The PE Business Model

PE is a form of financing that occurs outside of public markets, with the purpose of buying existing businesses. PE firms organize partnerships (also known as funds), in which the general partner (the PE firm) manages the fund’s investment portfolio for the limited partners who commit their capital to a specific PE fund and have limited liability and no management authority. To become a limited partner requires satisfying a legal definition of a qualified investor, which includes wealthy individuals, university endowments, philanthropies, pension funds, insurance funds, and foreign Sovereign Wealth Funds. The fund is marketed to prospective clients with a prospectus that describes the investment opportunity with a limited life expectancy of about ten years.

The PE limited partnership institutional form was adopted from the wildcat oil drilling industry (Reference KenneyKenney, 2011, p. 1965), where it had been used as a way of organizing high-risk, high-return business ventures. The limited partnership format had many favorable features for both the general partners, the PE firm, and the institutional limited partners. The general partners raise the funds and invest in a portfolio of companies and benefit significantly if they invest successfully. The limited partners have no say in the specific investments and also are not responsible for the activities of the general partners thereby limiting their liability in the event of any adverse outcome.

As a norm, the general partners are compensated in what is termed the 2 and 20 fee structure. PE firms make money annually through management fees, which are assessed at a certain percent (often 2 percent) of the committed capital. For example, a $1 billion fund charging a 2 percent fee provides the PE general partners $20 million a year in revenue. The limited partners pay this fee annually regardless of whether a PE firm invests successfully. Carried interest, often but not always, 20 percent, is a share of capital gains allocated to the general partners at the exit event and aligns the general partner’s compensation with the overall performance of the fund. Carried interest is only paid if the fund achieves a minimum rate of return known as the hurdle rate, which sets a minimum standard for performance. For example, a hurdle rate of 10 percent means that the PE fund needs to achieve a return of at least 10 percent per annum to the limited partners before the gains are shared with the general partners. The tax code defines carried interest as a long-term capital gain for tax purposes and is taxed at a lower rate than ordinary income if the investment is held for at least three years. This is an important way the US tax code subsidizes PE investment.

Once a fund is raised, the PE firm acquires firms, or parts of firms, from which it believes it can extract more money than the investment cost. The limited partners receive a return on their investment when the PE firm engages in what is known as an exit. An exit can occur, in a number of ways, through a public stock offering, acquisition of the portfolio firm, in whole or in parts, by another entity, or portfolio company liquidation through bankruptcy. For tax purposes, the profits realized from the exit are treated as capital gains and are taxed at a lower rate than ordinary income. When the acquired firm does well, the PE fund does well and both share in the returns. If, however, the fund does badly, the PE general partners have no financial responsibility to return the capital to the limited partners (Reference FleischerFleischer, 2008). Finally, the capital gains are disbursed to the limited partners without being taxed – the limited partners then pay any required taxes.

While there are more than 18,000 PE funds in the United States with more than $4.4 trillion under management and $1 trillion of uninvested capital (Reference WarrenWarren, 2023), the firms are highly concentrated in only a few cities. As Table 1, New York City is, by far, the center of the PE industry accounting for nearly 43 percent of the total capital of the top twenty firms. Notably, the majority of the large PE firms were founded after 1980 and have grown rapidly as demonstrated by their fund-raising success.

The Reasons PE Is so Lucrative: How PE Firms OperateFootnote ⁵

There is limited transparency and almost no regulatory oversight over PE practices. PE is inherently less liquid than public equity or stocks, so investors expect higher overall returns from PE. However the stated rate of return is not necessarily the case as there are with few generally accepted standards and guidelines as acquired firms are often illiquid. There are multiple algorithms for determining portfolio-firm value and the PE firm may choose the one that best serves their interest and achieves their desired rate of return – which ultimately can only be known at the time of a liquidity event (Reference HamlinHamlin, 2023a; Reference McElhaneyMcElhaney, 2022). This lack of transparency makes it difficult for limited partners, regulators, and others affected by PE to examine operations and follow the money.

The PE business model creates minimal risk to the fund as it uses the assets of the acquired company as collateral for the loans to purchase the company. Thus, the burden of repayment is on the acquired company itself (see Figure 1). In a typical purchase transaction, the PE firm uses its limited investor’s capital to purchase approximately 30 percent of the total acquired company’s purchase price. This is known as the equity investment. The remaining bulk of the acquisition cost is financed by taking out loans on the acquired company’s assets, that is, financed by debt – the leverage in the leveraged buyout. The bank may either retain the debt or, more often, sell it on to institutional investors. The acquired company deducts the interest paid on the leverage: This alone returned between 21 and 143 percent of their investment to the equity holders depending upon the speed of the repayment and the tax rate applied to the interest deductions (Reference KaplanKaplan, 1989, p. 611).

Figure 1 PE business model and ecosystem

Adapted from Reference Appelbaum and BattAppelbaum and Batt (2014: 7)

The interest deduction is another way that the US tax code subsidizes PE investors. As is the case with the home mortgage interest deduction, this provision favors debt over equity financing. Here, PE investors took advantage of the original Congressional intent to encourage firms to take out loans to invest in expansion or capital improvement. This benefit was limited in the 2017 tax cut legislation to a 30 percent deduction of a firm’s adjusted income (Reference Wamhoff and HughesWamhoff & Hughes, 2022).

Extracting Value from the Target

Upon acquiring a firm, the PE firm immediately appoints its representatives to the Board of Directors and initiates the process of reorienting the firm to a goal of extracting capital.

Often, but not always, a new executive team is appointed and members of the incumbent top management team are removed. The new executive team invariably receives large stock option grants to align their interests with the new PE owners. This equity share provides an incentive for the new management team to increase the value of the acquired firm.

As Table 2 suggests, there are a variety of tactics that can be employed to increase the value of the equity held by the PE firm. The most obvious is to cut costs through layoffs, replacing more expensive workers with less expensive ones, renegotiating contracts with existing suppliers, or finding lower-cost suppliers, often off-shore. Consolidating operations and closing facilities is another tactic.

Another way to increase the value of the acquired firm is to reduce balance sheet liabilities. Often, this is accomplished by renegotiating contracts and reneging on future obligations. For example, if the acquired firm has a pension plan, which is a liability, then ending or nullifying the plan can remove a large future liability, and, in certain cases, simultaneously provide access to the accumulated pension funds. Other liabilities that may be reduced include abandoning polluted sites or facilities that have dated equipment or challenging or repudiating outstanding legal judgments. The acquired firm’s value is instantly higher when liabilities are decreased.

For example, Reference CobbCobb (2015) shows conclusively that the takeover of a firm by PE investors leads to the termination of defined benefit pensions, thereby increasing the value of the firm and reneging on the promises to workers. A well-known example of this was the 1985 takeover of Revlon by Ronald Perelman and his termination of the company pension plan, which allowed him to extract more than $100 million in surplus pension value (cited in Reference CobbCobb, 2015; Reference SchultzSchultz, 2011). This tactic is so popular that by 2022 there were few defined benefit pension plans left in the private sector firms.

In many of these cases, pension liabilities were transferred to the Pension Benefit Guaranty Corporation (PBGC), a government entity. From 2001 to 2014, the PBGC received $1.592 billion in pension responsibilities but because not all benefits are covered, over 100,000 workers or retirees lost benefits amounting to at least $128 million in anticipated retirement income. In keeping with the neoliberal ideology adopted by courts, a PE firm, Sun Capital, purchased, Scott Brass, leading it to file for bankruptcy, and then was allowed to withdraw from its employer pension fund without paying a penalty (Reference SelbstSelbst, 2020). The legal system, despite various attempts by Congress to protect pensions, has been weaponized by the PE community against workers and, by extension, affecting the communities that depend upon the income from these workers to remain vibrant.

After PE investors buy a firm, there is an immediate pressure to cut costs to paydown the loans and increase the value of the firm – labor, quite naturally, is one of the costs. The academic research finds that after PE acquisition, on average, labor costs decreased by over 4 percent in the first two years. When PE takes over large publicly traded companies, job losses are far worse, about a 13 percent decrease in jobs in the first two years. While labor productivity increased by 8%, average earnings per worker fell by 1.7% two years post-buyout (Reference Davis, Haltiwanger and HandleyDavis et al., 2021).

Another common tactic is to sell the acquired firm’s real estate and then lease it back from the acquiring entity. For example, the portfolio firm sells its real estate and facilities for a lump sum adding the cash to its balance sheet. The entity that acquires the real estate and facilities does not have to be arms-length and may be a subsidiary or another firm in the PE portfolio. This capital can now be used to pay off the debt or provide a special dividend to the PE owner. The entity acquired by the PE firm, which has not changed location, is now saddled with monthly lease payments made to the new owners of their facility. The sale-and-lease-back strategy mentioned previously also benefits from the US tax code (Reference Appelbaum and BattAppelbaum & Batt, 2014, p. 79), which allows the portfolio firm to write off the lease payments as a business expense.

This strategy extracts the value of the fixed assets from the firm. In some cases, the portfolio firm may close facilities entirely, repurpose or sell them. Consider the case in 2022 when its PE owners closed the Delaware County Memorial Hospital in suburban Philadelphia: The real estate was too valuable as an asset to house a community hospital (Reference Lapook and KaplanLapook & Kaplan, 2022). Real estate is only valued for the market price it can command – other considerations, such as patients’ convenience, proximity to an emergency room, community health, or protecting the open prairie, are overridden by the drive for capital gains.

PE investors have developed many more complex strategies for increasing their returns. One of the increasingly common strategies is the “roll-up,” the process of acquiring and merging multiple smaller businesses in the same industry into one larger consolidated company, which is better able to cut operational costs, and has an increased base of customers to drive revenue and thus can command a higher valuation than the parts. For example, PE firms have been purchasing all manner of previously locally owned small businesses, such as funeral homes, hospices, dental practices, addiction treatment programs, and childcare centers. The goal is to develop a dominant position in a local market, which will provide the PE firm the ability to cut costs by common purchasing, increase prices due to the reduction in competition, and/or rationalize operations by closing “underperforming” facilities.Footnote ⁶ This local roll-up is facilitated by US antitrust regulatory rulings that exempted purchases of under $50 million from having to be reported. If a dominant position in a local market can be achieved, then services can be curtailed and priced higher, and consumers/patients will have no alternative and must accept the new reality.

Ultimately, it is this short-term orientation to extract the maximum capital from their investments that weaken the acquired firms and wring cash out of the firm. If the debt cannot be repaid, the company, its workers, and its creditors bear the costs. The PE business model is a low-risk, high-reward strategy for PE firm partners. The result is a shell game with limited transparency (Reference Protess, Silver-Greenberg and AbramsProtess et al., 2016).

There only have been a few attempts to track individual acquisitions to understand the outcomes. An example that has been carefully studied is G&H Orthodontics (G&H) of Franklin, Indiana, a designer, manufacturer, and distributor of clinical orthodontic products. G&H was acquired in 2010 for an undisclosed price by the PE firm, The Riverside Company. G&H soon threatened to leave Indiana and was granted $2.65 million in tax credits, property tax abatements, and subsidized worker training (McGuire Reference SponselSponsel, 2022). After two add-on acquisitions that added “new product lines and distribution channels while adding new customers and cross-selling opportunities (Reference DorbianDorbian, 2017).” Seven years later, G&H was acquired by another PE firm, Altaris Capital Partners. Presumably, the state subsidies contributed to the value that the Riverside Company reaped. In another of the few studies of the impact of PE acquiring local firms, Reference Olbert and SeverinOlbert and Severin (2023) found that local governments’ PE acquisitions experienced a 15% decrease in effective tax rates and a 10% decrease in total tax revenues. Indiana subsidized Riverside, and thus it is entirely possible that it paid to decrease its tax revenues!

Companies that are acquired by PE firms are ten times as likely to go bankrupt than a comparison group of similar firms (Reference Ayash and RastadAyash & Rastad, 2021). Brendan Reference BallouBallou (2023a), in the book Plunder: Private Equity’s Plan to Plunder American, demonstrates how PE firms benefit even when the companies they invest in go bankrupt. Following the circuitous history of Friendly’s Ice Cream, which was started in 1935 as a family business that grew into a 500-restaurant regional chain. When the founders retired, the business went through a series of different owners only to be acquired by Sun Capital, and then file for bankruptcy. After that, Sun Capital repurchased the company’s assets – stiffing the creditors who had provided the capital to buy the chain in the first place! The financial gymnastics that Reference BallouBallou (2023a) documents are truly breathtaking. When asked by The New York Times in 2012 about the failure of Friendly’s and his arguable manipulation of the bankruptcy law, the co-founder of Sun Capital stated, “We don’t make the rules” – a statement that is not entirely correct given the power PE has as a lobby.

Creating Private Equity – The Federal Government Paves the Way

The book, Barbarians at the Gate (Reference Burrough and HelyarBurrough & Helyar, 2010) is about the takeover of Nabisco by the firm KKR, which spun out of the financial firm, Bear Stearns. Many early targets were family-owned businesses that lacked a viable succession plan. These were often industrial concerns, and the focus was on restructuring the firm to sell in whole or in pieces in order to secure capital gains. With the change in ownership, long-standing relationships were no longer valued and the PE firms renegotiated existing contracts with suppliers and workers on more favorable terms. The targets of PE investment changed from dismantling the conglomerates of the go-go 1960s to the takeover and liquidation of undervalued assets in existing manufacturing firms in the 1970s and 1990s, to acquiring publicly traded companies and investing in consumer products and the healthcare sector – where the strategy is often to roll-up small entities in a sector into a larger entity that could exert market power. More recently, PE moved into acquiring municipal services. While the types of firms purchased and the methods for extracting value have evolved, the overarching goal, which is to reap capital gains, is unchanged. Given the incentives, it was probably inevitable that PE would enter ever more sectors in its search for monetizable assets.

