Retirement, in recent years, has increasingly become your problem. Since the 1980s, the defined-benefit pension—which offers a stable, guaranteed monthly income in retirement—has largely been replaced by the 401(k) plan, which allows employers to contribute a defined amount to a retirement account but provides no guarantees about the ultimate value of the benefits. This, as many have argued, has been a raw deal for workers. Whereas employers once shouldered the risks of market fluctuations to provide a guaranteed retirement package, workers now have to worry about whether their retirement accounts will run out before they die or get wiped out by a downturn in the stock market—if, indeed, they have any retirement savings at all.
Public-sector workers have mostly managed to escape this fate. As of early 2022, 86 percent of state and local government employees still had a defined-benefit plan that granted them a baseline of retirement security—the kind that all of us would enjoy if we had a humane, functioning retirement system, rather than one that leaves people working at Walmart well into their 80s or going without dentures and heating oil because their Social Security check is too small to live on.
But even as public pensions provide vital support for the nearly 20 million people who work for state and local governments, their funding often comes directly at the expense of other workers. Public pension funds once invested mainly in safe public debt and highly-rated corporate bonds. Since the early 2000s, however, they’ve poured more and more money into risky “alternative assets” like real estate, hedge funds and, above all, private equity (PE)—an industry notorious for aggressive, high-risk buyout deals that leave a trail of layoffs, benefit cuts, and bankruptcies in their wake. The private equity market, once a niche sector, has exploded as a result, growing from $576 billion in 2000 to $7.6 trillion in 2022. Flush with pension-fund cash, major PE firms like Blackstone, KKR, Apollo, and the Carlyle Group have elbowed their way to the very center of the U.S. financial system, with executives taking home 10- and 11-figure compensation packages that top bank CEOs can only dream of.
Three recent books— Brendan Ballou’s Plunder, Gretchen Morgenson and Joshua Rosner’s These Are the Plunderers, and Brett Christophers’ Our Lives in Their Portfolios—argue that this development has been an unmitigated disaster. As private equity firms buy up huge swathes of the economy—including everything from manufacturing plants to nursing homes, infrastructure, and rental housing—they screw over just about everyone they come into contact with. And though the firms themselves make obscene profits, the pension funds that invest in them aren’t seeing most of that money. Since 2008, average returns on private equity funds have been no better than the stock market even though they are much riskier than stocks. What’s more, this risk from private equity investments has become, as the market analytics firm PitchBook reported earlier this year, “a major threat to pension plans’ ability to pay retirees.”
The real beneficiary of the private equity industry is, in short, the private equity industry. All three of these books make this case in no uncertain terms. Skillfully cutting through the noise created by the industry’s PR machine and its army of lobbyists, they ask why we have not done more to rein in the industry’s abuses. Focusing narrowly on these abuses, however, they also leave a bigger question to the side: namely, why should so much of our retirement system depend on private investment in the first place? Why, in other words, can’t a comfortable retirement be a basic universal right rather than an elusive employment perk whose viability ultimately depends on the performance of financial products of varying degrees of odiousness?
If we want to fight off the private equity gremlins, we’ll need more than just adept muckraking that exposes financial predation for what it is. We need a retirement system that doesn’t put predatory firms in positions of power to begin with.
What is private equity? A private equity firm is one that raises money—mainly from pension funds, but also from university endowments, insurance companies, and other institutional investors—and then uses that money to buy up companies, with the goal of reselling them at a profit five to ten years down the line. In the meantime, the PE firm takes control, reorganizing operations, shutting down lines of business, and engaging in all manners of financial chicanery to squeeze out as much cash as possible.
The PE firm finances these purchases in two ways: first, with money that it collects from pension funds and other investors (equity), and second, with money borrowed from banks or other PE firms (debt). “Equity” is in the name, but in many cases, the vast majority—often as much as 80 percent—of the purchase is financed with debt. And because PE firms structure deals so that the debt falls on the acquired company, this creates a huge burden on the companies they buy. When PE giant Apollo (the subject of Morgenson and Rosner’s book) bought Missouri-based aluminum smelter Noranda for $1.2 billion in 2007, for example, $1 billion of that money was borrowed—and this debt landed on Noranda’s balance sheet, not Apollo’s. Before its purchase by Apollo, Noranda was profitable, carrying only $160 million in long-term debt. After, its debt load multiplied sevenfold, and the enormous debt service payments left the company running at a loss. To restore profitability, Apollo started laying off employees.
