,
just the other day I was eating a Cinnabon inside of a David's bridal while playing
a guitar center ukulele in a little ritual I like to call Wednesday.
I had absolutely no idea I was actually funding three different
private equity firms.
Though private equity is one of the most
powerful industries in America, it tends to operate behind the scenes.
But unfortunately for them, the Good Work investigative news team specializes in
bringing things that are behind the scenes out into the front of the scene.
So let's do the news.
Just seconds ago, I was matrix dodging bullets outside of here,
the offices of Blackstone one of the biggest alternative asset
managers in the world, and a place with a Bond villain ass name, I suppose.
Dr. Danger's Thunder, Doom and Luigi's Haunted
Mansion were already taken within the bowels of Blackstone and peer
firms like KKR, Apollo Global Management, the Carlyle Group and Bain Capital.
You will find funds whose specialty is investing in private equity,
an industry that manages a lot of cash.
But we're not really sure how.
Private equity firms are everywhere.
So what is a private equity fund? Private equity.
Private equity is one of the most lucrative
and interesting careers in finance.
Understanding private equity begins with understanding public equity, According
to Good Work's forthcoming bestseller How to Win Money and Influence Pores.
Anybody can invest in public equity in the form of stocks,
but private companies are different.
Average Joes like you and me can't just go and invest in them.
These companies need to raise
capital from other places, and that's where private funds come in.
The big types of private funds are venture capital, hedge funds and private
equity VCs.
You may remember Gamble Capital on high risk, high reward startups, hedge funds,
pool partner money together to be invested by a professional fund manager.
They focus on generating returns fast, and though investing pretty
much anything to make that happen, but usually not directly in private companies.
Private equity
firms, meanwhile, invest directly in entities that aren't publicly traded.
They acquire stakes in things or buy them outright,
then try to sell their positions at a profit over a little bit
longer of a time horizon, usually five or seven years.
And lately they've been stuffing their privates with a whole lot of equity.
It is everywhere.
They own businesses that you have no idea they own.
Gretchen Morgenson is an NBC reporter and author of the book.
These Are The Plunderers How Private Equity Runs and Wrecks America.
There are thousands of private equity firms, and I really want everyone to know
that the ones I'm talking about are the really big, very well-known
private equity firms Blackstone, Apollo, Carlyle, KKR,
that use heavy debt, the largest private equity firms in the world own
or have an ownership
stake in an array of stuff that you couldn't even imagine, including
Subway, Barnes and Noble, one third of Europe's soccer teams, a Formula
One team California Pizza Kitchen, Hooters, Adweek, Neiman Marcus,
FanDuel, Highways, an Indian music of Taylor Swift Hospital Emergency
rooms, tax on gastroenterology clinics, and even oatly
that would make the sickest mall ever.
Together, private funds now have over $25 trillion
in assets under management, a big chunk of which is private equity.
And just this year, Blackstone became the first private equity manager of over
$1 trillion in amount of money that Scrooge McDuck once called orgasmic.
But as private equity has grown, its operations have become
even more controversial.
And just like when me and Miranda broke up, everyone is choosing sides.
Or industry creates
jobs, powers the economy, and strengthens the retirements of millions of Americans.
They're really responsible for some of the worst
and most abusive business practices in the country.
Well, I've been friends with Emily for years,
but I can't really sort of grow on me recently.
We're talking about a big circle of pain
that enriches a very small, elite group of people.
It's kind of capitalism on steroids.
That was actually my nickname in college.
But it's strange for something so big and controversial to be so back of mine
for Americans.
It's like mass shootings or the bisexuality of Abraham Lincoln.
What?
Honest Abe did get the sloppiest topy in the history of theater
while sitting next to his wife, who has conveniently named both Mary and Todd.
You're trying to tell me our 16th president didn't four score both ways.
Anyway, how
do these private equity companies actually go about acquiring a business?
I put the question to Jeff Hook, a business professor at Johns Hopkins
University and author of the book The Myth of Private Equity.
It's just house flipping on a much greater scale, except
the companies are operating businesses, not real estate.
