- 5 months ago
Reporter and host Elizabeth McCauley explain tactics used by private equity investors to make money on leveraged buyouts, even if the companies they buy fail. Recent private equity investments in healthcare have stirred controversy, especially a string of hospitals that closed after being bought and sold by PE firms.
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00:00When most people hear about private equity, it's usually in the context of a famous business that's in trouble.
00:06Private equity, often seen as the enemy of business, loading on a bunch of debt and slashing the workforce.
00:12No more fun and games for Toys R Us.
00:13Red Lobster has officially filed for Chapter 11 bankruptcy.
00:17But I really got interested in private equity when a chain of hospitals went bankrupt,
00:21a few years after it was bought and sold by P.E. investors.
00:24In less than 24 hours, two hospitals will close their doors here in Massachusetts.
00:30And then basically the same thing happened in Pennsylvania.
00:33Crozier Health is set to close in just a matter of days now.
00:36In both cases, hospitals went bankrupt after private equity firms sold off their real estate,
00:41which left the hospitals paying rent to keep using facilities that they used to own.
00:45I wanted to know how this keeps happening.
00:48Studies like this one find P.E. ownership of hospitals leads to higher costs and worse care.
00:54Whenever things go wrong with private equity, the industry points to its economic benefits.
00:58These investments don't just benefit ultra-wealthy people.
01:02They help workers with pensions, including firefighters, teachers, and nurses.
01:06For decades, the P.E. industry has marketed its funds as the highest performing investments money can buy.
01:12And they use graphs like this to show that P.E. investments have performed way better than stocks.
01:17But experts I spoke with said that's not the full story.
01:20The whole chart is pretty much phony.
01:21Private equity is living on its past, past, past reputation.
01:28Yes, there was a time when they beat the market, but many of them are not doing that anymore.
01:33I spent months diving into the research to find out what's actually going on in this secretive industry.
01:41Private equity firms do a few different things these days, but this story is focused on buyouts.
01:45These buyouts are often compared to flipping houses, but instead of houses, it's businesses.
01:50They buy a company and try to increase its value as much as possible during a period of about three to seven years.
01:56Then they sell it, hopefully at a profit.
01:59Although, as we'll see, it doesn't always work out like that.
02:02But there's a key difference between a P.E. buyout and sprucing up a house.
02:06If I buy a house, I'll take out a loan from a bank to do it.
02:08And then I'll pay that loan back to the bank plus interest.
02:11When a P.E. firm buys a company, they'll often use loans to do it.
02:15But those loans are in the name of the purchased company, and it's the one responsible for paying back the debt.
02:22So the company gets bought, but it now has a hefty debt to pay off.
02:27This is called a leveraged buyout.
02:29In the P.E. biz, debt is called leverage.
02:32That's what happened to Toys R Us when a private investment group bought it in 2005.
02:36After the deal, the toy company was billions of dollars in debt and paying about $400 million a year toward it.
02:43That meant it couldn't weather the storm when competition from Amazon and Walmart started to eat into sales.
02:49The company filed for bankruptcy in 2017 and began closing down hundreds of stores, eliminating thousands of jobs.
02:56In a court filing, the CEO blamed the company's huge debt payments.
03:00But for private equity firms, when a business they buy fails, it's just one of many in the portfolio.
03:05Each private equity firm manages multiple funds, and each one has roughly 10 to 20 companies in it.
03:12The firms put a little bit of their own money into a fund, but almost all of it comes from institutional investors.
03:18Those are typically university endowments, state-owned investment funds, ultra-wealthy families, and, interestingly, the pension funds of many middle-class workers.
03:27In the U.S., thousands of firms manage more than $3 trillion.
03:31That's bigger than the entire GDP of Italy.
03:34P.E. firms make money by growing those investments, and by collecting various types of fees for their services,
03:40both from the investors who put their money in the pot, and from the portfolio companies that they buy with that money.
03:46Those fees tend to be higher than what you'd pay a company like Vanguard to put your money in stocks and bonds.
03:52The average fee on a Vanguard mutual fund, or ETF, is less than 0.1%.
03:56Meanwhile, investors in private equity funds pay both management fees and a share of profits, which work out to somewhere around 7 to 14%.