Prior to 1970, institutional investors, defined as entities who make investments or manage large amounts of financial assets for pension funds, mutual funds, insurance companies, university endowments, and sovereign wealth funds, invested only small amounts in what was at the time perceived as high-risk alternative investment, preferring to hold equities in established firms and highly rated bonds. With the stock market crash in 1973–1974 and the collapse of several union pension funds due to misappropriation of funds, the Employment Retirement Investment Security Act (ERISA) was passed. The law charged the U.S. Department of Labor (DoL) with over-seeing pension funds. Pension fund managers were concerned that if they invested in firms such as PE that made high-risk investments, they could be accused of violating the so-called prudent man standard that protected them from being sued by their beneficiaries. Given the enormous losses that investors had absorbed with the collapse of the stock market bubble of the late 1960s and early 1970s, few institutional investors wished to be charged with being imprudent. The result was an almost immediate cessation of institutional funds flowing into alternative investments, such as PE.

In response to this drought, venture capitalists, who had recently formed the fledgling National Venture Capital Association (NVCA) began lobbying the Department of Labor (DoL) to loosen their interpretation of ERISA to allow pension funds to invest in what came to be known as alternative assets that invested in a portfolio of high-risk firms rather than a single high-risk firm (Reference KenneyKenney, 2011). In response to the lobbying, in 1979, the Department of Labor (DOL) issued an interpretation stating that pension funds investing a small portion of their total assets in entities that assembled a portfolio of high-risk investments such as a PE fund might do was not, in of itself, imprudent. The idea was that while each investment might be risky, the high returns from successes could mitigate the overall risk. This cleared the way for pension funds, public and private, and other institutional investors to invest in PE making ever-increasing amounts of capital available to PE firms.

Furthermore, in 1975, compensation for stock brokers changed from fixed fees to negotiable commissions. Reference ReichReich (1989) reports that Wall Street revenues plunged $600 million, prompting a search for new sources of earnings that were paid during acquisitions and placement of the debt used to fuel leveraged buyouts. The ideology and operations of PE were perhaps best satirized in the 1987 movie Wall Street where the antagonist, Gordon Gecko, who made money from acquiring and dismantling companies, stated that the prevailing theme in “corporate America was survival of the unfittest” and that the solution to this was “greed” which was “good.” Going further, he said he was not “a destroyer of companies, rather he was a liberator” – freeing capital to be used more productively elsewhere. The plot of the movie, which is drawn from the PE-organized leveraged buyout deals of the 1980s, was for Gordon Gecko to acquire a firm, Bluestar Airlines, expand it by using savings from union concessions and accessing cash in the firm’s overfunded pension plan and then dissolve the firm leaving the entire Bluestar staff unemployed and with underfunded pensions and the communities where Bluestar employees lived, worked and spent their wages impoverished.

The growth of PE accelerated with the appointment of individuals who came from Wall Street to the Securities and Exchange Commission (SEC), where they advocated for deregulation and practices that benefited PE. For example, in 1982 the SEC adopted Rule 10b-18, which allowed stock buybacks (Reference LazonickLazonick, 2023). Corporate executives became motivated to ensure that stock prices remained high as stock options became a preferred form of compensation. Rather than paying dividends which were taxed as ordinary income, gains from stocks are taxed at the lower capital gains rate.

These significant changes are built on other precedents. In 1978, President Jimmy Carter signed a bill cutting capital gains taxes to 28 percent from the prevailing income tax rate of 49 percent. President Reagan would later cut the capital gains tax rate to 20 percent. The most visible lobbyists for this capital gains tax cut were from the National Venture Capital Association, which also included some individuals who would later shift from focusing on startups to the financial engineering that characterizes PE (Reference KenneyKenney, 2011). This cut was of particular benefit to PE general partners as their fee income was defined as capital gains that were taxed at the far lower capital gains tax rate instead of the higher ordinary income rate. Of course, this change also favored capital gains over wages, dividends, and interest that would be taxed as the higher ordinary income rate.

The term neoliberalism was coined at a Paris meeting in 1938, where Ludwig von Mises and Friedrich Hayek, exiles from Austria, vilified social democracy, as exemplified by Franklin Roosevelt’s New Deal. Later, Milton Friedman would codify a new purpose for business as the Reference FriedmanFriedman (1970) doctrine in a New York Times article entitled The Social Responsibility of Business Is to Increase Its Profits. Under this ideology, businesses need only be accountable to their shareholders, shifting the prevailing view that businesses had responsibility to their workers, suppliers, and communities. This shifted the meaning of the term “investment” (Reference SayerSayer, 2015), which had previously been thought of in terms of finance rather than as physical plant & equipment. This shift camouflaged the strategy of investing money in new wealth-creating activity towards the management of capital as a way of extracting value from underutilized or undervalued existing assets. While restructuring may be appropriate for some businesses, PE has perfected the practice of transferring the value of assets to themselves, thus removing any say over the claim of other stakeholders in the firms.

Neoliberalism was enabled by government actions. The courts, populated with neoliberal jurists assisted the expansion of PE firms. For example, in 1982, the Supreme Court struck down the 1978 Illinois Business Take-Over Law. The Illinois law required the material terms of a takeover offer to be made public, imposing a substantial waiting period to allow public comment and provisions for the conduct of a fairness hearing on the request of 10 percent of the owners of the acquisition target. The Illinois secretary of state could stop a takeover offer with adverse consequences. In the wake of the wave of leveraged buyouts in the 1970s, similar laws had been passed in forty other states with the intent to protect local businesses from takeovers. The courts prohibited what was seen as state obstacles to corporate control such as “disclosure-and-delay regulations that raise takeover premiums and lower the returns to acquiring firms. This takeover tax on bidders discourages investment in acquisition-oriented information and deters takeover activity” (Reference JarrellJarrell, 1983, p. 112). The court repeatedly removed obstacles and opened local markets to PE takeovers. This was not the only ruling in 1978 that would weaken local control over the financial sector. In that year, the Supreme Court ruled unanimously in Marquette National Bank of Minneapolis v. First of Omaha that state anti-usury laws capping interest rates did not apply to nationally chartered banks, effectively eliminating state interest rate caps (Reference JudgeJudge, 2023, p. 149).

With the acceptance of neoliberalism at US law schools, the courts have almost invariably ruled in favor of the interests of private enterprise and finance capital (c.f., Cato Institute, 1985; Reference EasterbrookEasterbrook, 1984). For example, PE firms were held to not be responsible for illegal or negligent actions of their portfolio firms since they own but do not directly manage the firm (Reference Bonvino, Ehrlich and GonzalezBonvino et al., 2021). In Ray v. Alad Corporation 1977, the California Supreme Court ruled that “apart from tort liability for defective products, … the acquisition of this manufacturing business imposed no liability upon it for [its predecessor’s] obligations other than certain contractual liabilities that were contractually assumed … This insulation from its predecessor’s liabilities of a corporation acquiring business assets has the undoubted advantage of promoting the free availability and transferability of capital” (Reference YaminYamin, 1984, p. 257). This meant that the PE managers could push, if that was even needed, the firm’s executives to increase returns with little concern regarding how this was accomplished. If there is litigation, the portfolio firm will be punished and, given the desire to exit its investments, by the time litigation occurs, the PE firm may no longer even be the owner.

The most important regulatory change of trajectory was the triumph of the ideology that supported industry consolidation by assuming mergers and acquisitions were neutral if they did not harm consumers. Rather than considering the impact on competition and market share, Robert Reference BorkBork (1978) argued that antitrust should be about economic efficiency and that small businesses were inefficient and should not be protected. This ideology was predicated upon the belief that consumer welfare was promoted by the workings of their idealized market.

This interpretation narrowed the economic analysis used to identify whether a proposed merger was anticompetitive (Reference Sokol, Bensley and CrookSokol et al., 2020). As the ideology took hold in the federal bureaucracy and the courts, to quote Reference Lancieri, Posner and ZingalesLancieri et al. (2022, p. 5) there was “no matter where one looks, the overall downward trend in public civil enforcement of the antitrust laws is unmistakable, when targeting dominant companies that monopolize or attempt to monopolize markets. With some exceptions, government enforcement of the antitrust laws now boils down to enforcement against cartels and mergers that create (near) monopolies.” Even when a merger was contested, the courts, led by the Supreme Court, rejected claims that it was anticompetitive, with the default assumption became that an acquisition was nearly always benign.Footnote ⁷ The weakening of antitrust law and the lack of enforcement attempts were a part of the greater context that was made ever more favorable to PE practices – especially their increased interest in local business acquisitions meant to roll up businesses and establish local market power.

In their quest for returns, any government program that can increase returns will invariably be exploited. For example, Reference Woodall and Valdes-VieraWoodall and Valdes-Viera (2020) estimated that 611 PE portfolio companies received nearly 16,000 CARES Act loans or grants worth at least $5.3 billion. These portfolio companies were owned or backed by 113 PE firms that collectively held $908 billion in cash reserves at the time of the request. The State Small Business Credit Initiative (SSBCI) was meant to be a historic investment in entrepreneurship, small business growth, and innovation. Through the American Rescue Plan, $1.5 billion was provided to individual states to promote entrepreneurship meant to assist in reducing barriers to capital access for traditionally underserved communities (US Department of Treasury, 2022). To secure funding, states submitted plans to the U.S. Treasury – all with provisions for PE, further deepening their influence and subsidizing their operations.

State and local governments are often coopted into providing subsidies and incentives to retain jobs or facilities, often without any real long-term benefit. State and local governments offer tax incentives, sales, property, payroll tax credits and abatements, and infrastructure subsidies. There is a large academic literature on the limited economic returns to states for subsidizing PE – given their goal of extracting as much capital as possible before disposing of the firm. Due to the 10-year term of the PE fund, the emphasis is against making long-term commitments. The complexity of such subsidies makes it difficult to calculate their exact value. What is certain is that the net effect is to decrease state and government revenue, and, unfortunately, the promised benefits in terms of jobs and growth are rarely realized.

Buying Influence: Our Government and Private Equity

As the executive, legislative, and judicial branches of the Federal government have been restructured to produce a neoliberal society many have accepted the idea that PE invests in innovation and creates greater efficiency. This acceptance is encouraged by massive amounts of campaign contributions and the employment of government officials before and after service in government. As Table 3 indicates, the relationship between PE and politicians and regulators is characterized by a revolving door. Open Secrets, curates a list called the Revolving Door that tracks former government officials who moved from government jobs to PE, with the Carlyle Group currently employing thirty-one former government officials, while Blackstone has ten (Open Secrets, n.d.).

This movement is bi-directional as PE partners and managers run for elected office or are appointed to important government positions. The billionaire founder of Bain and Company, Senator Mitt Romney (R-Utah) is a salient example. When he ran for president against Barack Obama in 2012, the financial firm employees were thirteen of his top twenty contributors (Open Secrets, 2013). The current Chairman of the Federal Reserve, Jerome Powell, was previously a partner at the Carlyle Group. Given the enormous wealth that PE key partners have amassed, they are able to fund political campaigns, secure influence, and further shape rulemaking to favor PE activity. PE firms also make massive investments in lobbying. For example, in the 2021–2022 legislative session, there was an attempt to lengthen long-term capital gains time horizon from three to five years. Blackstone alone made campaign contributions over $40 million (Open Secrets, 2023a). The legislation was defeated.

In 2023, the principal PE lobbying organization was the American Investment Council (AIC), previously known as the Private Equity Growth Capital Council (PEGCC). According to some, PEGCC renamed itself because of a perceived image problem with the term private equity. Indeed, the PE industry was originally referred to by the name leveraged buyout. The practice of using a company’s assets as collateral for the loan to take over the company was increasingly disparaged in the press, with calls for reform in Congress. The names have changed but the practices remain the same. Still, renaming and lobbying appear to have been successful as attempts to reform the preferential tax treatment on carried interest have not succeeded. The AIC retains a number of outside lobbying firms, making it difficult to trace activity and influence. Of the thirty in-house and outside lobbyists the AIC employs, 80 percent previously held government positions (Reference OpryskoOprysko, 2022).

PE campaign contributions have increased with their reach into different sectors. PE firms are aggressive in activities with federal government procurement and reimbursement for services. These activities provide a captive market with guaranteed payment. For example, as the government mandated that health insurance firms cover opioid addiction treatment, PE firms rapidly began acquiring and merging opioid treatment clinics to take advantage of government-mandated opportunities, primarily paid for by Medicare (Reference ChopraChopra, 2018).

PE’s political influence also extends to state capitals and local municipal government, with efforts to loosen consumer and worker protection. PE owns firms and service provider operations in every state and local economy across the nation. State and local governments who are trying to secure investments to keep and create jobs for their residents are easy targets and are willing to provide concessions (Reference Olbert and SeverinOlbert & Severin, 2023). Often there is limited transparency about specific deals. In sum, government actions, programs, and subsidies have been vital for the spread of PE to ever more sectors of our economy. The impact of PE is even more profound at the local level.

How PE Loots Local Economies

The impact of PE practices on local communities is profound. There are many reported cases where PE acquired a local firm, often a factory that was central to the community’s economy and subsequently closed the operations, affecting the community and its suppliers (Reference AlexanderAlexander, 2017; Reference Appelbaum and BattAppelbaum & Batt, 2014). Data are available on the dollar volume of PE funds raised during the last forty years, yet the number of affected businesses and employees is difficult to trace. Even so, statistics tell us little about the impacts, particularly the cumulative impacts that PE acquisitions have on localities and their residents due to the relentless drive to lower costs and extract value from their portfolio firms.

