This Invisible Industry Might Be the Worst Thing About Late Capitalism

Toys R Us, Sears, and even nursing homes are getting ravaged by financial predators in private equity.

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Nov 28 2018, 6:43pm

Left photo by Jericho/Wikimedia Commons. Center photo by Nightscream/Wikimedia Commons. Right photo by JJBers/Wikimedia Commons. Social image: Photo by Phillip Pessar/Flickr user southbeachcars

Imagine an elderly man stuck in a wheelchair without anyone tending to him, wearing only a blanket over his lower extremities—“no pants, no underpants.”

That horror story of alleged neglect at ManorCare, a chain of nursing homes, comes to you courtesy of a business model that is wrenching for many who come into contact with it. Except, that is, for the financial managers who suck profits out of companies and leave their hulking carcass by the side of the road. It’s an extreme version of rapacious capitalism called private equity, and it’s played a part in the demise of brands like Toys R Us, Sears and many more.

If we don’t put limits on it, we—or our parents—are all going to be that naked old man, wasting away quietly in a corner.



Private equity firms buy up companies, employing what they claim are superior management techniques to make them more efficient and profitable. Maybe sharp minds like Mitt Romney, America’s most famous private equity manager back when he worked at Bain Capital, can turn around struggling businesses. But in reality, the success or failure of the company is almost beside the point: this is about extracting profits, and not much else.

For example, in 2007, the Carlyle Group, one of the biggest private equity firms in the world, purchased the ManorCare chain, which served 25,000 residents, for $6.1 billion. As the Washington Post explained in their blockbuster investigation this week, $4.8 billion of that total was borrowed—which is normal in the private equity world. Using other people’s money allows a higher rate of return for managers. Plus, the debt burden is typically loaded onto the purchased company. ManorCare had to figure out how to pay off the debt, while also paying annual management fees to Carlyle, and eventually rent, after Carlyle sold off its real-estate assets.

The only way for the company to realistically handle the brand-new financial burden created by its parent—which would eventually total $6 billion in long-term obligations—was to cut costs. And that meant misery for human beings.

ManorCare claimed to the Post that its cuts only affected administrative expenses, not patient care. But the almost immediate rise in health code violations, in tandem with the cost-cutting, told a different tale: In all, violations rose 26 percent at a sample of 230 ManorCare facilities from 2013 to 2017, increasing at roughly three times the industry average, according to the paper’s analysis.

Even with the cuts, ManorCare ended where so many private equity deals end: in bankruptcy, which it filed in March. Carlyle chalked up the bankruptcy mostly to changes in Medicare payment formulas that cut reimbursement, but the rest of the industry didn’t go bankrupt as a result. The point is that ManorCare was so weighed down with debt and rental costs that it couldn’t adapt to business changes.

That’s true of a bunch of private equity-fueled bankruptcies across the American economy. Necco, makers of candy hearts and their trademark wafers, managed to survive for 150 years until a private equity firm bought it; within ten years it was in bankruptcy, torn asunder by outsized debt and unable to adapt to changing consumer tastes. Wild rats practically took over the confectioner’s factory, after cuts to extermination costs.

A recent analysis of seven major grocery chains that filed for bankruptcy since 2015 revealed they were all owned by private equity firms, with fund managers extracting millions of dollars that could have been invested in the stores to help them survive.

More than 15 percent of all private equity retail acquisitions since 2002 have ended in bankruptcy, according to an analysis from Retail Dive. For the ten largest private equity buyouts, three have hit bankruptcy, and two more were teetering on the verge. That includes Toys R Us, which was actually moving to profitability before it fell into bankruptcy and faced liquidation; it couldn’t handle the debt payments (it has since shown signs of possibly surviving in some form). Executive bonuses were paid out before worker severance at Toys R Us, and workers fought for months to win back just a portion of what they believed they were owed.

Sears, owned by hedge fund manager Eddie Lampert, is headed down the same path, asking the bankruptcy court to approve $25 million in bonuses even as it closes hundreds of stores and creditors recommend closing the rest. Lampert is not only the company’s chairman and largest shareholder, but his hedge fund is the main creditor; he stands to gain in a bankruptcy even if his shares of Sears stock get wiped out.

This is the reality about one of the most insidious forces in American capitalism: it pushes inflexible and unsustainable debt on companies, often making them either harm workers and consumers by cutting costs to the bone, or collapse under their own weight. The private equity firm feels none of the loss, having plundered as much money from the company as possible before the final catastrophe.

And private equity is growing: among other industries, it has made controversial inroads into journalism (including, full disclosure, VICE Media). Meanwhile, payday loan shops, bail bondsmen, prison phone operators, rental homes, and other services for the poor and the vulnerable have been overrun by these firms. Maybe private equity managers think nobody listens to the old man in the corner crying for help.

We don’t have to live with all this. We can legislatively limit the amount of debt loaded onto companies, which has been the catalyst for so many of these failures. We could follow a rule established in Europe that bans any dividends to managers in the first two years after a buyout, encouraging the revenues to be plowed back into the company. And we can increase transparency on these firms and their financial engineering, making them reveal whether they are ripping off their own investors and the companies they’ve purchased.

If we don’t, you can bet we’ll hear about plenty more stories where investor profits are placed well above safety or even the most base level of decency. Late capitalism is bound to be ugly, but it doesn’t have to be subhuman.

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