04:06So to recap, P.E. firms purchase companies using a mixture of debt, which they're not liable for, and equity, which is mainly other people's money.
04:15Then they collect fees from both the people who gave them the money to invest, and the companies they bought with it.
04:20Pretty sweet deal, right?
04:22One study looked at four of the biggest P.E. firms in the U.S., and found that over a seven-year period, they made at least $16 billion in fees.
04:31Almost as much as the $20 billion they made off their investments.
04:34Private equity funds also have ways of making money from the businesses they own, even if they aren't doing all that well.
04:43These include taking out a loan, which is then used to make a payment to the investors.
04:48This is called dividend recapitalization.
04:51It's controversial because it adds even more debt onto the purchase company, and pretty much just exists to make more money for private equity investors.
04:59In 2019, the P.E. firm that owned Staples, Sycamore Partners, paid itself an eye-popping $1 billion, using a dividend recapitalization that left the office supply company further in debt.
05:11Bloomberg reported that this let Sycamore recoup more than 80% of its original investment without selling the company, even as Staples was in financial trouble and laying off workers.
05:21Another maneuver is called a sale-leaseback.
05:24That's when the purchased company's real estate is sold off, and the company has to lease it back to keep using it.
05:30The P.E. firm can use the cash from the sale to reinvest in the company and improve its operations.
05:35Or it can just pay itself more.
05:38That's what happened to Red Lobster when Golden Gate Capital bought it in 2014.
05:42The P.E. firm made $1.5 billion, selling off about 500 of the chain's properties.
05:47Red Lobster then had to pay rent for those restaurants it used to own while juggling other debt.
05:52Golden Gate sold off its investment in Red Lobster in 2020, and the restaurant chain filed for Chapter 11 bankruptcy in 2024.
06:00But between selling off the real estate and its shares of Red Lobster, the private equity firm made back its initial investment and then some.
06:08One thing a lot of coverage glosses over.
06:10It's easy to think of these strategies as sneaky and exploitative, and they certainly can be.
06:15But remember, they are generally legal.
06:17Sometimes companies just make enough money to withstand a dividend recap.
06:20Ultimately, when a P.E. firm takes investor money, it has a legal obligation to act in the best interest of those investors.
06:28And that has been private equity's big selling point.
06:30University endowments and pension funds keep giving money to P.E. firms because they believe it'll get them the best possible investment returns.
06:38Even if getting those returns might involve some cutthroat business tactics.
06:42Some studies find companies are more likely to fail after they're bought by P.E.
06:46One found bankruptcy risk is 18% higher after a leveraged buyout.
06:51There's typically more than one reason a company goes under.
06:54But famous brands like TGI Fridays, Party City, Payless Shoe Source, Joanne Fabrics, all went bankrupt after being bought by P.E.
07:01When confronted about this, the P.E. industry will generally say if we have a higher bankruptcy rate, it's because we invest in risky businesses on the brink of failure.
07:10But they don't only invest in businesses on the brink of failure.
07:14Hard data on this is scarce, but some sources say as little as 1% of P.E. acquisitions are actually of businesses in distress.
07:22Meaning not making enough to pay their debts.
07:24So what explains the higher bankruptcy risk?
07:28One study found it might not be P.E. ownership itself, but the debt that tends to come with it that raises bankruptcy risk.
07:35If it were just chain restaurants and stores, that would be one thing.
07:38But P.E. is a massive force in other industries, too, including health care.
07:46Let's start with nursing homes.
07:48It's a tough business with slim margins, but P.E. has been investing heavily in it for decades.
07:53Long enough that we had lots of studies about how that affects these facilities.
07:57One study of Medicare patients found that P.E. ownership was associated with an 11% increase in mortality in nursing homes,
08:04which translates to more than 1,000 additional deaths every year.
08:08We find that they cut back on staff.
08:10Specifically on nurses, nurses are the most important input fuel into nursing care.
08:15You would think that would save money, but the same study found Medicare spends more per patient at these facilities.
08:21Another study found P.E. acquisition of a nursing home is linked to higher costs, more emergency department visits, and increased hospitalizations.