One way to understand the impacts of PE activity in a location is through the economic multiplier effect, which measures the impact of money earned, spent, and re-spent in the local economy. To give an example, a dollar received by a locally owned pharmacy for the sale of a product goes to pay the wages of the pharmacy’s employees and provides a profit to the pharmacy owners. In turn, this money circulates through the local economy to pay for other goods and services and in turn creates additional employment and jobs (Reference ShumanShuman, 2020). The multiplier effect is visualized in Figure 2 and demonstrates how a dollar multiplies as it moves in the community in a self-reinforcing circle. The more times a dollar passes between people locally, the more income, wealth, and jobs in a community. Staying with the pharmacy example, if the product is bought at a national chain or online, the owner’s income is rerouted outside of the community, and the purchase no longer has a local multiplier. This is the logic behind buy-local campaigns.

Figure 2 Local multiplier effects

The takeover of a local firm by PE means that value will be transferred out of the local economy in two ways. Consider if a PE firm buys a previously owned local manufacturing plant. First, the PE owner will be remote: retained earnings and the securitization of the existing capital value of the real estate, facilities, and other such assets are transferred out of the community. Income and profits will be sent to the headquarters of the PE firm and the bank that holds the debt used in the leveraged buyout and no longer circulates in the local community. Second, in the search for greater efficiencies, the PE firms will likely fire employees, cut wages, trim healthcare benefits or pensions – extracting more income from the local economy. With new ownership, supplier relationships will likely change, and goods and services previously sourced locally are now sourced elsewhere, further decreasing the local multiplier effect. The reduction or elimination of this local spending decreases not only the direct spending but also the multiplicative impact of that spending. Moreover, the community becomes more vulnerable to economic shocks.

The loss of economic activity reverses this self-reinforcing process setting in motion a downward spiral. More than the direct loss of jobs are the indirect and unanticipated effects that erode the economy of a community. Recent research provides insight into the impacts of PE acquisitions. Samantha Reference ZellerZeller (2023) measures the impact of the PE hospital acquisitions on local healthcare insurance premiums from 2002–2017. Her research found that smaller local firms were adversely affected, with fewer new firms started and existing firms growing more slowly after the PE-induced health premium increase. In another recent study of PE hospital takeovers, Reference Aghamolla, Jain and ThakorAghamolla et al. (2023) found that the increase in healthcare costs due to a PE buyout result in higher healthcare insurance premiums paid by local firms. These premium increases led to higher business bankruptcies, an increase in business loan volume, slower employment and establishment growth, and lower wages. These impacts are significant.

The extraction of value is a powerful blow to the local economy. With the loss of local ownership comes the loss of local leadership, with implications for the community. When the firm was locally owned and operated, it was part of the community, and the community influenced its decisions. Firm owners and executives often participate in civic decision-making and have a loyalty to the community. In contrast, PE owners command resources that allow them to offer higher prices. With a lack of other financing options, individual owners have every incentive to sell their businesses to PE, but any action that does not contribute to their internal rate of return is irrelevant to PE, as are the people impacted. And the corollary is that any decision that contributes to increasing the rate of return will be made, regardless of whether it impacts, or even destroys, a community. Without examples of how to run a business, and without access to local networks, entrepreneurs are disadvantaged in the places that need this activity most.

Local businesses and business leaders are often involved in philanthropic activities, supporting local organizations, charities, and initiatives. Business leaders have always played a central role in local networks and social structures. They are influential in building connections, supporting local entrepreneurs, fostering collaboration, and creating a sense of trust within the community. Local businesses sponsor local sports teams, hire local workers, and benefit the local economy through multiplier effects. When PE acquires firms, these networks are disrupted, and the community experiences a loss of wealth and fragmentation. When local leaders are displaced, the community has less social capital and connective tissue. The loss of local elites can result in a decline in cultural events and activities that contribute to the overall community quality of life, not only in small towns but also in large metropolitan areas (Reference LemannLemann, 2000).

Moreover, businessmen are skilled individuals with specialized knowledge and commercial expertise. When they are replaced by employees, the commitment to the local community erodes. In poorer and rural areas, this can lead to a shortage of skilled professionals, and ultimately a decline in the overall talent pool available to support economic activities. Overall, the loss of local business leaders contributes to a stagnation of economic activity, decreased job opportunities, and often a decline in economic activity, associated with deaths of despair (Reference Case and DeatonCase & Deaton, 2020).

Section 3 describes the scale and scope of PE investments, demonstrating that nearly every sector of local community economic life is affected and immiserated by the extractive practices of PE investors.

It Began with Manufacturing

The original application of the PE model was targeted towards manufacturing firms through LBOs. One early iconic LBO was KKR’s purchase of the machinery conglomerate Houdaille Industries in 1978 (Reference Appelbaum and BattAppelbaum & Batt, 2014, pp. 25–27; Reference HollandHolland, 1989), which, after PE firms had drained the firm, went bankrupt to the detriment of its workers, retirees, the local community, and US competitiveness. The role of PE acquisitions and restructuring is amply described in academic articles,Footnote ⁸ the popular press, and even full books as firm after firm succumbed to takeover offers (Reference BakerBaker, 1992; Reference HollandHolland, 1989). Initially, the targets were conglomerates that were perceived to be under-valued by the stock market. After the acquisition, the various businesses were spun off under the assumption that they would be more efficient if operating separately. Of course, the tax benefits that undergirded these financial actions are not efficiencies – they are subsidies that benefit the PE firm. What these initial LBOs did demonstrate was the feasibility of this type of investing.

Given their success with breaking up conglomerates, PE investors shifted their practice to the purchase of undervalued US manufacturing, leveraging the firms’ own assets in the takeover. The PE investors invariably applied their regime of extreme cost-cutting, ditching liabilities such as pension obligations and environmental cleanup, renegotiating contracts with workers and suppliers, and lowering quality. Part of cost-cutting was offshoring production wherever possible. This new phase of PE targeting would have a far greater impact on the communities where factories were downsized or closed. In aggregate, PE played an important role in the destruction of the towns and cities of what is now known as the Rust Belt. The impacts were most significant for local communities that were dependent on one major employer. Brian Reference AlexanderAlexander (2017) describes what happened to Lancaster, Ohio after PE firms repeatedly bought and sold Anchor Hocking until the point where the firm and its local operations were closed. At the end of this process, this economic anchor for Lancaster had disappeared, and it was one more devastated Rust Belt city. PE firms repeated this practice across the industrial Midwest, as the factories were closed, and pension plans were destroyed. Facilitated by tax law and other mechanisms such as NAFTA, the offshored jobs were never replaced. Though paradoxically, after forty years of these practices in 2023 the United States is concerned about its offshore supply chains – but few mention how financialization and rapacious PE investors contributed to the current state of events.

To illustrate how pervasive the phenomenon was in the decade of the 1980s, Reference Zorn, Dobbin, Dierkes, Kwok, Knorr-Cetina and PredaZorn et al. (2005, p. 284) found that 144 of the Fortune 500 firms (29 percent), mostly industrial firms, were subject to hostile takeovers: 90 percent (129) were successful. An analysis of large acquisitions from 1983 to 1998 concluded that the PE acquisition shifted as the number of unrelated or diversifying acquisitions dropped dramatically, while acquisitions of firms in the same industry or firms that were suppliers increased. Same industry acquisitions increased market power, while the acquisition of suppliers captured control of critical components and removed their availability for competitors. In addition, the supplier firms were often relocated offshore as part of a more general trend that accelerated after China joined the WTO in 2000.

This early PE investment in manufacturing could be understood as a reorganization of declining industries for redeployment to new sunrise industries. Investing in new technologies and new firms became the focus of venture capital, a specific form of PE associated with the rise of Silicon Valley. The VC model relies on taking a share of the company ownership in return for active management with the objective of increasing the companies’ valuation. Yet, investing in new technologies and building successful companies is risky and time-consuming, while acquiring existing companies using their own assets to flip and resell is relatively easier. Moreover, the amount of money invested in PE dwarfs the investment of VCs. VCs have a noted tendency to invest in certain regions and certain technologies, especially information technology and biotech, and overlook other sectors of the economy (Reference Florida and KenneyFlorida & Kenney, 1988). In sum, the deindustrialization of US manufacturing we have observed over the past forty years is no surprise given the modus operandi or PE investors.

From the perspective of the locals, the closure or downsizing of a local manufacturing operation after PE equity devastates the affected community. However, PE firms and their practices were evolving and finding new sectors. More recently, PE has become pervasive, with activity in every community and through purchasing existing local businesses resulting in an octopus-like grasp on a range of its acquisitions in the average community. Our analysis relies on existing studies and reports. As a reality check, using a well-known proprietary investment data source, we counted sixty-three separate PE investments made in one small American city since 2000. Indeed, all the activities we discussed were targets in this city.

Extracting Wealth from the Healthcare System

PE investment in the healthcare industry is dramatically weakening local communities and contributing enormously to the evolution of an overly expensive, badly performing system that leaves neither healthcare professionals nor patients and their families happy (Reference OlsonOlson, 2022).Footnote ⁹ Beginning in the 1990’s PE brought its form of investing to an ever-increasing variety of healthcare-related areas exploiting the fact that these services are not only essential but they are also covered by Medicare and private insurance making healthcare very lucrative. This trend coincides with healthcare becoming an ever-larger share of the US economy, increasing from 12.1% in 1990 to 18.3% in 2021 of GDP. The total size of the US healthcare market is $808 billion, with 65 percent or the lions’ share of revenue coming from patient care, where PE investment has been aggressive. In 2010, the estimated annual PE deal value was $41.5 billion – in 2021 it had grown to more than $200 billion. The sheer scale of this investment is telling: PE firms have invested over $750 billion into US healthcare since 2010 (Reference Scheffler, Alexander and GodwinScheffler et al., 2021). Even with Reference OlsonOlson’s (2022) vital work, the scope of PE ownership in the healthcare sector remains unmeasured.

By 2023, PE has penetratednearly every aspect of the lucrative US healthcare industry and is transforming them with the same playbook deployed in other industries – purchasing going concerns by levering their assets, saddling them with debt, and then decreasing labor costs, and raising prices. The income from the now-captive operation is funneled out of the local community to pay the interest on the debt and PE fees. Due to the multiplier effect, the community is worse off as income and profits accrue to the PE firm. But, even worse for the local community, control of decision-making moves away from the local community to the location of the PE firm, where, for example, healthcare assets are managed by accounting algorithms that constantly assess the income from each type of care, with local healthcare professionals pressured to offer or prescribe the care that generates the greatest return. In contrast to the local hospital or doctor’s practice that often provided pro bono work for the indigent, the PE owners have no interest or relationship to the community – they are simply a population from which to extract value. If the healthcare operations are not profitable, they will be closed as a purely economic decision that does not consider the healthcare outcomes for the local community.

Consolidating Hospitals into Systems while Dismantling the General Hospital

Traditionally, hospitals were operated by religious organizations, local government, local nonprofits, or as a university medical center. Hospitals saw their mission as operating for the good of the community and served as a center of activity and a place where individuals in need could get help. From the Roosevelt Administration through the Nixon administration, legislation increased access to healthcare by providing insurance and expanding benefits (KFF, 2009). This changed in the mid 1970s when the Carter administration began a focus on cost containment and divested oversight and administration to state governments. In response, individual hospitals consolidated into systems that typically involved similar-sized hospital systems merging or a larger hospital system acquiring a smaller one, often in the same city or state. The last decade has seen cross-market mergers – the merger between hospitals located in geographically separate areas. For example, the $27 billion Atrium–Advocate Aurora merger was completed in December 2022, creating the fifth-largest hospital system in the United States, serving nearly 6 million patients in the South and Midwest. Invariably, after these acquisitions and consolidations, managers with financial experience replaced doctors as hospital administrators.

In 2023, PE investors owned 30 percent of all for-profit hospitals (Private Equity Stakeholder Project, 2023), and they have begun making inroads with nonprofit hospitals (Becker’s Hospital Review, 2013).Footnote ¹⁰ However, this dramatically underestimates the impact that PE investors have had, as it includes only those currently owned by PE, not those that it has bought and have gone bankrupt or been sold to other investors including the public. Perhaps the most celebrated hospital system acquisition by PE was the 2006 $33 billion (of which $11.7 billion was leveraged debt) purchase of HCA (Hospital Corporation of America), the largest for-profit hospital operator in the United States (Hospital Corporation of America, 2006). This buyout proved to be wildly profitable and became the model for PE investing in healthcare. The alleged “victims” in the HCA buyout were institutional shareholders as the PE firms that bought HCA were later accused of price-fixing the bidding for the firm (Becker’s Hospital Review, 2012). PE investors were later accused in a series of New York Times investigative articles of requiring physicians to treat more patients and changing the coding for procedures to extract more reimbursements from insurers (Reference Abelson and CreswellAbelson & Creswell, 2012; Reference PressPress, 2023).

Ultimately, the HCA acquisition was a success for the PE firm and the limited partners, yet the costs were born by the employees who faced increased workloads, the insurance firms, and the government insurer Medicare who faced increased costs due to the practice of up-billing by switching coding for procedures to receive higher reimbursement or the cherry-picking of healthier patients. Health outcomes after the acquisition of hospitals by PE are documented to decline, with many horror stories of abuse (Reference PearlPearl, 2023), even as costs increase after PE completes an acquisition (Reference Borsa, Bejarano, Ellen and BruchBorsa et al., 2023; Reference SchulteSchulte, 2022).

Hospitals provide an attractive investment for PE because consumers’ need for health is recession-proof, decision-making and accountability are not transparent, and reimbursement from insurance is guaranteed. Hospitals hold assets such as real estate and equipment that could be leveraged for the initial purchase and then sold off and leased back. There are many studies and reports on the outcome of hospital acquisitions (c.f., Reference Bruch, Gondi and SongBruch et al., 2020), that conclude that social costs to communities and public health are substantial.

