The Havoc Left by Private Equity's Pioneers
October 20, 2021
Kingpins like Kravis and Roberts have been hollowing out the hopes of
average working people and the communities they call home, writes Sam
Pizzigati.
Henry Kravis in 2009. (World Economic Forum, Flickr, CC BY-SA 2.0, Wikimedia
Commons)
By Sam Pizzigati
Inequality.org
The billionaire founders of KKR, America's first nationally celebrated
"private equity" giant, have announced they're stepping down as the
company's co-CEOs. Henry Kravis, now 77, and George Roberts, 78, helped
found KKR in 1976. They opened up shop with $120,000 in capital to invest.
Their KKR portfolio currently holds assets valued not all that far from half
a trillion.
Kravis and Roberts also both personally now rank among America's 100
richest, Roberts with a net worth of $9 billion and his cousin Kravis not
far behind with $8.5 billion. In their retirement announcement, they
declared themselves supremely "proud of what we have built" and proclaimed
that "KKR still has so much potential even 45 years later."
Global business commentators, predictably enough, have been gushing over
Kravis and Roberts, extending to the pair all the plaudits the phenomenally
rich consider their natural due. The Financial Times, for instance, has
marveled that Kravis and Roberts began their illustrious career with one
"dazzling insight" and ended it with another. No one has ever, the business
journal added, "understood the concept of 'other people's money' better."
Kravis and Roberts, meanwhile, have of late been trying to show that the
"other people" they care about include those not quite as fortunate as they
happen to be. Last year, the cousins created a special $50-million KKR fund
to support front-line workers struggling their way through the pandemic. And
to help support the fund, the pair pledged a chunk of their own 2020
compensation, a gesture totally appropriate, they explained, in the face of
a pandemic that's "wreaking havoc on every country, every industry, every
household, and virtually every single person."
Kravis and Roberts, to be sure, certainly do know havoc. The private equity
industry they pioneered has been wreaking massive amounts of it for over
four decades now. In one niche of American economic life after another,
private equity kingpins like Kravis and Roberts have been hollowing out the
hopes of average working people and the communities they call home.
About 12 million Americans, some 7 percent of the nation's workforce, are
now laboring for firms that sit in private equity portfolios. That
employment total would be considerably higher, analysts have calculated, had
private equity not burst on America's financial scene. In retail alone, one
2019 study reported, private equity takeovers have cost over 1.3 million
U.S. workers their jobs.
Among the Victims
KKR led a consortium in the buyout of Toys "R" Us. (Waycool27, Wikimedia
Commons)
Among private equity's many retail victims: some 33,000 Toys 'R' Us workers
who lost their jobs when their retail colossus went bankrupt and liquidated
in 2018, just over a dozen years after KKR and two other private-equity
firms had bought up all of the company's outstanding shares. That leveraged
buyout saddled Toys 'R' Us with the massive debt that KKR and its partners
had incurred to make the purchase. The burden of that debt, some $400
million a year, fell squarely on workers. They lost jobs, pay and benefits
to private equity's machinations - as have workers across America's retail
landscape. Of the 14 largest retail bankruptcies since 2012, 10 have come at
retailers that private equity firms swallowed up.
Last year, The Wall Street Journal identified the nation's 38 surviving
retailers with the weakest credit profiles. Private equity firms owned 27 of
them. Between the massive debt private equity has foisted on retailers and
the billions in fees and dividends that private equity has extracted from
them, notes Jim Baker of the watchdog Private Equity Stakeholder Project,
private equity "has made it more difficult" for retailers "to innovate in a
changing industry."
One typical storyline: KKR became retailer Academy Sports' largest
shareholder in 2011, then paid itself $900 million in dividends from Academy
Sports Health over the next four years. A year ago, in April, Academy Sports
furloughed a "substantial number" of its employees. Last month, KKR
announced plans to sell its entire $853-million stake in the company.
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Similar stories abound elsewhere in the U.S. economy. Private equity firms
now own 11 percent of the nation's nursing homes, and this ownership, says
2020 research from three prestigious U.S. business schools, "has coincided
with cost cutting, declining quality of care, and increasing violations
discovered in government inspections."
This past February, another study - out of the National Bureau of Economic
Research - found that private equity nursing home ownership "increases the
short-term mortality" of Medicare patients by 10 percent, a dynamic that
over the 12 years studied led to over 20,000 premature deaths.
Private equity firms, observes The American Prospect's David Dayen, seem to
have a particular affection for collecting some of the nation's "worst
businesses," outfits that range from for-profit colleges and payday lenders
to bail companies and detention camps for children.