08:30That study is interesting because it only looked at for-profit nursing homes, comparing apples to apples,
08:35and found that those acquired by P.E. still performed worse than for-profit nursing homes not owned by P.E.
08:41I asked one of the authors about this.
08:43I think this may be largely due to the focus on short-term profits.
08:48P.E. firms tend to hold companies for less than 10 years, while the owner of a for-profit facility not owned by P.E. usually takes a longer view.
08:56They may be thinking more long-term and making investments to sustain the facility over time,
09:00while taking the impact of care quality and their reputation down the road into consideration.
09:05One complication. Many of these homes turn to private equity because the business is in trouble.
09:11With the baby boomer generation aging into these healthcare settings, they're battling increasing hiring and retention costs,
09:18and they're struggling amidst an increasingly tighter reimbursement environment.
09:23It's possible that without private equity investment, some nursing homes would simply shut down,
09:28and then there might not be a home to serve that region anymore.
09:30If you don't want private equity investment or other institutional forms of investment in there,
09:35and you don't want them selling off their facilities, you need to increase reimbursement.
09:41Nursing homes are somewhat unique in U.S. healthcare.
09:4370% of them are for-profit, and a majority of their revenue comes from taxpayer-funded programs like Medicaid and Medicare.
09:51That makes them attractive to private equity firms, plus they tend to own some pretty nice real estate.
09:55By contrast, only about a third of hospitals are for-profit, but just like nursing homes, they often sit on valuable property.
10:04So let's talk about P.E. and hospitals.
10:07Recently, an acquisition of several Massachusetts hospitals became the poster child for concerns about private equity and healthcare.
10:14Cerberus Capital Management bought 11 hospitals in the state from 2010 to 2013, and rebranded them all as Steward Healthcare.
10:22While Cerberus owned Steward, the management teams arranged a sale leaseback of the hospital's real estate,
10:28making more than $1 billion, selling the properties to a real estate investment trust.
10:33As part of that deal, Cerberus paid itself a hefty dividend.
10:37Bloomberg reported the amount as $484 million.
10:40The company bought more facilities in other states,
10:43eventually accumulating a chain of more than 30 for-profit hospitals, many of which were previously non-profits.
10:48It sold off its investment 10 years later, which is a relatively long time by private equity standards.
10:54But by then, many of the hospitals were in financial trouble,
10:57and there have been news reports of them being understaffed and not paying their bills.
11:01Nurses who worked at Steward-owned hospitals testified about this at a Senate hearing.
11:05This chronic understaffing has resulted in preventable harm and even death.
11:11The chain is now in Chapter 11 bankruptcy, and six of its hospitals have closed their doors.
11:15Obviously, each time that happens, people in the area lose care or have to travel farther for it.
11:21Cerberus says the hospitals were well-run under its care,
11:23and claims that the problems began after its exit in 2020.
11:27But financial documents paint a different picture.
11:30By the end of 2019, the hospital chain already had a huge debt problem.
11:34Its liabilities exceeded its assets by more than $1 billion.
11:37The Wall Street Journal reported that over the years that Cerberus owned Steward,
11:42through fees and the real estate sales, it made $800 million,
11:46more than triple its initial investment.
11:48In a statement, Cerberus says these returns primarily benefited our investors,
11:53and highlights the pensions of teachers and firefighters.
11:57After this whole thing unfolded, Massachusetts passed a law
12:00banning sale-leaseback agreements in healthcare.
12:02Of course, not every PE-backed hospital fails.
12:07One study actually linked PE ownership of hospitals to better financial performance on average,
12:12but also reduced staffing, indicating a trade-off.
12:15A similar story has unfolded at dental practices, with tragic results.
12:20In 2013, a U.S. Senate investigation found that hundreds of dental clinics owned by private equity
12:25had milked Medicaid for money.
12:28It's said they performed unnecessary dental procedures on children, including root canals.
12:32A family dumbfounded and searching for answers.
12:36Yet, four years after that report, a two-year-old boy received multiple root canals
12:41at one of the practices mentioned in it.
12:43He became unresponsive after the procedure, likely due to improperly administered anesthesia,
12:49and days later, he died.
12:52His parents sued, saying the practice over-treats, underperforms, and over-bills.