Hospitals stand at the heart of their communities and their presence contributes to community resilience and stability. In addition to providing clinical care for the ill and supporting public health, hospitals have a mission that includes caring for all members of the community, especially those most in need. Hospitals have traditionally provided emergency rooms, and continuing care for the critically ill, and are vital in disaster responses and preparedness. Hospitals are invariably among the largest employers in a community and provide a wide range of job opportunities for healthcare professionals, support staff, and administrative personnel. After an acquisition, invariably PE consolidates operations and often closes the local hospital – removing this key actor from the community causing many patients to travel great distances for care.

PE investors have engaged in the un-bundling, re-bundling, and outsourcing of the various functions and departments previously managed by the hospital. The general hospital as a unitary entity has been dismantled: noncore services from cleaning and food preparation, which were once often unionized, and medical-related services previously provided by hospitals have been outsourced. Even prior to the pandemic, there were shortages of medical professionals in the United States, but particularly concentrated in nursing. Bur shortages exist in many other medical specialties such as physical therapy and various technologists such as radiology, and ultrasound. There are ample reasons for these shortages that include criticisms of the general management, notably PE-owned hospitals (Reference BugbeeBugbee, 2022, p. 6).

What is certain is that the healthcare contract labor industry is growing rapidly. We direct attention to nurses and physical therapists. Already prior to the pandemic, traveling nurse revenue increased from $3.9 billion in 2015 to $11.8 billion in 2021 (Reference BugbeeBugbee, 2022). The cost to the hospital of a traveling nurse may be as high as $270 per hour, while the traveling nurse receives $85 per hour plus benefits including housing and meal allowances – the remainder is retained by the traveling nurse agency. These excellent profit margins attracted PE, as Reference BugbeeBugbee (2022, p. 13) shows PE acquisitions of medical staffing firms increased from two or three per year in 2010 and 2011, respectively, to twenty-seven and eighteen, respectively, in 2021 and 2022. PE firms also began investing in online staffing platforms.

From the local perspective, traveling nurses from outside the community are only temporarily local, thereby having connections to the local community. Conversely, local staff nurses become traveling nurses due to the wage differential and are out-of-town for long periods and lose connections to their local economy. Not only do patients not develop relationships with ever-changing staff, care is more costly and profits are transferred to the contracting firm; many of which are owned by PE firms.

While the hospital can be understood as a core institution for community healthcare provision, the healthcare system has become more differentiated and complex – and at each node, one encounters PE investment consolidating and extracting value. The following section considers medical specialties (e.g., urology, dermatology, etc.) and emergency rooms where PE plays a major role through their ownership of contract management groups (Reference Berry and BarauchBerry & Barach 2021).

Hospital Departments & Emergency Rooms

PE focused on acquiring organizations that provide hospitals with clinical services outsourced to control costs. The PE model is to purchase individual private medical practices, consolidate them into a bigger entity that provides outsourced services to the hospital, and then sell the entity for a profit. The most obvious rollup is horizontal by purchasing physicians’ practices in the same specialty, with the objective of establishing market power. For example, after Medicare announced coverage for total knee replacements in outpatient settings, PE investors began rolling up orthopedic practices (Reference Appelbaum and BattAppelbaum & Batt, 2020, p. 52). Medical professionals are often among the wealthiest and most committed residents in a local community. The retirement of baby-boom generation physicians, coupled with the high educational debt incurred by newly minted doctors, has created an opportunity for PE firms to purchase practices and turn physicians into employees rather than small business owners, shifting the locus of control away from the local community and towards the location of the PE firm.

One single PE firm has more than 50 percent market share of full-time-equivalent physicians in 13 percent of American communities (Reference Scheffler, Alexander, Fulton, Arnold and AbdelhadiScheffler et al., 2023, p. 4). Price increases associated with PE acquisitions are exceptionally high where a PE firm controls a competitively significant share of the local market. When a single PE firm controls more than 30 percent of the market, the cost of an office visit increases by 18 percent for gastroenterology, 16 percent for obstetrics and gynecology, and 13 percent for dermatology. The PE firm may require the physicians’ offices they control to order tests and procedures from other firms they own, guaranteeing greater opportunities for increasing revenues and profits – at the expense of patients, insurers, or the government. This integration of the supply chain is difficult to track and is rarely recognized when reporters or researchers examine the control PE firms have in a particular local medical specialty market.

The Emergency Room (ER) is one of the most vital hospital operations for a local community and has attracted significant PE attention: from 2009 to 2019, PE control grew from 8.6 to 22 percent of the total market (Reference Adler, Milhaupt and ValdezAdler et al., 2023), with other estimates as high as 40 percent of the market for ER services (Reference WolfsonWolfson, 2022). There is ample anecdotal evidence that as a result of the sale by hospitals of their ERs to PE firms, the price per visit increased, while the quality of service decreased, as the PE firms reduced costs by replacing physicians with nurses (Reference Kelman and FarmerKelman & Farmer, 2023) and used other cost-cutting strategies. Prior to the passage of the No Surprises Act in 2020, one of the largest income sources for PE-owned ERs was out-of-network billing that allowed them to charge wildly inflated bills for service. In 2023, the KKR-owned Envision Healthcare ER declared bankruptcy over litigation with health insurers regarding out-of-network surprise billing and upcoding of procedures (Reference HallemanHalleman, 2023). As a result, in Texas, there are lawsuits to overturn the law (Reference PearlPearl, 2023). The experience at the ERs is reproduced in nearly every corner of the healthcare sector. In the overall strategy to extract value, tactics include price increases, medical insurance up-coding of procedures, attempts to sell “add-on” services, lowering labor and other costs, service quality declines, and the use of leverage to extract value differ only by the specificity of each setting.

The original aim of outsourcing ERs was to lower costs (Reference Appelbaum and BattAppelbaum & Batt, 2020, p. 59). However, outsourcing the ERs had a surprising result, namely, the ER doctors were more likely to admit patients from the ER to the hospital. This benefited the hospital because, due to government policy, Medicare pays less for patients treated in the emergency room than those admitted to the hospital! This encourages not-for-profit hospitals to outsource their ERs. The ultimate result, of course, is that the hospital outsources its ER, which then experiences PE acquisition.

ERs are only the beginning. Instead of ERs, some of the traffic can be rerouted to outpatient urgent care centers, which are attractive to uninsured patients and medical insurers due to their lower cost and simplified organizational structures, which require less staffing and lower facility maintenance costs. Referred to as Doc in a Box, the typical center is small and located in a strip mall with one physician, one physician assistant or nurse practitioner, one or two medical assistants, one radiological technician, one center manager, and one or two receptionists. The services provided in these centers require a narrower range of skilled staff with less medical expertise, although perhaps, more social and patient communication skills. Employees are also paid less than hospital employees in similar occupations with similar educational and demographic characteristics (Reference Berry and BarauchBerry & Barach, 2021). On average, depending on the occupational group, urgent care centers pay roughly 9–12 percent lower hourly wages than hospitals, except cleaning services (which pay 18 percent lower). Moreover, unionization rates in outpatient care are half those of hospitals – 6 percent versus 13.6 percent in 2015 (Reference Appelbaum and BattAppelbaum & Batt, 2020, p. 44). The Urgent Care Centers, while clearly useful, are changing healthcare.

The acquisition of ERs by PE means that one of the key community-facing healthcare activities would be now managed by the PE textbook. One result was a rise of “surprise billing,” as PE firms strove to increase their revenue (Reference Sanger-Katz, Creswell and AbelsonSanger-Katz et al., 2019) and, as every American who has used an ER knows, ever longer waits and overworked doctors and nurses. Moreover, ERs became a template for outsourcing ever more activities from the hospital, which we briefly discuss in the next section.

Outsourcing Specialties and Private Equity

The unbundling of the hospital fed by privatization and the possibility of accessing federal monies has moved forward inexorably both in terms of medical specialties and functions such as surgery, and kidney dialysis. This has been motivated not by greater efficiency in terms of the delivery of high-quality healthcare but rather by an ability to extract rents.Footnote ¹¹ Rather, the goal of all of these acquisitions is to develop monopoly-like positions in various specialties, decrease costs as low as possible, and wherever the government extends medical coverage to that area, as this ensures a market with a payer that makes possible price increases.

The takeover of the kidney dialysis market is an excellent example of how PE operates in the healthcare field by identifying a hospital function, creating a freestanding practice, and then undercutting the hospital’s (pricing by lowering quality and service) operation, thereby attracting insurance and Medicare patients. This forces the hospital to cease its operations. With this accomplished, the PE-backed operation can raise prices. This process has been repeated in healthcare function after function. Rather than list here all the functions PE has penetrated, we refer readers to Laura Katz Reference OlsonOlson’s (2022) book, Ethically Challenged, which is a comprehensive study of how PE penetrates various healthcare functions. In many respects, the transformation that happened in the emergency room has been repeated in other fields. In this section, drawing upon Reference OlsonOlson (2022), we briefly review PE penetration and transformation of kidney dialysis as an example.

Kidney dialysis went from an in-hospital procedure to one practiced in free-standing clinics. In 1972, given the rising cases of diabetes, Congress extended coverage to those suffering from renal failure to all citizens. This immediately created a large and what would prove to be a growing market as obesity and diabetes caused greater renal failure. In 2022, Reference OlsonOlson (2022, p. 111) reported that it had grown to a $34.7 billion industry and was continuing to grow rapidly as the need increased and the industry was able to push up prices. The four largest dialysis chains have been or are currently owned by PE firms. Given the drive to increase profitability, it is not surprising that facilities owned by PE investors have significantly higher mortality rates than hospitals (Reference OlsonOlson, 2022, p. 114). Kidney dialysis has been transformed into a powerful profit center by Medicare reimbursement, but is largely unregulated, providing an incredible opportunity for profits.

Given the dilapidated and exploitative operation of these dialysis centers and the relative inaction of lawmakers to whom dialysis and PE firms make significant campaign contributions, the conditions are unsurprising. However, there have been various state attempts to regulate the activities of kidney dialysis centers. In California, where PE-owned dialysis firms made $3 billion in profits in 2018. In 2018, Proposition 8 proposed to cap profits and create minimum staffing standards for these largely unregulated clinics. The PE-owned dialysis clinics spent over $100 million to successfully defeat the proposition (Reference OlsonOlson, 2022, p.115). In 2022, there was yet another proposition placed on the ballot to create minimum standards for dialysis clinics. And yet again, massive spending on heart-rending television advertisements by the PE-owned clinics defeated the proposition. The result is, of course, massive profits and healthcare outcomes that are far worse than other nations, but also worse than outcomes at nonprofit hospitals. Here again, PE firms used government regulations to unbundle what was formerly a part of the general hospital using the same playbook. First, the PE-owned clinics offer the service at a low cost – but with measurably lower quality (Reference OlsonOlson, 2022, pp. 11–115). This pricing undercuts the hospital. In response, the hospital abandons the service because it is uncompetitive. Now that the superior competition has been vanquished, prices increase to whatever the market will bear. Unfortunately, as Reference Eliason, Heebsh, League, McDevitt and RobertsEliason et al. (2022) found patients of dialysis clinics experience increases in mortality and hospitalization following acquisitions by a large corporate chain. The dialysis clinic is now extremely profitable at the cost of price, quality, and service. For the community, the general hospital now offers one less service, and the health of the community is reduced.

Dialysis centers are only one of many healthcare activities and hospital departments that have been penetrated by PE firms seeking to extract value from healthcare. We used dialysis as an example of the far broader phenomenon. The proliferation of these various healthcare facilities may appear as though they contribute to local economies, but their purpose is to extract value, leading to inferior healthcare, while weakening the local not-for-profit general hospitals. Given the deep penetration of PE into healthcare it is little wonder that the US spends a far greater percent of its GDP on healthcare than other developed nations while having worse outcomes. For local communities, this has meant the closure of hospitals in smaller communities, robbing them of healthcare options and making patients travel further for care.

PE has a larger influence as its entrance into an industry also creates a new sector logic. For example, when PE acquires a local dental office, it implements its toolkit – cutting costs and upselling. Due to economies of scale, the PE-owned dental office can offer services at a lower cost than the existing office, but the PE firm can offer incentives for upselling patients and share the return with the dentist. The dentist-employee could conceivably be better compensated than the dentist-owner, thereby incentivizing the dentist-owner to begin upselling their customers or selling their practice to a PE firm. The ultimate outcome is that a new short-term financial logic would take hold overthrowing the older professional code in medical care.

Ambulances

When we dial 911 for an ambulance for an emergency, the chances are that PE will respond. Patients have no control over which ambulance comes in response to their emergency, which creates an opportunity for price-gouging (United States Government Accountability Office, 2019). Two PE firms, American Securities and KKR, control almost two-thirds of the national market for air ambulances (Reference Chhabra, McGuire and SheetzChhabra et al., 2020). Ground ambulances transport about 3 million privately insured patients to emergency rooms each year, with private companies providing one-thirds of those rides. While consumers expect insurance to cover the costs of transport after an accident, most patients receive a surprise bill, with a median bill amount of almost $22,000 for air transport and a median bill of $450 for ground transport. Congress last year enacted the No Surprises Act, which prohibits unexpected out-of-network bills, however, the protections do not apply to ground ambulance services. Many localities that once ran their own, nonprofit ambulance teams are now serviced by one of a few massive corporations, with frequent service disruption as assets are traded with little regard for the community. In 2016, PE owned twelve ambulance companies with three filed for bankruptcy from 2013–2016 (Reference Ivory, Protess and BennetIvory et al., 2016a).

