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How private equity firms are widening the income gap in the U.S.

Financial journalist Gretchen Morgenson explains how private equity firms buy out companies, then lay off employees and cut costs in order to expand profits. Her new book is These are the Plunderers.


Other segments from the episode on April 26, 2023

Fresh Air with Terry Gross, April 26, 2023: Interview with Gretchen Morgenson; Remembering Ahmad Jamal.



This is FRESH AIR. I'm Terry Gross. The place where you buy your coffee and doughnut, your child's pre-K learning center, your loved one's nursing home, your dentist or dermatologist's office, the ER and the ambulance that took you there and your pet care provider may be owned or overseen by plunderers. That's what my guest Gretchen Morgenson writes in her new book. The plunderers she's referring to are private equity firms, PEFs, which typically buy companies, then lay off employees and cut costs, services, benefits in order to expand profits. The ultimate goal is to sell off the newly acquired company in a few years, scoring a big profit for the PEF. But it's hard to know whether a company is owned by a private equity firm because PEFs are shrouded in secrecy. Their business model, Morgenson says, widens the income gap by extracting wealth from the many to enrich the few.

She's the senior financial reporter for the NBC News investigations unit. She previously was a New York Times columnist and a senior writer in the investigations unit at the Wall Street Journal. She won a Pulitzer Prize in 2002 for her reporting on Wall Street. Morgenson's new book is called "These Are the Plunderers: How Private Equity Runs - And Wrecks - America." Her co-author, Joshua Rosner, is a financial policy analyst.

Gretchen Morgenson, welcome back to FRESH AIR. It's been a while. It is a pleasure to have you back.


GROSS: So before we get to things like why so much of the health care industry is now owned by private equity firms, let's start with a little more background about how a private equity firm works. How does it make money?

MORGENSON: Private equity firms are what used to be called leveraged buyout funds and firms. You remember these maybe from the '80s and the '90s, but they changed their name. They basically buy companies, load them up with debt, and then they have to meet those debt obligations, and they strip assets. They often lay off employees to do so. They cut costs to try to improve profitability, and then they hope to sell the company to another buyer in, say, five years or so. So it's sort of the idea of capitalism on steroids, as one of my sources told me. It's kind of an amped-up capitalism where the results, where the returns to these firms have to be immediate. And what that means is there are a lot of people on the other side of these transactions that get hurt.

GROSS: You know, so the takeover of these companies by private equity firms is often at the expense of the acquired company's health. And you say the acquired company is loaded up with debt. What does that mean? How does the acquired company get loaded up with debt? They've just been purchased.

MORGENSON: These private equity firms don't use all of their own money to buy the company outright. What they do is they have the company raise debt in the public markets. OK? So they will issue debt to cover the expense of the buyout, and so...

GROSS: In other words, to sell bonds.

MORGENSON: Correct. And so it's not like the private equity firm pays 100% of the transaction to buy the company. What they end up doing is putting down a very small amount, but raising debt on the back of that company to pay for the transaction.

GROSS: So for people who don't understand how bonds work, can you explain a little bit more...


GROSS: ...How the acquired company has bonds issued in its name and why that leads to debt?

MORGENSON: So the company issues debt - bonds, notes, any kind of fixed income - security. Institutions buy that debt. The debt usually carries a pretty hefty interest rate. And so the company who issued the debt - in this case, the taken-over company - now has an enormous debt expense. It now has to pay interest on the bonds that it issued to cover the transaction. So right away, there's an enormous cost associated with these transactions that does not necessarily harm the private equity firm. It goes directly to the bottom line of the company that they have just taken over.

GROSS: Why would a company agree to this?

MORGENSON: Oftentimes, Terry, the executives of the companies get rich when a transaction like this happens. It is often a series of transactions where the directors approve the sale because they're getting a high price for the shareholders. So there are reasons for these transactions that don't involve the workers, the pensioners, the customers. Those stakeholders in these transactions have no voice in them. And so that's where the problems begin.