12:56In 2020, another PE-backed dental chain was in the news.
13:01Workers there said they saw unnecessary dental work performed on patients.
13:06I've watched them drilling perfectly healthy teeth multiple times a day, every day.
13:11Meanwhile, the percentage of dental practices affiliated with private equity doubled between
13:152015 and 2021, and research links this shift to higher costs for patients.
13:21PE investment is moving into more and more areas of healthcare.
13:25Right now, it's anesthesiology practices and gastroenterologists and pain clinics.
13:29Of course, heavy PE investment in these types of settings has brought a tremendous amount of
13:33scrutiny and bad press onto the industry.
13:36When asked about this, PE firms tend to say they're being scapegoated for systemic healthcare issues.
13:40Of course, PE's failures tend to get a bit more media coverage than its successes.
13:49It's true that sometimes PE investment can help build up a business.
13:53Blackstone's acquisition of Hilton Hotels is a famous milestone in the PE world,
13:57sometimes called the best leveraged buyout ever.
14:00During the six years Blackstone owned Hilton, the chain added more than a thousand new hotels.
14:06After that, Hilton went public again.
14:07It raised $2.4 billion in its IPO, the largest ever for a hotel company.
14:13By the time Blackstone sold its last stake, it had made $14 billion, the highest ever in PE.
14:19PE firms also point to what they say are the broader economic benefits of private equity,
14:24driving growth, making businesses more productive, and, of course, higher returns for people with pensions.
14:31Pensions are not as common in America as they once were, but many workers, including some nurses,
14:35teachers, and government employees still have them.
14:39There's over $27 trillion in U.S. pension funds, and nearly 90% of these funds have some investments in private equity.
14:46And that gives the industry a strong talking point.
14:49Pension funds across the country rely on private equity investment to strengthen the retirement of America's public sector workers and retirees.
14:56Experts I spoke with said the industry leans on pensions when it's criticized for its other tactics.
15:02Whenever you would go and say, well, it looks like in hospitals you are doing, like, bad things with the patients,
15:08they would say, look, the industry has created tons of jobs, we give lots of good returns to the patients,
15:14this is what, you know, we are meant to do, so we are just maximizing profit, we are good.
15:20People in the private equity industry say pension funds grow more quickly with private equity,
15:24because PE offers better returns than the stock market.
15:27That is their big pitch to pension funds and other investors.
15:31Private markets have outperformed public markets for every single one of the last 20 years.
15:36Private market outperformance is consistent.
15:38One dollar invested in private equity is worth a whole lot more than one dollar invested in public equities.
15:45There's just one problem with that. We don't actually know if it's true.
15:52This is a graph on the website of a professional group that represents the private equity industry.
15:57It's plotting state pension returns.
15:59You can see it has private equity returns beating stocks for every year studied, by more and more as time goes on.
16:06I broke this graph down with Jeffrey Hook, who once worked in private equity before writing the book, The Myth of Private Equity.
16:12It can't be real that public stocks drop 20 and private equity goes up 2.
16:18So they're the same kind of companies.
16:20So, you know, that's obviously phony.
16:22And so the whole chart is pretty much phony.
16:24You also have to pay close attention to how PE measures the competition, meaning what indexes they use to represent the stock market.
16:32The chart uses a combination of the Russell 3000 and an MSCI index that doesn't include the US.
16:37Historically, both have performed much worse than the S&P 500.
16:42Here they use performance measures that deliberately understate the performance of the US stock market.
16:48So that's another game that the pro-PE propaganda machine uses.
16:54Experts I spoke with said the PE industry picks highly convenient benchmarks.
16:58A 2020 paper called An Inconvenient Fact explores this idea.
17:02A University of Oxford economist, Ludovic Falipu, wrote it.
17:06He found PE funds have gotten about the same returns as public equity indices since at least 2006.
17:12At the time, this was a pretty shocking claim, and it's still controversial.
17:16If you tell them your performance is not that clear, then they go ballistic.
17:22And that's pretty much what happened, yeah, with that paper.
17:26The paper includes rebuttals from the big four private equity firms, who disagree with Falipu
17:32and claim his analysis contained multiple errors.