Veterinary Services and Pet Supplies

PE firms also extract value from our pets. From 2017 to 2022, PE investment in the veterinary sector totaled over $45 billion (Reference PretePrete, 2022). In 2015, the PE firm, BC Partners, purchased PetSmart and implemented the PE strategy. Not long afterwards, reports of animals dying due to understaffing and other forms of neglect were reported (Reference BallouBallou, 2023b). In contrast the human healthcare, veterinary clinics are cash-based businesses. Remarkably, veterinary prices increased faster than human medical services (Reference BallouBallou, 2023b).

Vets were traditionally highly trusted professionals but with consolidation and PE financing, the familiar story of increased prices and declining quality is reported (Reference CarrollCarroll, 2023). Of course, veterinary services are only a small part of a local community, but veterinary services and vets are another segment of independent professional businesses, often women-owned, that was another piece in the jigsaw of a resilient independent community that has been replaced by an algorithm-driven extractive logic built upon upselling to grief-stricken pet owners. In the next section, we turn to another vital sector of any community – housing.

Housing

Housing is an enormous asset class encompassing multi-family, single-family, and mobile home residences. In 2023, US residential real estate was estimated to be worth $43 trillion (Reference MaloneMalone, 2023) and in 2021 multifamily dwellings were worth another $3.8 billion (Nareit, 2021). Yet housing is more than an investment – it is an essential item for individual, family, and community quality of life. Housing proved to be a perfect industry for PE investors, as demand is inelastic – that is to say, the families and households will pay whatever the market demands to avoid the alternative of becoming homeless and living on the streets. PE competes against families to buy the limited supply of housing. With PE owning the home, instead of building wealth for residents, these homes are now a vehicle for profits, with rents increasing while quality and maintenance decline. PE’s entrance into housing, like so many other sectors, was facilitated by government policy.

PE has become a powerful actor in housing markets beginning in the 2000s. During the Housing Bubble in 2005, PE firms bought 100,000 units of rent-stabilized housing in New York City. These properties were formerly not considered good investments because of a rent control policy that kept the units’ monthly rental fees below that of similar apartments. But due to deregulation, that calculation changed. PE firms bought up entire buildings to convert these properties to market prices, using bank loans to pay wildly over-inflated prices. To pay back these loans, the investors had to either drive the affordable rent-protected tenants out and/or decrease maintenance, both of which they proceeded to do. To encourage tenants to leave the new owners harassed tenants “by filing building-wide eviction notices, baseless lawsuits for unpaid rent, aggressive buy-out offers, refusal to make repairs inside units, and threats to call immigration authorities.” As a result, tenant advocates termed the new owners as “predatory equity” (Reference FieldsFields, 2015, pp. 149–150). After the 2008 Financial Crisis, various tenants’ rights groups were able to pressure local governments for some relief especially as a number of these early PE investors were foreclosed by the banks.

As memorialized in the movie “The Big Short,” mortgages became vehicles for unbridled financial speculation. The 2008 mortgage ravaged entire communities as millions of homeowners defaulted on predatory loans. Reference Ellen and DastrupEllen and Dastrup (2012) estimated that $7 trillion in home equity evaporated during the crisis with many losing everything. However, the Obama Administration rather than rein in financialization and support the homeowners decided that PE could be part of the “solution.”Footnote ¹² After the federal government bailed out the Federal National Home Association (FMHA) and its sister organization, Federal Home Loan Mortgage Corporation (FHLMC), these two organizations bought foreclosed loans from the private banks and then sold the homes to PE firms as bulk transactions as they were supposed to be easier to manage. This proved to be a massive wealth transfer to the PE buyers and whetted their appetite for residential real estate (Reference BallouBallou, 2023a, Chapter 2; Reference FieldsFields, 2018).

These decisions by the Obama Administration attracted PE firms to purchase single-family residences (SFRs) and convert them into rental units as the housing market collapsed. Unsurprisingly, PE worked to cut operating costs to increase income. One of the solutions was to manage these properties through online platforms (Reference FieldsFields, 2022), removing on-site property managers, to provide service to tenants such as handling routine maintenance issues but also overseeing safety and routine functions. There is evidence that PE firms have slighted maintenance, piled on unexpected fees and charges, and ignored their tenant’s complaints (Reference BallouBallou, 2023a, Chapter 2). In yet another ploy to extract more capital from its portfolio of SFRs, Blackstone-owned Invitation Homes was able to secure a government guarantee for its securitization of future rent payments. This allowed for the sale of securities that generated a dividend – a remarkable achievement – that made its investments even more profitable, with the government and taxpayers accepting all the risk (Reference RichterRichter, 2017). Moreover, with government rent payment guarantees, Blackstone and other PE firms qualify to pay a lower interest rate, thereby favoring it over individual buyers who wish to take out a mortgage to buy a home (for further information see Table 4). Unsurprisingly, PE investors have plunged into SFR purchases: PE is estimated to own approximately 5 percent of all SFRs in the United States, with an estimate that this could grow to 40 percent by 2030 (Reference BakerBaker, 2022). PE portfolio firms (some of which have made public offerings) own even larger concentrations of SFRs in markets such as Atlanta, Phoenix, and Tampa (Reference Colburn, Walter and PfeifferColburn et al., 2021; Reference MillerMiller, 2022).

PE firms have become important buyers of new housing, accounting for 18 percent of single-family home sales nationally (Reference ShermanSherman, 2022). Reference EasonEason (2023) reported that families were outbid by investors for a home only to then have to rent from those same investors, who disproportionately target starter homes in communities of color. Rather than a local owner, the new model is the remote digital landlord, with all aspects of the relationship managed online, making it difficult to get service, resolve disputes, and simultaneously eliminate local jobs. Rather than regarding housing as an essential need and an important locus of family and individual life, real estate simply became another asset class.

During the last thirty years, real estate has become increasingly financialized as apartment buildings and mobile home parks went from being individually and locally owned to being owned by large national and global investors. PE investors have also been extremely active in purchasing apartment buildings, owning approximately 1 million apartment units in the United States or 3.6 percent of all apartments in the country. Importantly, a significant percentage of these were made with the support of the Federal government’s FHLMC (Federal Home Loan Mortgage Corporation or Freddie Mac). While only a small portion of all the total loans were financed by the federal agency, the PE firms accounted for 85 percent of FHLMC’s twenty largest deals to finance apartment complex purchases. The largest of these was for nearly $1.8 billion (Reference VogellVogell, 2022b)

Mobile home parks have attracted significant attention from PE. This sector often ignored is significant as a housing choice with approximately twenty million US citizens living in mobile homes (also known as manufactured housing). Mobile-home parks are the largest sources of nonsubsidized, low-income housing in the country very often serving senior citizens, veterans, and people with disabilities (Reference SullivanSullivan, 2018). Residents often buy their manufactured homes that often are not really mobile, thus their investment is actually fixed spatially. Normally, they rent the land that their homes occupy and, because the homes are expensive to move, they are very vulnerable to rent increases – a fact that PE firms recognize and thus, after acquiring the mobile home park dramatically increase the rent – confident that the residents will not move. Further, mobile home dwellers are excluded from the basic legal protections that cover tenants in rented houses or apartments, such as mandatory notice periods for rent increases and evictions (Reference KolhatkarKolhatkar, 2021). The captured nature of mobile homeowners makes investment attractive to PE firms. Finally, if the land is sufficiently valuable it can developed for another purpose driving the renters out completely.

University dorm housing, with its captured clientele, has also attracted PE firms (Reference LightLight, 2022). In 2022, for the first time, the average rents for purpose-built student housing grew faster (8.8 percent) than did rents for regular multifamily housing (Reference AlonsoAlonso, 2023). To illustrate, in 2022 PE giant, Blackstone acquired American Campus Communities, which owned 166 properties located on or around 71 large university campuses for $13 billion. This was added to the more than $7 billion worth of student housing it already owned. To complete the circle, Blackstone received a multibillion-dollar bailout from the University of California’s Board of Regents (Reference GallagherGallagher, 2023). Remarkably, student housing, which used to be owned and operated by universities, has been sold to PE firms.

Advances in technology have been the linchpin in the corporate consolidation of housing. Without innovations like cloud and mobile computing, digital platform architectures and business models, and massive data sets and the algorithms that sort them, it would not have been possible for large investors to take advantage of the market dislocation caused by the 2008 crisis (Reference Fields and VergerioFields & Vergerio, 2022). These new information technologies enabled firms like Invitation Homes (backed by Blackstone until 2019) to monitor markets at scale, rapidly evaluate and submit offers on homes that meet their investment criteria, and “efficiently” manage large, geographically dispersed portfolios of single-family rental homes. Corporate landlords have built powerful in-house data platforms fueled by algorithms that rapidly evaluate and submit offers on homes meeting investment criteria. With their vertically integrated corporate structures, institutional-scale landlords have access to a continuous flow of data about tenants and operating costs, which allows them to seek operating efficiencies and new market opportunities. Unparalleled access to precision technologies, data, and digital analytics underpins the institutionalization of single-family residents (Reference Fields and VergerioFields & Vergerio, 2022, p. 12).

This is a story of inelastic demand with little bargaining power providing a reliable source of income that can be managed digitally with little accountability guaranteeing a high rate of return. In 2022, there was an antitrust lawsuit filed in Texas that alleges that these giant PE housing owners share their data with a software firm, RealPage, that is also owned by PE firms. RealPage is then used by firms to algorithmically “collude” in setting rental prices (Reference VogellVogell, 2022b). In the process, local citizens experience higher rents and degraded quality of service, while smaller, local landlords who may know and care about their tenants are squeezed out of the market. When citizens try to use the ballot to curb the abuses of these nonlocal PE landlords, the PE firms pour money into stopping the ballot initiatives and invest in ensuring that politicians favorable to their interests are elected. And, if on the off chance local regulations meant to control their activities pass, the PE firms invest in high-powered legal firms to take the local government to courts that have been packed by neoliberal judges. Finally, PE uses state and federal preemption to impose zoning and building code restrictions to override local discretion, as a final resort. Local laws and jurisdictions are anathema to PE firms and their supporters, as they form barriers to the unfettered flow and prerogatives of capital.

Supermarkets

Supermarkets are core institutions for any community and their closure can result in food “deserts” that have dire health and well-being impacts on the surrounding community whether urban or rural. Since the early 2000s, PE firms have invested repeatedly in supermarket chains consolidating operations (see Table 5). Supermarket chains are attractive to PE investors for a number of reasons: First and foremost, rollups could result in oligopolistic concentration whereby customers had fewer choices allowing the supermarket to increase prices (Reference TkacikTkacik, 2022). Increased size creates greater leverage for bargaining with suppliers; many of whom have also been consolidating – often under the tutelage of their PE owners. Often, the land and facilities could be liquified by selling and leasing them back, thereby releasing significant amounts of capital that were used to pay “special dividends” to the PE owners.

As in all of our cases, workers are one of the first victims. In the 1940s and 1950s, supermarket chains unionized and the workers were paid significantly more than the nonunionized workers that staffed most retail stores. These unionized workers not only had higher pay and benefits, but for many supermarket chains their pensions were significant liabilities decreasing the overall “value” of the firm – if these could be discharged the value of the firm would increase (Reference Batt and AppelbaumBatt & Appelbaum, 2018). These conditions thus were significant opportunities for PE investors to increase the value of their investment.

As with PE acquisitions in other industries, supermarket takeover strategies such as “prepackaged” bankruptcies to shed pension fund liabilities have been used (Reference Batt and AppelbaumAppelbaum & Batt, 2018, p. 4). Through their various roll-ups, bankruptcies, and store closures, 10,000s of workers have lost their jobs, even as food deserts across the US have expanded (Reference HamidiHamidi, 2020). PE-owned firms are very focused on the financial returns of individual stores and, unsurprisingly, in their efforts to improve profitability, and stores located in small towns and poorer neighborhoods were abandoned.

Supermarkets are critical institutions in local communities. PE investors, as can be seen from Table 5, have bought chains resulting in the closure of more than 1,500 stores due to bankruptcy alone (Reference Batt and AppelbaumBatt & Appelbaum, 2018) with hundreds more closed in cost-cutting exercises. Communities were impoverished as unions were weakened and even, more directly, when the PE owners reneged on the firm’s pension obligations. Moreover, the roll-ups meant that control of these supermarkets, which previously had been regional, was increasingly distant and thus less amenable to local influence. In the process, supermarket workers, food consumers, and the local tax base have been harmed by the extractive activities of the PE industry.

Newspapers

PE played a significant role in the demise of local newspapers and a corresponding lack of reporting on local events and providing civic information important to communities. Newspapers played an important role in democracy and local opinion formation. When observing the US and the factors that supported the early American democratic experiment, De Tocqueville noted, “Nothing is easier than to set up a newspaper, and a small number of readers suffices to defray the expenses of the editor” continuing “the number of periodical and occasional publications which appears in the United States actually surpasses belief.” At the time, these newspapers were often crude but served as a source of public order and local control of politics important to democracy Local newspapers provide information about local concerns, provide transparency for public meetings, and report on civic and social events. Since 2005, roughly 2,200 local newspapers have closed, as the number of newspapers per hundred million population fell from 1,200 (in 1945) to 400 in 2014. The number of newspaper journalists has decreased from 43,000 in 1978 to 33,000 in 2015 (Reference Kamarck and GabrieleKamarck & Gabrielle, 2015). The consolidation of US media has been an ongoing process. As these newspapers closed or were amalgamated, the news became ever more standardized. PE and other investment partnerships moved quickly to acquire hundreds of distressed newspapers and in 2023 they owned seven of the largest twenty-five newspapers.