GROSS: And as you point out, it's really hard to know what companies are owned by PEFs because they're shrouded in secrecy. And, you know, I should mention that the names of some of the biggest PEFs are names that most people aren't familiar with. You want to name some of them?

MORGENSON: Well, of course, we have Apollo Global Management, which was founded by Leon Black. We have the Blackstone Group, founded by Steve Schwarzman. We have the Carlyle Group, which was founded by David Rubenstein. And we have KKR, which is probably the most well known. They were the private equity firm behind the huge RJR Nabisco buyout back in the late 1980s.

GROSS: So what are some of the fields that are the biggest targets of PEFs?

MORGENSON: Private equity firms have savaged the retailing industry in recent years. You may remember the bankruptcy of Toys"R"Us. That was a perfect example. But there are many, many cases. And in this - in these kinds of transactions, what the private equity firms were after was perhaps more about the real estate under the stores than they were about the operations themselves. See, these firms always look for assets that a company owns that they can strip, that they can peel off and sell and generate revenues that way. So retailing was an enormous focus of private equity firms. And in fact, over two decades, ending in 2020, there were 542,000 jobs lost among retail workers because of private equity firms buying them.

GROSS: Health care is huge for private equity firms. How much of the health care sector is now owned by private equity firms?

MORGENSON: This, again, is one of those mysteries that are difficult to solve because we don't have ownership figures, ownership stakes. An estimate of 11% of nursing homes are owned and operated by private equity firms. And that is probably a low number, Terry, because, again, of these shrouded ownership. We have 40% of the nation's emergency departments are operated - run by private equity firms. And by the way, these were the firms that created the surprise billing problems. You go into your emergency department, and you think it's your local hospital. You don't know.

GROSS: Yes. That's what I was going to ask. I always think it's my local hospital.

MORGENSON: And you think your insurance covers it, but it's actually possibly run by KKR or could be run by Blackstone, and it could be a situation where your insurance actually doesn't cover. That's what the surprise billings were all about. A recent study found that 30% of private hospitals in the country are owned by private equity. So you are talking immense numbers. Now, we just don't know how many dermatologists, anesthesiology firms, but they have been taking over doctors' practices and amassing them into, you know, large groups. So the takeover has been stealth, but it has been dramatic.

GROSS: When you choose a doctor, is there any way of knowing whether that doctor's practice has been taken over by a PEF? We've talked about how shrouded in secrecy the private equity funds are. But still, is there any way of finding out?

MORGENSON: Very difficult. Very hard.

GROSS: Can you ask the doctor?

MORGENSON: You can ask the doctor, yes.

GROSS: Would the doctor tell you?

MORGENSON: Yeah, you would hope that the doctor would be honest with you - certainly somebody that you've known and gone to for years, yes. Doctors are well aware of this. It's really making this - these takeovers are really making their lives more difficult because with every private equity takeover of a doctor's practice, the push is more efficiency, more patients, less time with the existing patient, more, you know, likely that the patient's going to be seen by a nurse practitioner rather than the MD. You know, it's - the push for profits is absolutely immense. And so I've spoken to many people who have been in the middle of these situations and they just find it to be intolerable and ultimately leave.

GROSS: So let's focus on nursing homes for a minute, because you said - what? - 10 or 11% of nursing homes...


GROSS: ...Are owned by private equity firms, and that might be underestimating it.


GROSS: So why are nursing homes such a big target? Where is the money in nursing homes?

MORGENSON: Well, we talk in the book about a case in point, which was the Carlyle Group's takeover of ManorCare. And that was an enormous nursing home company. And again, as with retailers, these private equity firms look at the properties, the land on which the nursing home sits, and that is a potential asset that can be sold, can be stripped. So in the case of ManorCare - perfect example of what happened after private equity took over - and drove it into bankruptcy, by the way. After the deal, all of the ManorCare nursing homes were sitting on properties that ManorCare had owned. But after the deal, those properties were sold and now the new owner of the properties billed ManorCare nursing homes for rent.