17:35But he's not alone in questioning whether PE actually beats public markets.
17:39You have lots of very senior academics who have the same results in their papers.
17:44I didn't invent the data, it's not proprietary data, like anybody can go and check the numbers.
17:49More recently, a working paper from Harvard Business School compared PE returns to what you
17:53would have gotten if you'd put the same money towards similar public stocks over the same period.
17:58The authors found average PE funds have not actually outperformed their public market equivalents
18:03since the great financial crisis of 2008.
18:06Eileen Applebaum, another economist, has written extensively about PE and echoed these sentiments.
18:12Private equity is living on its past, past, past reputation.
18:17There was a time in the past when investments in private equity funds beat the market.
18:23All of these advantages have been competed away over the years.
18:28Institutional investors like endowments have flocked to private equity.
18:32In under two decades, they've helped increase the cash flowing into the industry tenfold.
18:37This means more competition for deals.
18:40It's not that easy to find a company that is undervalued, that you can buy cheaply,
18:46pull around with its books for a while, and sell it for a lot more than you paid for it.
18:51It's getting harder and harder to find those companies.
18:54Yet, the PE industry still says they consistently beat the stock markets.
18:58How can there be so much uncertainty here?
19:00Well, the first issue is a lack of transparency.
19:04Private companies don't have to share much about their businesses compared to public ones.
19:08And even private equity firms that are public companies, like Blackstone and KKR,
19:12aren't required to publicly disclose earnings for individual funds.
19:16There's been very little pushback from either the investors or the government,
19:22in part because everything is so mysterious and hidden and confidential.
19:26Some of the best data we have comes from public pension plans,
19:29which are relatively transparent about their returns.
19:31But the other problem lies in how you analyze the numbers.
19:34It's difficult to make a fair comparison between private equity funds and public stocks.
19:39You have to make choices, like which time periods you look at,
19:42and what index you use to measure the public markets.
19:45US stocks tend to perform better than the global average,
19:48so a global index will be a lower performer,
19:51while an American index, like the S&P 500, is harder for private equity to beat.
19:56Also, private equity portfolios contain much smaller businesses than those traded on stock exchanges.
20:01Falapu's paper says once you compare apples to apples in terms of region and size of the companies,
20:07and subtract the fees paid by institutional investors,
20:09the supposedly dramatic gap between public and private equity basically disappears.
20:14Some of these experts might be seen as pessimistic on P.E. returns.
20:19Analysis from industry sources often supports the idea that private equity beat stocks.
20:23But even one of those recently changed its tune.
20:26This is BI reporting from March of this year.
20:29The investment firm Hamilton Lane issued a report showing that the MSCI World Index beat out P.E. returns
20:35for the first time since the dot-com bubble burst of 2000.
20:39Remember, that's the historically lower-performing index that the P.E. industry tends to prefer to use.
20:45And this time, P.E. returns couldn't beat it.
20:48So there's lots of uncertainty around the question of when P.E. stopped beating the stock market.
20:52Some people say in 2006, some people say just in the last two years.
20:56But it seems like that huge gap between the lines on the chart we looked at is looking more and more implausible.
21:02All this suggests that pension funds might not be getting as good a deal as they think they are.
21:07I mean, Warren Buffett thinks so. Just listen to this clip.
21:10If I were running a pension fund, I would be very careful about what was being offered to me.
21:17We have seen a number of proposals from private equity funds where the returns are really not calculated
21:27in a manner that I would regard as honest.
21:33Three economists I spoke to said one of the key numbers P.E. firms use when pitching their funds to investors is easily manipulated.
21:41It's called the internal rate of return.
21:43It's a complex formula that can be used to predict future returns based on expected cash flows over time.
21:49It's very sensitive to the timing of those cash flows, which means you can gain this number by timing sales strategically.
21:56They're always selling their best investments first.
21:59P.E. firms are usually fundraising for their next fund before the last one has been totally sold off,
22:04using figures based on the strong early sales and guesstimating the value of the companies still sitting in the portfolio.
22:10The problem is that the unsold companies are probably not worth as much.
22:15Their buyout funds have aging companies in them.
22:19Well, they sold the good ones early, so these have to be the dogs.