The conventional, and overly simple explanation, is that the internet killed the news. Yet, advertising revenue for newspapers peaked in 2006 at $50 billion. This was more than ten years after the Internet became a commercial medium. Certainly, the internet had a role in the decline of news publishing. However, the entry of PE as it acquired not only local newspapers but also television and radio stations contributed to increased industry concentration. PE firms, following the pattern of buying distressed businesses, increased their share of America’s newspaper industry from around 5 percent in 2002 to 23 percent in 2019 (Pew). PE firms cut reporting staff and reduced local coverage more than other types of owners (Reference Ewens, Gupta and HowellEwens et al., 2022). PE owners cut back local news coverage, ran more national news content, and decreased the number of articles by nearly 20 percent.

When studying PE buyouts of local newspapers, Reference Ewens, Gupta and HowellEwens et al. (2022) found that following PE buyouts, in elections of county commissions and councils, mayoral and sheriff elections both total votes and turnout declined. Further, the fraction of people with no opinion about their U.S. House Representative increased by two percentage points (relative to a mean of 18 percent), but had no effect on opinions about the U.S. President. These results suggest lower participation in local democracy after PE buyouts, almost certainly driven by the decline in local news coverage that was instituted as a cost-savings measure.

Payday Loans

This lack of access to banking and the lack of individual ability to secure loans has given rise to the payday loan industry. Payday loans are short-term loans for less than $10,000, with high-interest rates. While pawn shops have long existed, payday lending exploded in the late nineties (Reference StegmanStegman, 2007). Due to extensive industry lobbyingFootnote ¹³, payday lenders are highly profitable and unregulated. Annual percentage rates (APR) can range above 600 percent when add-on insurance and service fees are included. In 2021, there were approximately 23,000 payday lenders in the United States, of which at least 5,000 are owned by PE firms.

Payday lenders serve a unique function as the household lender of last resort. Reference MorseMorse (2011) demonstrates that following natural disasters, the presence of payday lenders reduces foreclosures and larcenies. Reference MelzerMelzer (2011) finds access to payday loans decreases households’ ability to pay mortgage, rent, and utility bills. Driven by need, with limited options payday lending offers a means to prey on the most vulnerable in society and creates a cycle of debt traps that threaten the most vulnerable (Reference WhoriskeyWhoriskey, 2018). Predatory practices have been exposed in lawsuits. A 2022 lawsuit against the PE firm, Mariner which has 480 branches in 22 states notes, “Mariners’s policies and procedures are set and directed by headquarters, leaving minimal discretion to branch managers and loan officers to extend loans that work best for consumers according to their need and financial conditions” (Case 2:22-CV-03253). In another case, Elevate Credit paid $33 million to resolve litigation with Tribal Nations (Reference Pierre-LouisPierre-Louis, 2023). As always, it was the enormous profitability of this industry has induced PE to invest and increase the footprint of this most predatory of financial institutions.

Cradle to Grave

The provision of childcare services has been fragmented, with many providers, serving geographically distinct markets. The industry has been consolidating, with large national chains, including familiar names like KinderCare Learning Centers (Partners Group), Bright Horizons (Bain Capital with IPO in 2013), Primrose School (Roark Capital), and Goddard Systems (Sycamore Partners). Indeed, nine of the top eleven for-profit childcare providers, including all the top five, are backed by PE (Reference HaspelHaspel, 2023). Collectively, these investor-backed chains serve over 750,000 young children every day, representing a roughly 10 percent market share within childcare. Consolidation occurred to realize economies of scale. PE funds have been consolidating by buying up services. While the typical community-based center operates with thin profit margins, the chain centers can expect annual profits of 15 percent to 20 percent of revenue (Reference GoldsteinGoldstein, 2022). PE firms lobbied against Biden’s Build Back Better legislation, which would have created a near-universal childcare system and limiting childcare payments to 7 percent of family income for all but the wealthiest families (Reference GoldsteinGoldstein, 2022). This US decision occurred roughly in parallel with Canada instituting a universal $10-a-day childcare program (Reference YongYong, 2023).

PE firms are also investing in behavioral services for children and adolescents, including services for youth with intellectual and developmental disabilities, services for youth in foster care, services for youth in the juvenile justice system, troubled teen programs, and autism services (Reference O’GradyO’Grady, 2022). These care services are contracted out by state and local governments and are largely unregulated.

The PE entry into nursing homes, skilled care, and other such facilities has been nothing short of breath-taking and tragic – and really questions the US’s willingness to care for our older population. Here again, the logic of wealth extraction is absolutely dominant and transformative. Unsurprisingly, Reference Gupta, Howell, Tannelis and GuptaGupta et al. (2021) find that PE acquisitions of nursing homes increase short-term mortality and decrease the reported well-being of patients – in a familiar refrain they find that the acquisitions were financed by borrowing that puts pressure on the facility in terms of cost.Footnote ¹⁴

For the last act, PE has aggressively entered the funeral home industry. Typically, funeral homes are a venerable and high-touch local service. In many towns, the funeral home is a stately building, prominently located and run by the same family for generations. PE is attracted to this industry by high-profit margins, the inevitability of death, and the ability to cut costs by leveraging economies of scale in purchasing, administration, and marketing. Despite these arguments for cost savings, prices increase. For example, Angel Valley Funeral Home in Tucson Arizona was sold to PE-backed Foundation Partners Group in 2019, with prices increasing from $425 to $760 for a cremation, from $1,840 to $2,485 for a burial with no viewing or visitation, and from $3,405 to $4,480 for a full, economical funeral (Reference HawrylukHawryluk, 2022). For private funeral home operators, their reputation is their strongest asset, limiting opportunistic behavior at an emotionally vulnerable time.

Education

While K-12 education to date has received little investment from PE firms, other parts of the educational system have attracted PE investment. Another pernicious area of PE investment is for-profit technical schools and universities. These for-profit educational organizations have a long history of abusing their customers, a.k.a. students. Reference Eaton, Howell and YannelisEaton et al. (2020) found that PE buyouts lead to higher tuition and per-student debt. As has been seen in every sector, PE-owned schools capture government aid and after the buyouts spent less, had lower graduation rates, higher loan repayment rates, and lower earnings among graduates.

These abuses have been exposed in Congressional hearings and investigative reporting but little has been done to halt their activities (Reference Eaton, Howell and YannelisEaton et al., 2020). A 2017 study showed that for-profit schools received nearly 90 percent of their income from federal student assistance programs (Reference KelchenKelchen, 2017). Until recently, the US Department of Defense allowed for-profit universities to recruit students on military bases, all of whom had veteran’s educational benefits (Reference BurkeBurke, 2023). Only in 2023 did Congress propose laws providing the veterans with the ability to sue these firms for failure to deliver promised services.

PE firms investing in education deploy the same playbook as they do in other fields. What is remarkable is the educational benefits that our government provides to citizens and, in particular, veterans are hijacked by PE firms, that often have investments from universities such as Harvard, Stanford, and the University of California endowments, and little or no real education is delivered. But, more importantly, the dreams and ambitions of these young people are stolen, and, in many respects, the public benefits are squandered. The net loss to society is incalculable. For communities, for-profit university students siphon off from community colleges. In contrast, these for-profit universities have a very small local footprint and pay their employees and instructors poorly.

Home Repair

The universe of PE investor targets appears to be constantly expanding with greater destruction of local ownership. In 2023, an article in Bloomberg News entitled “Why Private Equity Is Chasing Plumbers and Lumber Yards” was published (Reference SassoSasso, 2023). This article captured the increased interest of PE in smaller private local service firms that have developed a local or regional market niche. A recent example from June 2021, was the consolidation by the PE firm, Grove Mountain Partners, of twelve East Coast HVAC firms (Reference MesenbrinkMesenbrink, 2023). These local recession-resistant industries, in some ways, resemble healthcare in that demand for these services is inelastic as repairs are not discretionary when problems arise. Of course, if homeowners cannot afford the repairs they might live without air conditioning or not repair the plumbing thereby allowing the housing stock to deteriorate as it has in many cities. Earlier, a typical market would have a large number of small providers with competition keeping prices under control. However, the massive entry into these industries has, as Tim Clarke, PitchBook’s lead PE analyst, was quoted, “If you acquire enough, you get economies of scale … You just keep rolling rolling, rolling and before you know it you’ve got 10–20 percent of the market (Reference SassoSasso, 2023).” What Clarke did not mention is that when two or three PE firms can capture 30, 40, 50, or 60 percent of the market, oligopolistic collusion can occur simply through price signaling. In these local markets, there is no scrutiny by any regulators either at the time of acquisition or afterward.

Similar tactics used elsewhere, such as cost-saving from buying parts in volume, using lower quality parts, decreasing wages for experienced technicians, hiring unqualified personnel, increasing prices to whatever the market will bear, and extensive advertising allow PE back companies to achieve powerful local market share. Once again, developing large local market share can turbocharge profitability and thus increase the value of the now rolled-up set of firms for a corporate buyer. For home services, there is far less government regulation, political concern, or press scrutiny.

Municipal Infrastructure and Public Goods

PE firms are actively working to access the $2.9 trillion that state and local governments spent in 2019 (Reference Nunn, Parsons and ShambaughNunn et al., 2019). PE investors have been delighted to create “public-private partnerships” where they acquire and manage public infrastructure. Investments are often hailed as partnerships but rather are privatizations where cash-strapped cities sell their service operations to the private sector. This is part of the neoliberal agency that favors fiscal austerity and greater dependence on the market and the private sector. Invariably the long-run costs to taxpayers and citizens are greater than public ownership. As importantly, the public loss key public assets diminishes a municipalities’ ability to pursue others and make investments. Invariably, with the PE extraction model the service levels decrease and the price for service in cases as the PE investors move to extract value from the asset as rapidly as possible. Finally, the value created by this infrastructure does not remain local but rather is transferred to the PE investors, thereby initiating a local divider effect that siphons off tax revenue.

There has been a long-standing philosophical debate about the balance between the public and private provision of government services. In the United States, this debate is noted to go back to the Revolutionary War with the procurement of armaments. When government provides services there has been a constant refrain that there will be waste, fraud, and abuse on the part of politicians and the, often unionized, public employees. These criteria have become dominant over concerns about equity, access, and the quality of service. Advocates of privatization promise greater efficiency and a reduction in the costs of service delivery, although the empirical evidence does not bear out the promise of lower costs and anecdotal evidence suggests that service quality declines, especially if PE is involved in the privatization (Reference Mann and WarnerMann &Warner, 2019).

Concurrent with the rise of neoliberalism, the sale of municipal services to PE began in the late 1970s. The ideology implicit in public choice theory and the new public management supported outsourcing public services in the putative name of greater efficiency. This ideology combined with the increasingly straitened local government budgets convinced local governments to begin privatizing municipal water and sanitation operations, solid waste disposal, parking revenues, and emergency and social services (Reference Ivory, Protess and PalmerIvory et al., 2016b). This decision to move public assets to private ownership and/or control invariably results in the breaking of public-sector unions, whose members live locally, reducing any multiplier effects from their local spending.

Shrinking populations and a declining industrial base have led to chronic budget deficits for many small and medium-sized communities. In contrast to the federal government, state and local governments are required to balance their budgets. Their only remedy has been to engage in complex privatization schemes, selling off or monetizing their assets, including stadiums, parkland, and utilities. One of the most dramatic and widespread sales of former municipal services is the privatization of water systems, which provide a fundamental necessity (Reference GrantGrant, 2013).

Infrastructure is expensive to provide and requires constant maintenance. The water and sewer systems in the United States are over 100 years old. Consider Pittsburgh: The American Society of Civil Engineers estimated that a minimum investment of $39 billion between 2010 and 2030 would be required just to update Pittsburgh’s water infrastructure with another $1.3 billion per year to treat the water supply (Reference ZessoulesZessoules, 2022). PE was very willing to join in. The city of Flint, Michigan offers another example of the lack of attention to this fundamental public service and the dangers of privatization. Both Pittsburgh and Flint ended their relationship with private entities in closed-door litigation.

Cash-strapped localities have privatized their water and sewer services. Often referred to as public-private partnerships these deals are found in any community that finds itself in financial difficulty. There are many different types of contractual arrangements covering operations, management, and ownership arrangements of water systems (National Research Council, 2002). Many municipalities lack the necessary technical expertise to negotiate complex water privatization contracts, providing a disadvantage in bargaining. This is exacerbated further by the fact that PE often bargains in bad faith or later decides to violate the terms and conditions forcing the community to sue in courts that are invariably packed with judges whose main goal is to uphold the rights of capital investment against the constraints of tradition, culture, and community.

Private acquisition of municipal utilities is a last resort source of capital. In the United States, government borrowing is the preferred funding mechanism.Footnote ¹⁵ Publicly owned utilities can issue tax-exempt municipal bonds that offer an advantage as bondholders do not have to pay federal income taxes on their earned interest. Yet, struggling municipalities have low credit ratings and are unable to competitively issue bonds. The sale of a municipal asset provides a one-shot infusion of capital.

One rationale for privatizing of water systems is the promise of efficiency gains and cost savings. Yet reviews of the evidence suggest that there is no significant difference in costs or efficiency between public and private production (Reference Bel and WarnerBel & Warner, 2008; Reference Bel, Fageda and WarnerBel et al., 2010). One study that followed the ten largest known sales of municipal water or sewer systems to for-profit companies found that typical household water bills had nearly tripled since privatization, increasing at an average of about three times the rate of inflation, and adding hundreds of dollars to annual household bills (Food & Water Watch, 2011). Water systems are essentially natural monopolies. They are capital-intensive and it is cost-prohibitive to have multiple providers serve the same location, resulting in a captive customer base. Public control of a natural monopoly can help ensure that service is widely available. A private firm in a monopoly position would act to maximize profits by raising prices and excluding service to those customers who are unable to pay. Municipalities that own their water utilities are more likely to have policies to protect low-income residents from disconnection. A greater risk is that once all the value has been taken out of the water system and it is close to collapse then the private firm will walk away leaving the residents without service. While the private sector benefits from short-term returns, the public sector is left responsible for long-term impacts (Reference Merme, Ahlers and GuptaMerme et al., 2014,p. 20).