So instead of something big and scary like Apollo Global Management,
imagine your PE firm is called Chip and Joanna Gaines,
and instead of acquiring a business or another entity that you think could
grow, you're just looking to buy a shitty house in a nice neighborhood.
In slightly fancier financial terms.
This is called a leveraged buyout, and it's the type of acquisition
that the private equity industry has made famous.
It basically means buying something with borrowed cash
that you will need to pay back with interest.
But we're going to fail to borrow enough money to buy
Subway.
Private equity firms.
Oxygen comes from public pension
funds, endowments and other huge institutional investors.
The sugar daddies of private equity, insanely wealthy families,
insanely wealthy college endowments,
and the retirement funds of middle class firefighters.
But what the hell?
CalPERS, the largest pension plan in the United States, had $457
billion, has a $55 billion private equity portfolio,
which is normal practice pension funds, which poor public sector
employees retirement funds to more effectively grow in
have long invested in private markets to meet their high return goals.
But once the firms get that institutional investor bag,
what do they do with the companies they acquire?
Supporters say that they bail out financially underperforming companies
and turn them around with capital and operational support.
We're in a business together for a long term, but if you walk down
any main street in America today, you will see private equity all around,
whether you're taking an Uber to work or you're grabbing lunch at Panera Bread.
All of these businesses were supported by private equity.
That was Drew Moloney, president and CEO of the American Investment
Council, one of private equity's main lobbying groups in the United States.
We were this close to getting a meeting
with both him and the AIC, but at the last minute they were busy.
We assume they actually just watched our YouTube channel,
or maybe they were working on their own YouTube
channel, which includes sick clips like this.
But critics of the industry contend that private equity
and their leveraged buyouts saddle companies with debt
that they have to pay back over too short of a time frame, the heavy debt
that is required to make the acquisition and the short time frame
that they want the company to be able to be more profitable
and therefore be flipped put to pressure points on the company.
For example, Toys
R US, which was purchased by a group of PE firms and overwhelmed with debt, so much
so that it declared bankruptcy in 2017 and since has not recovered.
Noranda Aluminum,
the largest power plant in New Madrid, Missouri, who went into bankruptcy
and was forced to close plants after being acquired by Apollo.
But private equity firms don't just buy companies where there is the big money.
That's where they're going to go.
Why Health care?
17% of GDP.
It's $1,000,000,000,000 industry.
Well, Flannery is an ophthalmologist based in Oregon.
He's also a comedian whose videos shine
a light on the growing trend of PE firms buying out medical practices.
He also has more followers than us.
But whatever, there's middle man all over the place.
Health insurance companies, we have pharmacy benefit managers,
all of these people.
They're extracting billions and billions of dollars from the health care system.
So there's money there.
So of course, it's going to attract
anybody who wants to get money, including private equity.
By 2018, Blackstone and KKR controlled one third of the nation's
hospital emergency rooms.
And while some have argued that a firm's ownership of practices lets doctors
focus on patient care rather than running the actual business.
So I said to the doctor, I said, Why?
Why would you partner with private equity?
And the doctor said, Well, the best thing is
I like to practice medicine when I have a partner with private equity.
They worry about the back office, they worry about the I.T.
and I don't have to worry about that.
I can see patients.
Others point to surprise billings, higher costs, layoffs and overprescribing
patients as examples of what happens when a hospital is owned
by a profit seeking corporate baddie rather than a medical professional.
Private practices
historically there like run by physician deep down all physicians.
They got into medicine to tell people to practice medicine.
Now, though, you're selling to this private equity firm
that has no motivation to maintain or improve patient care.
They want to do what's going to improve the bottom line.
Which is a sentiment Gretchen echoed about nursing homes.
Nursing homes that are owned by private equity companies
have the residents encounter 10% higher mortality rates.
Now, why is that?
Well, because they cut staff, because they're trying to make
the thing more profitable to sell outside of health care.
You can find lots of examples of private equity
getting all up in things that are commonly thought of as public services,
like when water bills rose 28% in Bayonne, New Jersey, following KKR, its
acquisition of the town's water system.
Or when pandemic relief
money found its way to PE firms, despite being intended for small business support.