So suddenly the expenses, the costs of doing business for all of those nursing homes, went up. Now, who received the proceeds from the sale of those assets? The private equity firm. So they cashed out the hard asset, the real estate, the land that had been part of the company. They siphoned that off and made the company, the nursing homes, pay rent, which was part of the problem that drove them into bankruptcy.

GROSS: Are there certain patterns in complaints that you heard both from the caregivers at nursing homes and the patients in nursing homes that were taken over by PEFs?

MORGENSON: What I heard consistently was that costs were always an issue, that hiring was always supposed to be limited. I had one example of a nursing home in California where the ceiling wasn't fixed. It was - there was a hole in the ceiling for, you know, months, if not years, that was never repaired. The heating system was not working properly and was not repaired. It's all about the costs, Terry, because the lower the costs, the higher the profits to the entities that are running these nursing homes.

But yes, I spoke to many patients and loved ones of patients who talked about how they felt that in the nursing homes owned by private equity, their loved ones were just a dollar sign. And the moment that dollar sign was under threat, the care would go downhill. One example was that the nursing home in question had accepted COVID patients as a way to generate revenues. And this was during the height of COVID when we were really unsure about it, and - you know, in 2020. And so it really seemed that the acceptance of these patients was a way to generate income for the nursing home, but it really threatened the existing residents of that home.

GROSS: Well, let's take a break here and then we'll talk some more. If you're just joining us, my guest is Gretchen Morgenson, co-author of the new book "These Are The Plunderers: How Private Equity Runs - And Wrecks - America." We'll be right back after a short break. This is FRESH AIR.


GROSS: This is FRESH AIR. Let's get back to my interview with Gretchen Morgenson, co-author of the new book, "These Are The Plunderers." It's about private equity firms, or PEFs, which buy companies, then lay off employees and cut costs and benefits in order to expand profits. The ultimate goal is to sell off the newly acquired company in a few years, scoring a big profit for the private equity firms.

Not only do private equity firms acquire companies, but there are public pension plans, you know, pension plans for public employees that invest in private equity firms. How are private equity firms affecting public funds and 401(k)s?

MORGENSON: Private equity has been a big investment opportunity for public pension funds for decades, really starting in the '90s. California - the Public Employees Retirement System, CalPERS has been a big investor in private equity. They actually took a stake in Apollo as a company, but they're not the only ones. Public pensions across the country have made enormous investments in this business model, this private equity business model, which really ends up hurting so many people, workers, pensioners, taxpayers. So it's a fascinating case where public pensions, who really have to generate a return for their former employees, are investing in a type of business model that hurts employees.

So right off the bat, that's an interesting, I think, paradox. But these pension funds have invested trillions of dollars with private equity in the hopes of generating the returns that they need so that they can supply the pensioners who are relying on them with their monthly check, OK? So pension funds invest in stocks. They invest in bonds. They invest in real estate. They also invest in private equity.

And for years they were doing that, Terry, because private equity did have better investment returns than some of the other options. So that worked for a while. But since 2006, roughly, private equity returns have reverted back to the stock market's overall returns. Initially, it made sense because private equity was generating higher returns for pensions, but it no longer makes that kind of sense because the returns have dropped to reflect more of what you might get in a Standard & Poor's 500 stock index.

GROSS: So you have public employee money being invested in private equity firms, which are cutting jobs, cutting benefits for other employees.

MORGENSON: That's right. That's right. Now, you also have - private equity firms are really trying hard to get your 401(k) money, OK? They understand that that's an enormous pot of gold for them. And if they can get access to, you know, the vast majority of people's 401(k)s, then they will be very happy because their fees are very high, and they can actually extract from the 401(k) holder the fees. They also had very high fees in the pension funds.

And this was something that was quite troubling to people who did investigations into these pension funds' investments in private equity, that the fees were high. There were actual cases where the SEC brought enforcement actions against private equity firms for, basically, not telling their pension funds the truth about what they were charging the companies that they bought and sold. So there have been real questions raised about the benefits of private equity in public pensions, but they're still very, very deeply involved.