The higher prices of private services do not result in investment in the water system infrastructure – quite the opposite. For example, in 2011 the Missoula, Montana water system was sold to the Carlyle Group. The Carlyle Group extracted the maximum income from its investment by neglecting maintenance while raising prices before selling it to a Canadian firm (Reference DouglassDouglass, 2017). During this period, the system degraded so badly that half of the water flowing through its pipes was lost. In June 2017, Missoula completed the condemnation process and paid $95 million including attorney fees to reacquire the system – after the assets had been run down, rates raised, and service quality lowered (Reference WeiserWeiser, 2017).Footnote ¹⁶

In the neoliberal era, politicians and others have urged local communities to privatize infrastructure and public utilities because, allegedly, private management will improve efficiency, presumably driving costs down. Nearly always, in these situations, the PE investors are far better bargainers than the local governments and make commitments that are very difficult to enforce after the transaction has closed.

Where to go from here?

This section has demonstrated the remarkable growth in the scope of PE investing during the last four decades, touching every sector of the economy. This investment, rather than increasing capacity, depletes the existing assets of the businesses acquired in an effort to maximize profit. While financial services are essential to any economy, the PE model reduces the resources that provide resilience and adaptability to change. For communities, this has meant a deterioration in quality even as prices for goods and services increase, thereby extracting increasing amounts of value out of our communities. In many cases, so much value is extracted that the operation is closed, thereby depriving the community of that service. Effectively, many communities lose the diversity of services that provide it with resilience and cohesion. Small local businesses are replaced by national chains or rolled up into larger entities managed to extract the maximum amount of profit. Going back to the multiplier concept, there are fewer and fewer local businesses that keep profits local and as a result, communities suffer.

PE is part of a larger system of financialization that has become dominant over the past forty years. These changes occurred as the quality and length of life for the average US resident has decreased by any number of measures and income inequality has increased, both among different groups of citizens but also geographically. Of course, PE is only accountable to the narrowest definition of profitability. All other dimensions of life and society are assumed away in the name of profitability. Investors, believing in their claims of higher-than-average rates of return are happy to look away. This entire system is structured and incentivized to operate against community and social welfare.

It is difficult to imagine what sectors PE may target next, although, while preparing this Element, we were surprised to learn the full range of activities where PE already operates. Without intervention, PE will continue to seek out other sectors and activities from which to extract value. After earning large returns by going into new sectors and wringing market efficiencies, the easy and affordable targets may be limited and the pursuit of return may become desperate and predatory. Consider the ownership and management of prisons, following the healthcare model of divesting activities to subsidiaries which then charge inmates for healthcare, personal products, and phone calls – a literal captive market. Without regulation, PE will also increase its market power in existing sectors by expanding its market share and becoming local monopolies.

The next section explores policies to reverse the hold that PE has on communities and our society. It took forty years to reach the current situation but it does not have to take forty years to reverse the damage. All that is needed is to restore local autonomy, discourage business roll-ups, regulate extractive investment, and invest in productive activities. Going back to the multiplier concept, there are fewer and fewer local businesses that keep profits local and communities suffer.

Promoting Experiments in the Laboratories of Democracy

Action at the state and local level will be vital to enact change and act like laboratories of democracy, as the constitution was interpreted by Justice Brandeis. Unfortunately, decision-making has become centralized removing the ability of state and local governments to respond to the actions of PE. Reference HopkinsHopkins (2019) documents the nationalization of state policy: state party platforms are more alike; residents are less likely to know their governors’ names; and, money for political races increasingly comes from out-of-state donors. This trend goes against the doctrine of federalism and voter sovereignty and has only intensified recently. With state and local oversight, it would have been more difficult to roll up businesses, loot employee pension plans, extract capital from cities and states, and transfer the value to a very few money centers such as Greater New York City. In the name of creating a good business climate, finance capital has engineered a race to the bottom as state governments crippled or abandoned entirely their oversight responsibilities, offered a wide variety of relocation or retention incentives, and reduced corporate tax rates, all in an attempt to attract or retain economic activity. The general idea that a favorable business climate would generate more tax revenue has not been realized but has created a rigged game in which companies are able to have states and municipalities bid against one another. The tangible results for communities of PE investment are lower wages, reduced worker protections, reduced service quality, higher prices, weakened pension funds, and diminished social safety nets – even as value is transferred to PE firms.

Local and state governments are critical as they are closest to communities and witness the impacts of job losses, service degradation, and local monopolization more immediately. Even state efforts such as using the California initiative process to control PE-owned kidney dialysis resulted in an onslaught of $233 million lobbying effort that ultimately ended in defeat. State attorneys general can and have acted to hold PE firms accountable for the actions of their portfolio firms. For example, in the fall of 2021, a PE fund agreed to pay $25 million in a settlement with the Massachusetts attorney general that was upheld by the U.S. District Court (Office of Attorney General Maura Healey, 2021). Rather than acting in isolation, states and local jurisdictions can join together to initiate lawsuits to challenge the status quo.

There are many possibilities and opportunities for state and local jurisdictions to protect their communities and reverse the reach of PE. This begins by recognizing the number of limitations imposed by uniform cut-and-paste, one size fits all, legislation that limits responsiveness to the needs of residents, and limits democratic representation. For one, it has often left state governments with more to do and less functioning or fiscal capacity. States, in turn, passed on limitations to localities, which hamstrings efforts to provide needed services or initiatives that municipalities have enacted.

US federalism is predicated on the assumption that different levels of government are best able to make decisions for certain public responsibilities. Remarkably, the neoliberal revolution has, in fact, weakened local and state government jurisdiction in order to make them subject to the whims of financial capitalism. But of far greater importance are the rules and policies that state and local governments make about infrastructure, education, and other services that create distinctiveness and build the long-run capacity of not only the local but synergistically the entire economy. It is easier for PE firms, and businesses in general, to comply with one set of national laws than to monitor the actions of fifty states and multiple municipalities, counties, and special districts. However, our argument is that local governments and communities are losing their freedom of action and ability to serve their constituents due to the passage of unnecessary national laws that preempt local laws better suited to the local context.

With fifty states, and so many counties and municipalities, we might expect to see great variation and policy experimentation. While this was the case earlier, the federal government regulatory agencies and courts have deliberately ruled in ways that inhibit and weaken state policy autonomy.

Return State & Local Autonomy: The Need to Limit Preemption

There is one organization and two forces that limit state and local autonomy. These would be an easy target for change. First, states have increasingly adopted uniform model legislation drafted by the American Legislative Exchange Council (ALEC), which is composed of conservative state legislators and executives from private companies that fund the organization. The second related force is preemption – a process by which state legislatures restrict the actions of smaller jurisdictions within their boundaries. We discuss each of these forces in turn.

ALEC is an organization founded in 1973 that actively promotes the neoliberal agenda by proposing model legislation that limits the choices of state government. Rather than serious consideration of evidence of what is needed to promote the interest of citizens, ALEC creates model legislation that has been reproduced across states with conservative legislatures. The Center for Media and Democracy’s website ALEC Exposed, monitors these activities. Most visible are efforts to limit gun control, and restrict abortion and civil rights, ALEC also promotes corporate interest over concerns about quality of life, with model legislation such as the Capital Gains Tax Elimination Act, that further advantages PE.Footnote ²¹ ALEC also has model legislation that limits states’ ability to raise revenue, punishes socially responsible business practices, and restricts worker rights – all provisions that weaken opposition to PE takeovers.Footnote ²²

A second concern that is part of ALEC’s agenda is preemption – the legal doctrine that allows state government to limit, or eliminate the power of municipalities to regulate a specific issue (Reference Goodman, Hatch and McDonaldGoodman et al., 2021). Consider the example of Wilson, North Carolina, a remote, low density that was unable to attract an Internet Service Provider (ISP). Taking initiative, the town champions organized their own broadband provider, Greenlight, as a local utility to provide reliable and affordable service, with free wireless in the downtown to attract visitors. Arguably, internet connectivity and broadband are essential services that are public utilities in the internet age that could be provided by a municipal government. But telecom companies enlisted the support of the North Carolina state legislature, who with the help of the ALEC, wrote legislation to restrict other jurisdictions from launching their own ISPs. Indeed, as of May 2023, sixteen states restrict municipal broadband networks. But laws can change: broadband preemption was eliminated in Maine, New York, and Colorado since 2022.

Reducing preemption at the city level would allow more flexibility and greater local regulation appropriate to the community. To address preemption, the National League of Cities (NLC) suggests a three-pronged response strategy to preemption that includes communicating the problems to local voters, forming citizens’ coalitions to fight preemption, and using the court system to challenge state laws (Reference Wagner, Davidson and HaddowWagner et al., 2019). Reference Swindell, Svara and StenbergSwindell et al. (2018) add the use of ballot referenda to directly change states laws, and citizen lobbying of state legislature. These actions can be effective in addressing the range of restrictions, and requirements that limit local autonomy and ability to respond to the needs of local citizens.

Local and municipal activities are regulated by their state governments. State governments are responsible for laws and regulations that define how economic activity takes place, including regulating business activity, determining environmental standards, and overseeing labor practices. The federal government and, in particular, the judiciary and regulatory agencies have actively worked to erode this control to facilitate the free flow and operation of financial capital. State governments must be encouraged and protected when they assert their power to regulate their jurisdictions. While some might argue that this would erode the business climate the positive impacts on the quality of life of local residents would be apparent.

There are specific instances of what states can do. Reference Muravchik and ShieldsMuravchik and Shields (2023) provide a counterexample of the establishment wing of the Wyoming Republican Party that argues for focusing on the issues that state government can address, rather than discussing social issues that attract attention at the national level and galvanize voters. Often at the state level, the political parties can come to an agreement about budget and policy issues important to their citizens.

Cutting Off the Source – State and Local Pension Funds and Charitable Endowments

State and local government pension plans hold nearly $5 trillion in assets; their annual payments to beneficiaries are about 1.5 percent of the national GDP, with over 11 million beneficiaries relying on these plans to support their retirement (Reference SheinerSheiner, 2023). Public pension plans shifted away from fixed-income investments such as government and high-quality corporate bonds and turned to alternative investments such as PE in order to achieve their unrealistic investment return targets.

One of the most remarkable paradoxes of the entire PE industry is that it raises money from pension funds and charitable endowments. and issues will be whether to overturn the ability of public pension funds to invest in PE. The irony of public pension funds investing in organizations whose modus operandi is based on extracting value from the firms and even local governments that are the economic building blocks of local economies. There is now ample evidence that pension fund managers are not the “sophisticated investors” that the Securities and Exchange Commission (SEC) assumes them to be. The proliferation of fees and other charges levied on the portfolio firms and pocketed by the PE firm rather than flowing to the pension fund limited partners seems almost prima facie evidence of how they are out-classed by the PE firm managers. Additionally, the enormous amount of capital being deployed to the PE firms creates an enormous incentive for corruption on the part of the public pension fund executives. For example, in 2016, former CalPERS CEO Fred Buenrostro was sentenced to prison for guiding investment funds to Apollo Global Management and receiving kickbacks (US Department of Justice, 2016). Alternatively, when the PE portfolio does not perform well, state pension plans, despite their importance as general partners, have little recourse. In 2023, the PE firm, Blackstone, won a lawsuit against the Kentucky pension system, which claimed that the PE firm put the pension fund into unnecessarily risky investments (Paul Reference WeissWeiss, 2023). The lack of high returns promised by PE has likely prompted more litigation against PE firms but these are settled in mandatory arbitration. Unfortunately, the pension plans are unlikely to recover their losses given the way the legal system has been structured to favor PE.

State pension plans should be compelled to end their investment in PE – public pensions should not be participating in the destruction of their local economies. The realized returns are not better than safer investments, after management fees are taken into account (Reference PhalippouPhalippou, 2020). Alternatively, state and local pension funds could invest in companies and infrastructure projects in their own local jurisdictions (Reference ClarkClark, 1995), creating opportunity and igniting multiplier effects. This also solves an information problem as pension fund members would have more information on their investments and could be connected to local activity and frequent the firms where they have a stake.

The Role of States Attorneys Generals

In previous decades, state attorney generals reviewed acquisitions for antitrust implications (Reference BallouBallou, 2023a, p. 238). In the process, the do-nothing Federal Trade Commission and Department of Justice never saw a merger they did not approve of decided to preempt smaller mergers, that is, exactly those that led to the roll-up of all manner of local government services. Empowering and encouraging the development of state antitrust regulators would ensure that smaller mergers that created local monopolies received greater scrutiny. State attorney generals can keep watch on PE firms’ activities and acquisitions within their state and investigate any potential anticompetitive or antitrust violations.

State attorney generals can specifically investigate and take legal action against PE firms that engage in deceptive practices or anticompetitive behavior within their states. If there is evidence of fraudulent activities by PE firms operating within their states, state attorneys general can launch investigations and, if warranted, file civil or criminal charges against individuals or firms involved in the fraud. State attorneys general can collaborate with federal agencies like the SEC and the Department of Justice (DOJ) on investigations and enforcement actions involving PE firms that have a presence or operate within their states.