22:22If we haven't sold them, are they worth what we say they're worth?
22:26It's almost 100% on the honor system.
22:29Experts I interviewed said there are also incentive issues here.
22:32There's a lot of people who benefit from pretending that the private equity funds all do well.
22:39If you're paid to manage a pension fund, for example, you're expected to have an advanced investing strategy.
22:45Investing in a classic 60-40 mix of stocks and bonds probably doesn't justify your salary.
22:51Not to mention, you might be thinking about your next job.
22:54There's a revolving door from public pension funds into private equity.
22:59So you want to be on good terms of private equity because that's your next job.
23:03This points to a system where even if some of the players here suspected P.E. doesn't dramatically beat stocks,
23:08you'd have little incentive to speak up.
23:10One important side note.
23:12Even if P.E. investments merely match the stock market or even slightly underperform it,
23:16it wouldn't necessarily be the end of the industry.
23:18Theoretically, it could still have a place in diversified investment portfolios.
23:22Perhaps the strongest indicator that investors are worried about what lies ahead for P.E. returns
23:28is the fact that some, including pension funds, are trying to get out.
23:32The same is true for university endowments.
23:35In April of this year, Reuters reported that both Yale and Harvard were exploring sales of their P.E. interests.
23:42The universities could simply be looking for cash as they face federal funding cuts.
23:46But it's also possible they've been disappointed by the returns on their P.E. investments.
23:51Yale, which pioneered the endowment model, saw a 5.7% investment return for 2024,
23:57which was among the lowest performers of the Ivies.
24:01And that's not the only change to this industry coming down the pike.
24:07Pensions and endowments have been a massive and reliable source of funds for private equity for about two decades.
24:13Even if those investments scale back slightly, it'll have a big impact on the P.E. business.
24:17So now the P.E. industry is looking at other funding sources.
24:20One way it's doing that is by gradually working its way down the income ladder.
24:25Until fairly recently, if you couldn't write a $10 million check without blinking, you couldn't invest in private equity.
24:32But they wanted to get the, you know, near wealthy and the merely very rich into private equity.
24:39And they designed products for them.
24:41Right now, private equity investments are typically only available to institutional investors, like endowments, and people with ultra-high net worths.
24:49But for years, the industry has sought access to retail investors, essentially meaning regular people.
24:55And it scored a big win during the first Trump administration, which removed some of the barriers to having private equity in Americans' 401ks and IRAs.
25:03Proponents say it's a way to make a lucrative form of investment available to more people than just the ultra-wealthy.
25:08I always said, why is it that the richest people in the world get the greatest assets, and the average person who needs it the most don't?
25:15Others, like Investopedia, interestingly, say this would create significant dangers for mainstream investors who might not understand these opaque, high-risk, and expensive investments.
25:26But there are some big hurdles before investing in PE goes mainstream.
25:30Private equity investments are highly illiquid, usually 10-year commitments where you can't get your money out.
25:35There's also the issue of convincing people to pay high fees.
25:39Despite all that, the nation's second-largest retirement plan provider, Empower, announced this May that it was opening up private market investing to its 19 million plan participants.
25:49The company is teaming up with PE giants like Apollo Global Management to make this happen.
25:53And it says the fund is designed to provide liquidity protection and reduced fee exposure.
25:58Vanguard also teamed up with Blackstone and another asset manager to launch a fund for retail investors that would include a mix of stocks, bonds, and private markets.
26:08By private markets, they mean not only buyout funds, but also private credit, real estate, and infrastructure.
26:14Eileen Applebaum says investors should be very cautious.
26:17The fees are high, the returns are risky.
26:22You could be in one of the funds that doesn't make a good return, but they take your fees whether they make a return or not.
26:30Less experienced investors could be jumping into private equity right as new competition is transforming the industry.
26:36Here's one of the co-founders of KKR, the firm that pioneered the leveraged buyout.
26:41When we started the private equity industry, Jerry, George, and I, there was nobody doing it.
26:46Yeah.
26:47Today, everybody and their brother seems to be in private equity.
26:49We got a room full of private equity people here.
26:51Another thing that's changed since the early days of PE is that the industry has shifted its focus to smaller companies in what they call the middle market.