GROSS: Can you talk about how investment in private equity firms backfired for teachers in Ohio?

MORGENSON: Yes. There's a great example of a case in Ohio, and this was the state teachers' retirement called STRS, Ohio STRS. And this was a situation very typical for a public pension where it had invested significantly in private equity. And, you know, a lot of public pensions, Terry, don't have employees who are especially sophisticated as far as financial instruments are concerned. And so this was a situation where the fund ended up - and the teachers who were relying on it - ended up paying enormous amounts to the private equity firms that were, you know, investing on their behalf, even as the pensioners themselves had to take a hit on their cost of living increases.

The Ohio teachers' pension fund stopped giving beneficiaries a cost-of-living increase, called a COLA. And so this became an issue. And there were complaints. The teachers went to the meetings. I mean, it was a kind of an interesting battle that raged between the beneficiaries, i.e., the retired teachers who had spent their life, you know, teaching children and assuming that their - at the end of the line, they would have enough money to live - where they ended up paying private equity firms very generous amounts, even as they took a hit to their benefits.

GROSS: Well, let's take a short break here, and then we'll talk some more. If you're just joining us, my guest is Gretchen Morgenson, a Pulitzer Prize-winning journalist and co-author of the new book "These Are The Plunderers: How Private Equity Runs - And Wrecks - America." She's the senior financial reporter for the NBC News investigations unit. We'll be right back after a short break. I'm Terry Gross, and this is FRESH AIR.


GROSS: This is FRESH AIR. I'm Terry Gross. Let's get back to my interview with Gretchen Morgenson, co-author of the new book "These Are The Plunderers." It's about private equity firms - PEFs - which buy companies, then lay off employees and cut costs in order to expand profits. The ultimate goal is to sell off the newly acquired company in a few years, scoring a big profit for the private equity firms. Morgenson says these PEFs are having an adverse effect on just about every sector of the economy - from health care to pension funds and retail - and it's affecting our lives, as consumers. Morgenson is senior financial reporter for the NBC News investigations unit. She's also been a New York Times financial columnist and a senior writer in the investigations unit at The Wall Street Journal. She won a Pulitzer Prize in 2002 for her reporting on Wall Street.

So let's talk about Donald Trump when he was president and his connection to private equity firms. First of all, he appointed Jay Powell to head the Federal Reserve. What's Jay Powell's connection to PEFs?

MORGENSON: Jay Powell was an executive - a high-ranking executive at the Carlyle Group in Washington for several years. So he definitely has, you know, the mindset of private equity. Donald Trump also had, as a very high-level adviser to him, Steve Schwarzman, who is the co-founder of the Blackstone Group. You would often see Steve at Donald Trump's, you know, right or left hand when they were having meetings about business. So, you know, these firms do have a lot of clout and power in Washington.

And unfortunately, regardless of who's in power - obviously, Donald Trump was certainly more interested in furthering what the private equity firms want to do. For example, he made it easier for private equity firms to be able to get into your 401(k), to be able to be an option. And under Donald Trump, the Department of Labor changed a guideline that it had about private equity. Previously, it had been sort of off limits for 401(k). It was too risky, too costly, too opaque. You know, it's too difficult to know what they're buying. And so it was off limits. You couldn't invest in it in your 401(k). But that was changed when the Department of Labor, under Donald Trump, put out a letter basically sort of opening up the door.

GROSS: So did the Federal Reserve - under Jay Powell, who was a Trump appointee and is still the chair of the Fed, did the Fed create any policies that intentionally or inadvertently benefited private equity funds?

MORGENSON: Absolutely, Terry. There was a really interesting change that the Fed made. They had never done this before. When COVID just struck and everybody was deeply uncertain and stock market was cratering - so this is March 2020 - Apollo went to Washington and had some talking points about how the government needed to make sure that the debt markets - i.e. the bond markets, corporate bonds, where they raise money for their portfolio company purchases, right? - they needed to have those markets continue to operate. And they were in sort of freefall because everybody was concerned and upset, and nobody knew what was - what COVID was and what it was going to do to the markets. And so what the Federal Reserve did in an incredibly unusual, never-before policy change, they decided to offer a backstop to offer to buy corporate bonds to sort of stabilize the very market where the private equity firms operate. That was an enormous change, and it was a big gift to the industry.