Or the state of California had to evacuate dozens of boys from an abusive Michigan
rehab facility for troubled youth that was owned by a Bay Area private equity firm.
the thing more profitable to sell outside of health care.
But if we look at all of these troubling examples of private equity, massive growth
and entanglement into public services, one thing remains clear.
These guys fucking rock at making money.
2012 Private funds as a whole, a lot of which
is private equity in the net, $9.8 trillion.
Now, ten years later, it's $27 trillion.
So the private funds industry, which again includes hedge funds and DC,
is now bigger than the commercial banking sector, according to Gensler.
Indeed, private equity
has had an even more meteoric career rise than euphoria hottie Jacob Elordi.
But what, besides Ivy League grads burning desire to own a helipad yacht
has contributed to this industry's startling growth.
Low interest rates, zero cost of money.
Big reason.
Huge easy money means you can borrow at low rates.
This gave private equity a cheap source of debt, which is like new
could juice for leveraged buyouts, combined with the fact
that private markets haven't historically been very regulated by the FCC.
The industry has been able to expand pretty much unchecked.
So you've got this really big part of the economy that is
more or less operating in the shadows because there's not really
systematic there hasn't been systematic disclosure on it.
So why does the government ignore these asset managers?
It's not like they're some annoying ass
public school teacher asking for money to buy a protractor that works.
The SCC or the government's first response would be, okay, we supervise
the public markets where we have to protect widows and orphans.
They don't know what they're doing. So we got to protect them.
There's also lobbying.
Private equity spends more time in Washington, D.C.
than the worst kid you went to college with.
For example, the industry spent $70 million on lobbying in the run
up to the 2020 presidential election,
while they donated $262 million directly to political campaigns.
And it turns out that private
equity in Washington have a few mutual LinkedIn connections as well.
Lawyers that work at the FCC, they don't want to work at the FCC.
They want to work on Wall Street, make triple what they're making now.
How are you going to get a job on Wall Street if you're a pain in the ass
that you prosecute PR firms?
You know, that's not the way you get a job on Wall Street.
Looks like the revolving door between Washington and private equity.
His gun, too, needs some maintenance
because it revolves a lot.
Jerome Powell,
the current chief of the Federal Reserve, was a partner at the Carlyle Group,
and three months after finishing his stint as Donald Trump's S.E.C.
chair, Jay Clayton became Apollo's first ever lead independent director
of its board of directors.
And those are just the head honchos.
Private equity's money and political influence is so immense
that it's been difficult for regulators to square up with.
The government is reluctant to bring a case against the big name like
Blackstone or Carlyle private Equity, because they think they can't win a case.
They just don't think they got the horsepower
to go up against these gigantic blue chip Wall Street law firms.
So you're saying that the S.E.C.
feels less powerful than some private equity firms?
Right.
And as you might imagine, this unchecked growth in private equity has also somehow
correlated with the unchecked growth of P executives bank accounts.
In 2005, there were three multi-billionaires among the executive
class.
In 2020 it was 20 to 22 multibillionaires.
Just think of how s their group chat is.
You can chalk all this up to the way the industry pays itself.
Regardless of how investments
perform, a private equity firm will charge a management fee of about 2% each year.
So a fund with $2 billion in management will baseline make $40 million annually.
But the real claims come from the second thing called the performance fee.
Unlike the management fee, the performance fee is 20% of a firm's annual profits
and it's taxes, capital gains, which means it's taxed as an investment
you've held for over a year instead of income for your services.
This performance fee is more famously known as carried interest,
and it's one of the biggest tools PE executives use to maximize their earnings.
In fact, this carried interest tax rate is so important to the private equity
industry that this spike in lobbying spending in DC
happened the same year that Congress first started having hearings about it.
Income tax, if you're really wealthy, might be might be 35 or 40%
plus state tax and the capital gains tax would be half of that.
So there's a big, what you call benefit from having a capital gain
as opposed to income before an industry that generates such an exceptional amount
of wealth for its practitioners.
Surely they must get a great deal for their investors as well, right?
The answer isn't as obvious a yes as you might think.
