How ‘Vulture Investors’ Get Rich Wrecking Companies, Killing Jobs, Endangering the Vulnerable & Spoiling the Environment–And Our Tax Code Helps Them Do It

Private equity (PE) firms use money raised from wealthy individuals and institutional investors like pension funds, university endowments, and sovereign wealth funds to take over and manage companies. Once they take control, PE firms pursue aggressive financial-engineering strategies–such as severe cost-cutting, charging excessive management fees, paying themselves debt-funded dividends, and selling off valuable assets–that prioritize extracting short-term value over the long-term stability of the companies they control. These practices can severely undermine the financial viability of the targeted businesses, with workers, consumers, communities, and other stakeholders bearing the brunt of such cost-cutting and revenue extraction.

The tax code has enabled the private-equity industry through special tax breaks that create perverse incentives to ruthlessly “extract value” from takeover targets. 

Private equity investing has been described by leading financial reformer Sen. Elizabeth Warren (D-MA) as “legalized looting” and PE firms as “vampires”. The vampire image is apt because of the industry’s model of taking over companies for a few years, “bleeding” the firm of cash through short-term strategies that can hurt in the long-run, then moving on to the next “victim.” One study of almost 500 public companies taken private by PE firms through leveraged buyouts–acquisitions funded by a big loan secured against the takeover target, which is also responsible for repayment—found they were 10 times more likely to go bankrupt than similar firms that had not been acquired. 

The first notorious purchase and privatization of a public company was the leveraged buyout of RJR Nabisco back in the late 1980s–then the biggest leveraged buyout in American history and the subject of the book and movie “Barbarians at the Gate.” Among the most infamous PE bankruptcies was the Toys ‘R’ Us collapse some 30 years later: investors led by PE firms KKR and Bain Capital and their installed managers continued to receive millions of dollars in payouts even as tens of thousands of workers were laid off without severance pay and creditors went unpaid. (The workers eventually got some compensation, but only a fraction of what the bankruptcy lawyers for Toys ‘R’ Us received.)

Among the tactics PE investors use to wring as much money as possible out of acquired companies are drastic cost-cutting (including mass layoffs), imposing excessive fees on the acquired company for dubious services, and further borrowing to fund dividend payments to the acquirers, which can in turn necessitate even more cost-cutting. Those cuts in staffing and other expenses often and predictably lead to poorer service and drain resources from productive capital and worker investments. While poor service may only be an inconvenience for customers of many PE-owned businesses, like clothing stores and restaurants, in areas like healthcare–a field private equity is increasingly invading–such a decline in service quality can lead to inflated medical bills, physical harm, increased illness and even premature death. 

The extractive business model of private equity is unknowingly subsidized by the public in the form of an accommodating tax code. Preferential tax rules, income-misclassification schemes, and other loopholes–plus weak IRS enforcement of those restrictions that do exist–help make PE particularly profitable.

Among the key points of the report:

• PE firms raise money from wealthy individuals and institutional investors—including pension funds, university endowments, and sovereign wealth funds—to acquire and manage companies.

• PE investors use several tactics to wring as much money out of acquired companies as possible: aggressive cost-cutting through mass layoffs, charging excessive fees for questionable services, and taking on additional debt to pay dividends to themselves—which often leads to further cost reductions.

• Special breaks in the tax code make private equity even more lucrative for the firms and their wealthy owners and incentivize the financial engineering and predatory extraction that undermines the viability of the companies they acquire.

• Just eight top executives at two of the biggest private equity firms–Blackstone and KKR–saved a collective $335 million in taxes over a recent five-year span thanks to the carried interest loophole.

• An expired business tax break on loan interest that private equity is trying to restore as part of the effort to permanently extend the expiring parts of the 2017 Trump-GOP tax law would save the industry a fortune and also result in burdening acquired companies with more destructive debt.

• Victims of private equity–including homeowners, employees, and environmental activists–share their stories of corporate exploitation, hardball tactics and busted dreams.

Read full report here.