GROSS: So do you think the Biden administration has done anything on behalf of consumers and workers when it comes to private equity firms?

MORGENSON: Well, actually, the Federal Trade Commission and the DOJ both have announced that they are going to be giving much more scrutiny to private equity acquisitions. So companies that are bought by private equity, these government entities want to look at them to make sure that they are not anti-competitive, that they're not monopolistic. So that is a change. And that is an excellent change because, as I said earlier, these buyouts have been sort of stealth. Because they're not sort of announced and they're not under the umbrella of a company name that you recognize, you don't really know the degree to which private equity controls an industry, OK? And so finally, the government, in the form of the FTC and the DOJ, is watching for these kinds of, you know, acquisitions, watching these deals to make sure that they are not resulting in a monopoly or anti-competitive activity. That's big, and that's a change for the better.

GROSS: Your book is - in case this isn't already clear - very critical of private equity firms. I mean, just look at the title. "These Are The Plunderers: How Private Equity Runs - And Wrecks - America." So were you able to get any kind of response from the firms that you were writing about so that they could defend themselves?

MORGENSON: Well, for starters, they don't agree. Let's just start there. They disagree that their business model is unsustainable, that their business model harms the vast majority of people it touches and helps the small number of people who are operating these firms. But what was interesting was their response on a particular question. So one of the academic studies that we cite in the book is the number of bankruptcies that private equity-owned companies go through. So that is actually 10 times the number that non-private equity-owned companies file for bankruptcy. So you have a vast number of, you know, greater likelihood that you're going to have a bankruptcy situation with a private equity company. And so, also, they maintain that they create jobs, that they don't slash jobs, that they are job creators and, you know, innovators.

So Blackstone in particular told me that the firm over the past 15 years has created 200,000 new jobs and that its bankruptcy rates are far, far, far lower than those numbers that we just discussed. They were saying a fraction of 1% of their companies go bankrupt. And so I was very intrigued, and I said I would really love to be able to report this. Please provide the data so that I can verify it. They refused. So I'm, you know, at a bit of a loss. I'm not simply going to report that they say that without saying that they did not provide the background information that I needed to be able to verify it.

GROSS: Well, let's take another break here. If you're just joining us, my guest is Gretchen Morgenson, co-author of the new book "These Are The Plunderers: How Private Equity Runs - And Wrecks - America." We'll be right back. This is FRESH AIR.


GROSS: This is FRESH AIR. Let's get back to my interview with Gretchen Morgenson, co-author of the new book, "These Are The Plunderers." It's about private equity firms, PEFs, which buy companies, then lay off employees and cut costs and services in order to expand profits. The ultimate goal is to sell off the newly acquired company in a few years, scoring a big profit for the PEF. You write that private equity firms have bought public companies that have come under pressure to jettison businesses that strip-mine ecosystems or pollute the planet. You can regulate public companies, but private equity firms are harder to regulate. So what's the connection there between private equity firms buying public companies and then being more opaque and more difficult to regulate?

MORGENSON: This is a great example of how this happens in environmental damage done to the planet. So public companies have been pressured and/or have simply wanted to do this themselves, reduce their carbon footprint, reduce the damage of their operations to the planet. They have shuttered or sold pieces of their businesses that have come under sort of scrutiny by Environmental Protection Agency, people who care about the planet. Well, often these operations are bought by private equity firms who don't have the same responsibility to public shareholders that a public company does.