In July, the Wall Street
Journal reported that for the first time since the 2008 financial crisis,
benchmark, private equity returns turned negative for the reported fiscal year.
But since the government can't regulate private equity very effectively,
it's pretty difficult to figure out what the industry's finances
actually look like even if you are an investor in the fund.
In terms of regulation, I'll contrast this with like mutual funds.
You go to Vanguard's website and you look at one of their mutual funds,
you'll see a semiannual report that's got maybe 28 pages and it's
got their expenses, and that's like required by regulation.
What is currently required by regulation is basically no disclosure
by funds, by private equity funds to their investors.
The investment process would all be hush hush.
And for the private equity industry, you know, that's good.
They can keep a lot of their fees hidden and their returns,
which are mediocre at best secret.
And while there are studies claiming
that private equity as a whole offers better returns than the stock market,
there's reason to be skeptical about their numbers.
We have seen a number of proposals from private equity funds
where the returns are really not calculated in a in a manner that,
well,
they're not calculated in a manner that I would regard as honest
or all are doing is lying a little bit to make the money coming in.
Yeah. Yeah, that sums it up.
Those gobbling muppets raise a good point.
One of the reasons why the returns can be tough to trust is that they're often
calculated by people who are hired by the firms themselves for the most part.
There's no outside party going in and doing a smell test.
To some extent, the auditors might do it like PricewaterhouseCoopers deliver.
The problem with them is they're getting paid by the p e fund itself.
Okay.
I'm receiving breaking news against all odds,
the Southeastern Football Conference has announced
the most significant regulations to private.
I am sorry.
The Security and Exchange Commission has announced
the most significant regulations to the private equity industry in years.
It makes much more sense down by the SEC imposing changes on hedge funds
and private equity firms on fee disclosures.
The move is meant to curb preferential treatment of certain investors.
There's the disclosure on a quarterly basis of of performance
in a way that right now is not required per se.
There is a element that prevents special deals.
So so everything's fixed, right?
So it's about 15 or 20 years too late.
Now the train's left the station.
A plutocracy has become too powerful.
They'll be able to ride roughshod over these
if they don't even try to get them thrown out in a court case.
Well, the new rules have to mean something, right?
Like, how fast could they sue them anyway?
So they're really three reasons why we're suing the FCC to sue today, man.
That's Brian Corbett, CEO of the Managed Funds Association,
one of the many groups that lobby for hedge funds and private equity
firms and are currently suing the SEC for its recent regulation.
We think the FCC in this final role has exceeded its statutory authority.
So as we stand today, private equity is mobilizing their cinematic universe of
lawyers while the FCC tries to rein them in for the first time in many years.
So what does this mean for the future, not just for private equity,
but for us everyday people whose lives have been in one way or another
tied to this industry?
If I was a union employee looking forward
to retirement and let's say I can pose a few questions
to my union representatives on the board of trustees of these gigantic funds,
I asked my representative, Hey, look, I've been taken a closer look at this.
I think it's a moment
to really sit down and say, okay, what kind of capitalism do we want?
Do we want the kind that really benefits the a broad array of people?
Or do you want to have a system that benefits a tiny, tiny fraction
of people at the expense of a lot of a lot a lot of people?
What type of capitalism do we really want?
Do we even know the type of capitalism we already have?
If investigating private equity teaches us anything, it's that powerful profit
seeking forces are indeed all around us in every part of our lives in places
we wouldn't even think to look.
Wait a minute.
This YouTube channel is owned by morning.
Morning Brew was bought by Business Insider in 2020.
Business Insider is owned by Axel Springer, who is 43.54% owned
by private equity mega fund KKR,
which means for good work.
I'm 43.54% private equity.
And lately they've been stuffing their privates with a whole lot of equity.
And lately,
these guys have been stuffing their privates with a whole lot of equity.
And lately they've been stuffing their privates with a whole lot of equity.
And lately these guys,
they've been stuffing their privates with a whole lot of equity.
And lately they've been stuffing their privates with a whole lot of equity.
And lately these guys,
they've been stuffing their privates with a whole lot of equity.