Layoffs are common responses to the massive debt burdens created by private equity-led buyouts. In an attempt to keep the money flowing while still making payments to creditors, PE-controlled companies will slash burdensome liabilities like payroll, healthcare, and pensions. When it works, the company returns to profitability by trampling over employees. When it doesn’t, bankruptcy—ten times more common in companies bought by PE firms than in those that are not—soon follows.
Conveniently for the private-equity firm, the costs of bankruptcy also fall on workers—an extraction that is standard in the industry. After Noranda went bankrupt in 2016, average household income dropped by $6,000 in the county where the main Noranda plant was located as workers found themselves unemployed. The company’s pension funds also collapsed, which meant they would have to be bailed out by the federally funded Pension Benefit Guaranty Corporation. In short, Apollo used its investors’ money—which, recall, came principally from pension funds—to raid and destroy the pension fund of another company. For its part, Apollo had long since recouped its investment. Extracting hundreds of millions of dollars in dividends and fees over five years, it made a 300 percent profit.
As PE managers destroy workers’ livelihoods with one hand, they pay themselves with the other. Hefty advisory or management fees—payments that PE firms extract from acquired companies for “the privilege of being owned,” as Brendan Ballou puts it—are ubiquitous. So too are brazen strategies for redirecting revenue away from investments that could improve business operations and toward immediate payouts for the fund’s partners. PE firms sell off the assets of acquired companies, load them up with debt, and do whatever they can to extract short-term profit, with little regard for the company’s long-term prospects. And these are not occasional or incidental abuses, but rather the core of the business model. As Christophers explains, PE fund managers are desperate for immediate cash because they compete for investors on their advertised “Internal Rate of Return” (IRR), a benchmark for measuring profitability that is extremely sensitive to the timing of payouts. The sooner a fund can pay investors, the higher the IRR. This creates a built-in imperative to inflate advertised returns by shifting payments forward in time—even when other strategies would ultimately make more money for investors.
The cascade of public pension fund investment into private equity over the past 20 years has occurred for a variety of reasons. One is outright corruption. Kickback schemes between private equity companies and corrupt pension officials have not been uncommon. But there have also been broader structural factors at play. Before the 1980s, most public pensions were funded directly out of general tax revenue. And those that did rely on investment income were usually required to invest in low-risk securities such as government debt. But as the number of employees working in state and local government rapidly expanded in the 1970s, this system came under severe financial strain. Rather than raising taxes or cutting benefits to shore up the system, pensions started shifting to a model that relied more on income from investments to pay retirees and less on taxes. Regulations restricting the kind of investments pension funds could make were also lifted over the course of the 1980s, which allowed pension funds to shift money into riskier stocks.
Stocks were great as long as the market kept going up. But when it inevitably crashed—as it did in 2000, and then again in 2008—pensions were left underfunded: the amount of money that they expected to make from investments, contributions from employers, and contributions from employees would not be enough to cover promised payments to retirees. This made pension funds increasingly desperate to find high-return investments that could fill the hole in their books. Once again, rather than trying to raise taxes and increase employer contributions, politicians and pension fund managers opted instead to reach for riskier investment strategies.
In the early 2000s, at least, PE funds were generating consistently above-market returns, so they seemed like a promising way to compensate for funding shortfalls. But as more pensions clamored to get in on the action, the PE market got crowded, and easy opportunities for quick profits became harder to find. PE funds started to competitively bid up prices for potential acquisitions, which made these bets risker (since turning a profit in the future would require an even higher selling price). With “too much money chasing the same deals,” Morgenson and Rosner note, average returns fell as losses began to stack up. Today, pensions increasingly find themselves stuck with PE investments that have gone sour—with billions tied up in “zombie” funds that have little hope of turning a profit.
And yet, private equity companies still manage to make plenty of money off of pension fund investments. This is because much of their income comes from high and unpredictable fees that have no relation to the fund’s ultimate profitability. These “money for nothing” fees, Morgenson and Rosner point out, can add up to a big drain on pension funds rather quickly. In 2021, for example, the State Teachers Retirement System of Ohio paid fees to private equity companies amounting to some $143 million, enough to pay $1,067 to each of its 134,000 retirees.
