Reverse Robin Hood: Private equity steals from ordinary people and gives to the rich

  • 07/28/2021 12:33 pm ET • Stacy Whittle
Cartoon drawing of a "fat cat" holding two money bags

AFR

It’s not business, it’s looting.

With about $2 trillion available to spend, private equity firms have the financial firepower to buy companies in all sectors, everywhere, from manufacturing to health care to housing to sports and entertainment. The lack of regulation and liability in this sector is enabling predatory practices that harm workers and consumers.

You might work for a company owned by a private equity firm. If not, you likely have friends or family who do. The 35,000 companies owned by private equity employ nearly 5.8 million workers in the United States.

Private equity acquisitions in 2021 are accelerating as the U.S. economy emerges from the pandemic-induced recession. The decisions made by private equity executives, some of the richest people in the world, will increasingly determine how we all live, work, and play. And we’re not going to like the results.

Indifference is the name of the game

Private equity investors often prove indifferent to the welfare of employees and to their communities. In fact the list of abuses by private equity grows daily. It has destroyed retail jobs that Black and Brown workers and their families rely on most, contributed to the affordable housing crisis, harmed national security, shortened life expectancies in nursing homes, exploited families of incarcerated people, increased health care costs, and hollowed out local newspapers.

Consider Hufcor, a manufacturer of collapsible partitions and glass walls, founded in Janesville, Wisconsin in 1900. Hufcor is the world leader in its industry and was profitable when, in its 117th year, it was purchased by Los Angeles, California-based private equity firm OpenGate Capital. Despite Hufcor’s success and legacy, OpenGate decided this spring to shutter its Janesville factory and to fire 116 employees in search of cheaper labor and conditions in Mexico.

This follows a pattern of job cuts at OpenGate owned companies, including 678 firings at the Pennysaver classified ad business, 100 jobs cut at the Golden Guernsey Dairy, 140 layoffs at Fusion Paperboard and 200 dismissals at Hamilton Scientific. But there has been no such suffering at OpenGate.

OpenGate’s owners and investors have been rewarded with over $5 billion in revenues from 44 acquisitions during its first decade of operations.

A destructive playbook?

Hand holding out to catch money

Pixabay

Too often, private equity investors follow a playbook that can destroy companies and communities. They buy a company and borrow heavily against its assets. Though they often tout plans to fund operational and technological improvements that make the company more viable for the long term, the reality is that they often leave weakened, indebted companies behind.

It’s similar to the way a homeowner might borrow from the bank to improve their kitchen in the hopes of raising their home’s value. But that owner lives in their own home and often plans to stay for a while; private equity executives are distant owners of companies they buy, and they typically sell off acquisitions in 3-5 years, if they don’t go bankrupt. And there are other problems:

Imagine if that homeowner simply took the money from the loan and started spending on cushy vacations or a new car. That’s what private equity does; it pays itself out of a company’s debt.

Also, when a homeowner takes out a loan, they owe the money. The private equity firms direct their companies to borrow, and it leads to bankruptcy, the private equity firm is not liable. It’s like a home improvement loan in somebody else’s name.

It’s not business, it’s looting

Watch this video from Americans for Financial Reform to appreciate the human toll of private equity greed: jobs lost, local newspapers gutted, and services cut from vulnerable nursing home residents are just a few of the horrors that emerge when profits take priority over people.

You’ll meet Francine Townsend, at risk of being driven from her mobile home after private equity bought the land from underneath her and her neighbors. You’ll also meet Shirley Smith, who adored working for Michigan’s Art Van Furniture until the company was gutted by TH Lee partners, a private equity firm run by Boston billionaire Thomas H. Lee. There are many other heartbreaking stories that flow from private equity’s abuses.

 

Private equity used to be known as the “leveraged buyout” industry in the 1980s, a moniker that highlighted its debt-driven business model. It still raises money from pensions, endowments, and wealthy individuals and uses the cash and debt to buy up companies.

But rebranding hasn’t changed the nature of how it operates. It’s a short-term mindset, focused on extracting wealth for the benefit of Wall Street – no matter the human cost for workers and communities.

 

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