So a private equity firm that owns a sort of fossil fuel company, for example, would not probably feel the same pressure to divest that company from its portfolio than a public company who has shareholders who vote every year on issues related to the company. So again, it's a situation where it's sort of one step removed. The fact that it's private equity owned makes it one step removed from the ability to hold them accountable. And the other thing about the environmental issue is that private equity companies have a short-term horizon, five to seven years. And so if they can eke out the last bit of, you know, profit from a polluting entity, they will do so. So they're not sort of long-term stewards of the company that others might be. And so that has been a source of irritation and scrutiny among people who care about what's happening to the planet.

GROSS: One example you write about shows how when a private equity firm takes over a certain company or a certain sector, that it can influence so many people in so many different ways. And the example I'm thinking of is when a private equity firm bought an aluminum smelting plant in a small town. Tell us about what happened in that instance.

MORGENSON: That was such a sorry situation. The thing about the Miranda (ph) case that is so interesting and telling is that the employees were not the only ones who were hurt. It was a company - aluminum smelter in New Madrid, Mo., which is in the, you know, southeastern part of the state, on the Mississippi River. This was a smelter that was a source of immense pride to the local population. It provided great jobs, good pension. And it was a, you know, solid member of the community.

Apollo stepped in and bought the smelter, immediately levied it up with debt, immediately took out cash from the company. And over a period of years, not many years, but over a period of, say, five years or so, it drove the company into the ground, partly because it was taking money out repeatedly. The company filed for bankruptcy. Because the company was such a big part of the community, it was a big taxpayer in New Madrid. And so you had a situation where the school district couldn't supply books to the students because Noranda didn't pay what it owed to the school district, as far as the taxes.

Then you had a situation where Noranda under Apollo, wanted to try to reduce its electrical rate, the rate of - that the local utility charged for electricity. Obviously, an aluminum smelter is going to use an awful lot of electricity. Well, when the company started on the downward slope, Apollo wanted lower electricity rates. So they had to go through the, you know, utility commission. There was a big battle. People were fighting about it because if Apollo got a lower utility rate, lower electricity rate, it would have to be made up by other ratepayers.

GROSS: Oh, I see. They wanted it just for themselves.

MORGENSON: That's right. They wanted it just for themselves. And it had to be made up by other ratepayers in Missouri. So you had a situation where Apollo wanted a lower rate and other people had to pay the freight. So it was kind of a perfect example of what I call the 360 degrees of pain that can occur when a private equity company comes to town.

GROSS: Has doing all this research into private equity firms changed any of your behavior as a consumer?

MORGENSON: Well, I certainly do look and see who runs the hospital emergency department...

GROSS: (Laughter) Yeah.

MORGENSON: ...In a town that I might be in.

GROSS: How do you look and see? How do you look at it? What are you looking up?

MORGENSON: It's so crazy what you have to do. So they'll hire Envision, which is a KKR company, or they'll hire TeamHealth, which is a Blackstone company. And they'll say to those companies, OK, run my emergency department for me. The only way I can tell - and you're not going to want to air this because it's really boring. But the only way I can tell is by looking at the job listings for Envision and TeamHealth - those are the two big, you know, staffing companies - job listings at a hospital, right? If they have a job listing at that hospital, then I know they run the staffing at that hospital. That's the only way I can find out.

GROSS: And how do you get access to the job listings?

MORGENSON: You go on their website.

GROSS: I see.

MORGENSON: Envision - we're hiring.

GROSS: I see.

MORGENSON: Anyway, it's circuitous. They don't make it easy.

GROSS: No, no. Well, you had a hard job writing this book.


GROSS: And I want to thank you for telling us about what you've learned.

MORGENSON: Well, thank you for having me.

GROSS: Gretchen Morgenson's new book is called "These Are The Plunderers." She's senior financial reporter for the NBC News Investigative Unit. After we take a short break, jazz critic Kevin Whitehead will look back on the career of pianist Ahmad Jamal, who influenced many musicians, including Miles Davis, Herbie Hancock and Keith Jarrett. Jamal died last week at age 92. This is FRESH AIR.

(SOUNDBITE OF THE BAD PLUS' "THE BEAUTIFUL ONES") Transcript provided by NPR, Copyright NPR.

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