Fossil Fuels
The latest unsavory addition to private equity portfolios: the fossil fuel
industry. Private equity funds, The New York Times reports, are "buying up
offshore platforms, building new pipelines, and extending lifelines to coal
power plants."
KKR has become a major player in this space, notes a just-released Private
Equity Stakeholder Project study, and "recently redoubled on fracking."
Private equity firms like KKR have been picking up fossil-fuel assets on the
cheap, exploiting the eagerness of publicly traded oil companies eager to
ditch their dirtier holdings in the face of growing public pressure. Sales
to private equity firms let Big Oil look more environmentally conscious, but
the environment - and the 17.6 million Americans who live within a mile of
an active oil or gas well - get no relief.
KKR headquarters building in Manhattan. (Greaper37, CC BY-SA 4.0, Wikimedia
Commons)
Through all this wheeling and dealing, of course, private equity dealmakers
just continue getting richer. That aggrandizement comes with the territory,
with the "business model" that Henry Kravis and George Roberts have done so
much to perfect. Characters like Kravis and Roberts - they mostly call
themselves "general partners" - have over $7 trillion in assets under
management, mostly raised, notes policy analyst Matt Stoller, from wealthy
people and institutional investors like pension funds. They pay themselves
by the rule of "2 and 20," charging the enterprises they've bought up a 2
percent annual management fee on their assets under management and a 20
percent performance fee on profits above some benchmark level.
This 20 percent fee, in turn, gets treated as a "capital gain" for tax
purposes, and this "carried interest" may now be the U.S. tax code's most
notorious loophole, just one of the many ways government policies and
inadequate oversight have fueled private equity's rise.
"For far too long," as Sen. Elizabeth Warren declared two years ago as she
introduced reform legislation, "Washington has looked the other way while
private equity firms take over companies, load them with debt, strip them of
their wealth, and walk away scot-free - leaving workers, consumers and whole
communities to pick up the pieces."
Warren's proposed Stop Wall Street Looting Act, if enacted, would stop
"private equity firms from stripping cash, real estate and other assets from
the companies they take over," one appraisal notes, and, most importantly,
"hold private equity firms responsible for the large debts that they use to
buy companies."
But even the provisions of Warren's legislation, the Center for Economic and
Policy Research's Eileen Appelbaum has told Congress, won't be enough to
fully prevent private equity's pillaging of Main Street. She's called for
other legislation to halt "particular financial abuses" like the organizing
of so-called "wolf packs" to secretly accumulate shares in publicly traded
companies.
But even these additional moves might not be enough to tame the animal
spirits the Kravis-and-Roberts crew has been visiting upon us. Private
equity, argues analyst Matt Stoller, amounts to "a highly ideological social
movement that comes out of the modest conglomerate craze of the 1960s" and
the junk bond mania that followed soon after. The essential lesson private
equity's pioneers gained from these episodes: Go for it. Get everything you
can grab.
This new attitude began emerging, not so coincidentally, when the federal
income tax rate on America's highest incomes began sliding in 1964. The year
before, the nation's richest faced a 91 percent tax on income over $400,000.
By the middle of the Reagan years that top rate had dropped down to 28
percent, only rising marginally in all the years since.
In this new, low-tax environment, America's rich could keep the lion's share
of whatever income streams they could get their hands on. They now had a
powerful personal incentive, in other words, to seek out new sources of
income and exploit them to the fullest. And exploit they did, employing
their new wealth politically to stack the deck in their favor. They soon won
the massive deregulation of the rules put in place to stop the nation's
original Robber Barons. They neutered the labor movement and white collar
criminal enforcement. They birthed private equity.
Americans have a received, in effect, a half-century-long lesson in what
happens when you let the rich get ever richer. Our New Deal forbears had a
better idea: discourage the accumulation of grand personal fortunes. In
1942, Franklin Roosevelt even proposed what amounted to a "maximum wage," a
100 percent tax on income over $25,000, about $400,000 in today's dollars.
That 100-percent top rate didn't become law, but the nation's top tax rate
would hit 94 percent in 1944 before leveling off at 91 percent for most of
the next two decades.
Those decades would see the emergence of the first mass middle class society
in world history. The U.S. has been going backwards from that middle-class
society ever since, leaving Henry Kravis and George Roberts, in the process,
with plenty to smile about.
Sam Pizzigati co-edits Inequality.org. His latest books include The Case for
a Maximum Wage and The Rich Don't Always Win: The Forgotten Triumph over
Plutocracy that Created the American Middle Class, 1900-1970. Follow him at
@Too_Much_Online.
This article is from Inequality.org.