State attorney generals can enforce labor laws and protections to safeguard the rights and job security of workers and require PE to maintain existing collective bargaining agreements and ensure that employee compensation and benefits are not substantially reduced. Most states prohibit the corporate practice because the healing arts should not be transformed into a purely for-profit enterprise and, in our case, just an asset class to be monetized. PE firms have developed a variety of strategies to circumvent these laws (Reference Zhu, Rooke-Ley and BrownZhu et al., 2023). Congress should act to reinforce these laws and state governments should act to invalidate the strategies used to circumvent these laws. Such action would have significant benefits for communities particularly those that are under-served.

Most Americans agree that healthcare needs to be reformed. That important topic is certainly beyond the current volume. While our imagined ideal may be the decentralized healthcare system of the past, other solutions warrant consideration. One critical consideration is legislation or, at least, regulatory scrutiny to limit the roll-ups that allow PE to achieve a local monopoly position. Another concern is the impact on consumers, with two-thirds of personal bankruptcies in the United States related to medical debt (Reference Himmelstein, Lawless, Thorne, Foohey and WoolhandlerHimmelstein et al., 2019). The PE model is antithetical to providing high-quality, reasonably priced healthcare to Americans.

Legal action is another way to challenge PE. The PE firms have demonstrated that they will spend enormous amounts on advertising campaigns, consultant, and legal talent to defeat their opponents. This system is structured to operate against community and social welfare and in favor of extractive PE firms. A recent film, Burial (2023) dramatizes a David v. Goliath effort to limit the roll-up of funeral homes in Mississippi and exposes the predatory practices that made these acquisitions so profitable.

In many cases, there are laws preventing various PE practices but they are not enforced. Citizens should demand enforcement, both to improve medical care AND ensure that towns have medical practices that are local businesses embedded in their communities. Rather than the arms of anonymous PE firms that manage their practices by algorithm pressing their professional employees to constantly upsell patients and their families, there is a need to establish that access to healthcare is a fundamental human right, as established by the 1948 Universal Declaration of Human Rights

Greater Transparency & Oversight of PE Takeover Activity

States can adopt anti-takeover legislation, which can make it more difficult for PE firms to acquire or take control of companies based within the state. Reference Karpoff and WittryKarpoff & Wittry (2018) document that 43 states have enacted 153 anti-takeover laws. Reference Guernsey, Sepe and SerflingGuernsey et al. (2021) demonstrate that anti-takeover provisions benefit firms, specifically during the negative market shocks that attract PE.

Most of these provisions are designed for hostile, junk bond-funded, leveraged buyouts that were popular in the 1980s and 1990s. Laws can be updated to reflect the new PE reality of roll-ups and acquisitions. These laws often require shareholder approval for certain transactions or impose waiting periods. Two states (Massachusetts and Michigan) required tender periods of sixty days, which allows for public comment.

To limit the political influence of PE in the legislative process, states can enact campaign finance reforms, disclose political contributions, and regulate lobbying efforts. These measures can help reduce the ability of PE firms to shape legislation in their favor.

Limit corporate takeovers of essential public services

Approaches to preventing PE takeovers of public services will vary from one jurisdiction to another, and the success of these efforts depends on the specific legal and political landscape of the state. Collaboration among government agencies, lawmakers, community organizations, and concerned citizens is often key to achieving successful prevention of privatization when it is deemed not in the public interest. This would require transparency in the decision-making process regarding the potential privatization of public services. This would include disclosure of all relevant information, including financial terms, potential risks, and long-term consequences of privatization efforts. Such data would enable comprehensive economic and impact assessments before privatizing public services. Such assessments should consider the long-term financial implications and potential negative impacts on workers and service quality.

If local finances are strained and privatization can potentially be a viable option, contracts should include provisions in privatization contracts that establish performance standards, service quality benchmarks, and penalties for noncompliance. Contracts should also have clear exit strategies in case the private operator fails to meet its obligations. This should include long-term monitoring mechanisms for ongoing monitoring and evaluation of privatized services to ensure that they continue to meet public needs and expectations.

Remember that the approach to preventing PE takeovers of public services may vary from one jurisdiction to another, and the success of these efforts depends on the specific legal and political landscape of the state. Collaboration among government agencies, lawmakers, community organizations, and concerned citizens is often key to achieving successful prevention of privatization when it is deemed not in the public interest

Coupling Ownership with Responsibility

One of the most remarkable features of PE investing is the fact that the PE firm may own its portfolio firm, but legally the PE firm has no responsibility for the actions of the firm it owns. The PE firm appoints all of the managers and even because of its control of the board of directors makes policy but has no responsibility. Remarkably, if the portfolio firm commits fraud or borrows money to pay its PE owners a dividend and then goes bankrupt, neither the creditors nor the victims are able to claw back the payments. The quintessential example of this reported by Reference BallouBallou (2023a) was of a patient at the second largest US nursing home chain, ManorCare, which had been acquired by Carlyle. In the transaction, ManorCare was loaded with so much debt that it was forced to cut back on costs causing health code violations to spike. As a result of the shoddy care, one patient fell and died and the family sued Carlyle, as, in the interim ManorCare had failed. The suit was dismissed after Carlyle argued that technically they were not the owner of ManorCare.

This decoupling of ownership and management responsibility is a powerful protection for the PE firm as it allows them to avoid legal/financial responsibility for the firms they own. An effective solution would be to mandate that PE firms accept responsibility for the actions of their portfolio firm. Effectively, since they own the portfolio firm, they bear responsibility for its actions and those wronged by the PE-owned firm should have the ability to sue the PE owner.

States can further impose regulatory requirements on PE firms, such as mandatory reporting, disclosure of fees and expenses, and transparency regarding their investment strategies. We have tried to demystify the PE model and more information helps ensure that the public has a clear understanding of PE operations.

New Types of Finance

Unfortunately, with the demise of community banking there are fewer financing options available to small businesses to finance expansion but also to provide lines-of-credit to smooth out fluctuations. Community banks engaged in relationship banking that relieves on soft information about lenders but has a greater understanding of the needs, and potential, of the local community. The reliance on soft information has been replaced by the credit score defined by an algorithm using standardized information. Those with a lower credit rating pay more in interest rates and have less access to opportunity, reinforcing their disadvantage and making it more difficult to reverse their fate.

Individuals who do not have access to a financial institution live in Banking Deserts and are forced to rely on payday lenders and others, which offer less favorable terms. Often, these same communities are also Internet Deserts, with less access to the high-speed internet required for Internet banking. For local businesses, there are limited places to deposit receipts, requiring travel and presenting a personal safety hazard.

Local ownership of small businesses, shops, and restaurants keeps profits local to be spent and invested in the community. Consider the case of the Green Bay Packers, a major American football team that competes in the National Football League (NFL). The team’s home of Green Bay, Wisconsin, stands as an outlier, as it is significantly smaller than most cities represented in the league. The Green Bay Packers have played in their original city longer than any other team in the NFL, despite being the smallest market in all of North America’s professional sports. Green Bay was able to secure an NFL team and keep the team local because the Packers have been owned by a community-based corporation since 1923 (Reference FeldmanFeldman, 2018). No shareholder is allowed to own more than 200 shares, a safeguard to ensure that no one individual is able to assume control. The rewards are civic pride and the millions of dollars each game brings into the local economy. Interestingly, the NFL banned community ownership in 1960. While the Packers’ ownership agreement was allowed, additional attempts to secure community ownership have not proceeded as the NFL has restricted other efforts at community ownership. Indeed, the NFL would like to allow PE to invest minority stakes in their teams, following practices in the National Basketball League (NBL), the National Hockey League (NHL), and the Major Soccer League (MSL).

Ownership Works, a nonprofit started by KKR veteran Pete Stavros, has experimented with employee ownership models in over sixty companies. Perhaps, not surprisingly, when workers are given an ownership stake, efficiencies increase, and the companies generate high rates of return. Workers receive compensation for their shares when the company is sold, which is an improvement in PE practices. Yet, the Ownership Works project is at risk of becoming a new form of corporate greenwashing – creating good feelings and a few social benefits while not addressing the systemic problem. Reference Kelly and KahnKelly & Kahn (2022) provide an illustrative example of how employee ownership could be used to protect workers and jobs, using contrasting examples of two guitar manufacturers. Gibson Guitars was taken over by KKR in 2018, while Taylor Guitars transitioned to 100 percent employee ownership in 2021. KKR incurred $250 million in new debt at Gibson, using $225 million for a special dividend to the PE fund, while announcing $7 million in profit sharing for Gibson’s estimated 800 employees – about $9,000 each, with returns expected when the company is sold. In contrast, Taylor Guitars, by contrast, was bought out in a 10-year financing deal from a Canadian pension fund. The deal was structured as an employee stock ownership plan (ESOP), which are for-profit entities in which employees own part or all of the businesses for which they work. The Taylor deal did not saddle the company with excessive debt. Employees are motivated and will own the firm when the loan is paid off. The pension fund receives a good return, with no associated PE management fees.

There are 6,000 privately held companies, involving 2 million workers with ESOPS. The U.S. Department of Labor Employee Benefits Security Administration (EBSA) created a new Employee Ownership Initiative in 2023. EBSA will implement new programs to promote employee ownership and facilitate the formation of new programs, which may provide an alternative as companies undergo ownership changes. Educating consumers about how they vote their preferences when purchasing products will be part of making a change. We see this in Buy Local or Buy American campaigns but consideration of the ownership structure of the producing entity also matters.

These types of investment options are disdained by Wall Street but many small investors, who have not seen their portfolios grow are looking for alternatives. Another alternative financing is the Slow Money movement (Reference TaschTasch, 2008). With various chapters around the United States, the organization acts as a match-maker between people who need small loans (typically for $5,000 or less at a rate of 2–3 percent) and people who would like to give loans. More than $80 million has been invested in over 1000 small food enterprises in the United States, with funds raised from 5,000 funders. Though this movement has focused on food and agriculture, its guiding principles can be applied to financing other types of small businesses that have a local, community focus. Michael Reference ShumanShuman (2020) provides advice for individuals to set up investments using Self-Directed IRAs and Solo 401(k)s to invest in local businesses. These investments offer opportunities for individuals to become engaged in their local communities, watch over their investments, and increase the local multipliers.

Responsible investment practices and preserving economic growth and innovation appear as a complex challenge. This requires creative new financing mechanisms, such as opportunities for worker buyouts and supporting institutions like community banks, credit unions, and co-ops. Encourage PE firms to engage in more responsible and sustainable investing practices. This can be done through incentives, tax breaks, or regulations that reward firms for socially responsible investments. And in even that PE cuts wages, and lay off employees, state and local governments can include claw-back provisions that would return public funds in the event of adverse outcomes.

PE goes international

Already in the 1980s, PE firms looked abroad for investment opportunities and, unsurprisingly, London became the European center for PE and initially, the UK absorbed much of the PE investment. However, as Reference ChristophersChristophers (2023) so ably shows, Europe and even the continent have become more PE friendly with largely the same results as in the US, though somewhat mitigated by a larger (though shrinking) public sector, regulatory and judiciaries that are not as dominated by neoliberals, and family-owned business in nations such as Germany that are not as eager to liquefy their operations. Despite these obstacles, in 2011 the European Union passed the Alternative Investment Fund Managers Directive which was meant to ensure greater transparency and require an independent valuation of the PE assets (Linklaters no date). While there have been some actions in Europe to rein in PE, in large measure, its activities go unchecked and unmonitored. Further, global financial institutions such as the International Monetary Fund and World Bank have deliberately encouraged the penetration of poorer nations by PE firms, thereby spreading the system to even more vulnerable nations that have weakly developed regulatory systems (Reference Lerner, Ledbetter, Speen, Leamon and AllenLerner et al., 2016).

Now is the Time to Act

Regardless of political party, all US citizens want a well-functioning economy and opportunities for themselves and their children. This is the essence of the American Dream that has been the social contract since the country’s founding. There is now general dissatisfaction with the economy that is encouraging political unrest.

Neoliberalism and free market capitalism, with PE as the epitome, have created a society that is at odds with the type of future that most Americans want and without action now things will not get better. Rather than shrugging with hopelessness, focusing on national problems that are beyond their power to influence, or being diverted by the so-called culture wars, state and local government can embrace new ways of thinking that promote an equitable local future will prioritize economic development that benefits all residents, not just the extraction and transfer of value to a few financial centers. A more humane future would include supporting small businesses, promoting job training and education programs, and ensuring that economic opportunities are accessible to all. Communities should strive to ensure that there is quality of life and opportunity for residents.

Deciding on a future together is the essence of democracy. For the past forty, the government has been vilified as too large and ineffectual while business exerted political influence. What is needed is a re-balancing, adjusting the fulcrum so that the economy can thrive. Government, after all, most simply provides the rules in an economy, incentivizes good behaviors, and oversees the distribution of the returns. Many look to wealthy individuals, entrepreneurs, and tech millionaires to provide solutions and define the future but true change must come from consensus about the type of future our citizens want. The power to improve our future lies in our actions.

Our analysis highlights the changes that the operation of PE has induced over the past forty years. In reviewing the evidence, we became outraged at the extraction of value from American communities. Rather than making the US a better place, PE has enriched a few at the expense of most citizens, along the way dismantling communities by acquiring and looting local businesses and even public services. As the US economy has been degraded, PE is now looking for an international opportunity to export the worst of the US model of capitalism.

Capitalism will always require finance, which should be geared to investment in productive activity. The goal must be to increase the total value created not simply to extract value. This Element challenges us to refocus on rebuilding communities through long-term investment in citizens and public goods. PE, as it currently operates, cannot and will not provide results that lead to either greater efficiency or the achievement of other important social goals. It will only weaken our communities. This extractive financialized capitalism is contributing to an increasingly alienated population that believes that the system is corrupt and cares little about them. The future is ours to define – but we must act.