26:59But experts I spoke to said there are signs PE dealmakers are struggling to find attractive businesses to invest in.
27:05In 2024, firms had record amounts of cash from fund investors that hadn't been put towards a deal yet.
27:11That's called dry powder.
27:13So dry powder is a problem because it means they kind of figure out where in the economy there will be opportunities to invest that money.
27:21Finding deals might be getting harder because so many sectors of the economy have already gotten the PE treatment.
27:27A lot of things have been kind of quote unquote professionalized, but they keep going down and down and down to smaller companies.
27:34Car washes, your roofing companies, your local HVAC guy.
27:39Personally, I would have loved for them to do the car washes before the hospitals, but hey, maybe that's just me.
27:45So the industry famous for trimming fat might be running out of fat to trim.
27:49PE is a trendsetter.
27:51They may have started the trend of slashing costs, but it's now the norm in the US economy.
27:56Given all these challenges, it makes sense that the firms are diversifying their own businesses.
28:01Major private equity firms like Blackstone, Carlyle, and KKR are not exclusively in the buyouts business anymore.
28:07They've expanded into real estate, infrastructure, and, increasingly, private credit.
28:12This is part of why these firms don't call themselves private equity anymore, opting for labels like alternative asset managers.
28:18Even the industry's main lobbying group changed its name from Private Equity Growth Capital Council to American Investment Council.
28:24This could also have something to do with the term private equity developing a poor reputation, but who knows.
28:30One thing seems clear.
28:31If they're going to get regular people investing in PE, they're going to need to get the word out.
28:35It's likely we'll see this historically private industry start to put more effort toward managing its reputation.
28:41We've already seen Blackstone start to run TV commercials for the first time ever.
28:48The days of PE firms operating in the shadows are ending.
28:51Now, they want people to know what private equity is.
28:54And, of course, to like it.
28:56Because PE firms stayed relatively under the radar for so long, I think many people might not have noticed just how big the industry has become.
29:08But in fact, this isn't a slice of the economy we can just lift out if we don't want it anymore.
29:13It's maybe not the foundation of the economy, but it's a weight-bearing pillar.
29:17Just in the U.S., private equity firms have investments in about 21,000 businesses, which employ more than 13 million people.
29:24Private equity is everything and everywhere, whether you like it or not.
29:28And they can't really be separated from what the economy is now.
29:31Even so, the industry is facing more and more scrutiny from regulators.
29:35One of lawmakers' main interests has been closing the carried interest tax loophole.
29:40This allows PE investment gains for people in the highest income bracket to be taxed at a marginal rate of 20%,
29:46instead of the roughly 37% that they'd pay if the gains were taxed as income.
29:51A recent study looked at more than 10,000 funds and found that making this change could have raised up to $250 billion of extra tax revenues over two decades.
30:01The idea has had bipartisan support in the U.S. for quite a while.
30:06Well, one thing I do is get rid of carried interest.
30:08I've been in favor of getting rid of carried interest for years.
30:12But it never quite makes it over the finish line, due to lobbying and pressure from the finance industry.
30:17In 2022, it almost made it into the Inflation Reduction Act, but one legislator pushed for it to be removed.
30:23That was Senator Kyrsten Sinema, an Arizona Democrat turned independent who happened to receive nearly $1 million that year
30:30in donations from private equity and Wall Street interests.
30:33Other proposed legislation would go even further than tax loopholes.
30:37If passed, it would hold the private equity firm accountable for the debts of the companies it buys.
30:42So the firms wouldn't be as likely to load companies up with large amounts of debt.
30:46This would be a foundational transformation of incentives in the PE industry.
30:50But the chances of that bill passing at present are slim to none.
30:54If anything has the potential to actually shake up what's so far been an untouchable industry,
30:59that would be institutional investors shifting their resources elsewhere.
31:04That is, if regular Joes don't pick up the slack.
31:13If you're wondering about the sources I used for this video, I made a reading list for you, and it's linked in the video description.
31:18I'll see you next time.
31:19I'll see you next time.
31:20Bye.
31:21Bye.
31:22Bye.
31:23Bye.
31:24Bye.
31:25Bye.
31:26Bye.
31:27Bye.
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