Another important point is that, even though public pension funds are the largest single category of investor in private equity funds—contributing 67 percent of PE fund capital overall—they are not necessarily PE firms’ most valued customers. Banks, insurance companies, and ultra high net-worth individuals are also, alongside pensions, major private equity investors. Goldman Sachs, for example, just raised $15 billion for its own PE investments. Sovereign wealth funds—state-owned investment funds usually built from oil money or other export revenues—are big investors as well. And as Christophers shows, even though banks or sovereign wealth funds collectively put less money into private equity than pension funds, their individual contributions are often larger, which gives them leverage to extract better terms. When Saudi Arabia’s sovereign wealth fund alone put $7 billion into a single investment with Blackstone in 2017, for example, the sheer scale of the transaction gave it the power to negotiate much better terms than the Pennsylvania Public School Employees’ Retirement System, which invested $500 million in the same fund.
Private-equity lobbyists and their congressional lackeys love to talk about how they are serving the hardworking teachers and firefighters of America—“providing long-term retirement security by delivering strong returns for public pensions year after year.” Admittedly, “serving Goldman Sachs and the Saudi royal family” doesn’t have the same ring to it. But it would be more accurate.
If the influx of pension fund money into the private equity market led to too much money chasing too few deals, it also spurred leading PE firms to seek out greener pastures in new sectors. Historically, the private equity industry has been best known for its high-profile buyout deals in retail and industry, where its ruthless financial extraction has bankrupted everything from Toys “R” Us to Linens ‘n Things. But over the past few decades, PE firms have increasingly moved into housing, infrastructure, and the care economy. The industry, as Ballou puts it, has metastasized. Like a cancer moving from lungs to lymph nodes to bones, it has insinuated itself into the basic services that make our lives possible.
The results have been predictably dismal. Consider the case of HCR ManorCare, covered both in Morgenson and Rosner’s book and in Ballou’s. The second-largest operator of nursing homes and assisted living facilities in the United States at the time, ManorCare was acquired in 2007 by the Carlyle Group—a powerful Washington D.C.-based PE firm whose alumni include George H. W. Bush and current Federal Reserve Chair Jerome “Jay” Powell.
After the purchase, Carlyle squeezed ManorCare for every cent it could deliver. Most importantly, it sold off the majority of the company’s nursing home properties for $6.1 billion, enough to recoup its entire initial investment. It then had ManorCare lease back its former properties for $40 million per month. And when the rent proved to be too much for ManorCare to handle, Carlyle did what PE firms do best: it laid off hundreds of workers.
Facilities soon became so understaffed that they were unable to meet basic care needs. Residents were given incorrect medications. They were left with untreated bed sores. Those with limited mobility had to venture to the bathroom without needed help from staff, often injuring themselves in the process. Health code violations accumulated. Meanwhile, Carlyle bilked the nursing homes for more, pressuring the remaining employees to offer unnecessary treatments that would maximize its Medicare reimbursement rate.
Aggressive revenue-maximization frequently crossed the line into fraud—and occasionally into outright abuse. Patients were billed for care they supposedly received while they were asleep or actively resisting due to dementia. One 84-year-old man at a ManorCare facility in Illinois was forced to participate in therapy sessions he didn’t want or need—against his physician’s recommendations—even as his health deteriorated. On-site staff were trying to force him into yet another group therapy session on the day he died. Whether these abuses played any role in the man’s individual death is not clear, but we do know that, on average, nursing homes owned by private equity had 10 percent more resident deaths than those facilities not owned by private equity between 2005 and 2017.
Accountability for these deaths has proved elusive. One family whose relative died of neglect at a ManorCare facility tried to sue, but as Ballou shows, Carlyle’s Matryoshka-doll legal structure made it nearly impossible to pin down in court. It turns out that ManorCare was owned not by Carlyle itself but by a number of private equity funds that Carlyle created and managed. This is another industry norm: PE funds are distinct legal entities and are not directly owned by the PE companies that create them. Instead, the PE firm contracts to provide management and advisory services to the PE fund. What’s more, even if Carlyle did own its portfolio company directly, ManorCare itself owned actual nursing homes only through multiple layers of shell companies. So, despite exercising de facto control, Carlyle could plausibly argue in court that it was merely an advisor to a series of funds that owned a company that owned other companies that killed people.
The court agreed. Any lawsuit would have to be taken up with the individual nursing homes. Thanks to Carlyle, they were all too broke to pay any significant damages.
Describing private-equity buyout deals as “swashbuckling” or “buccaneering” is a journalistic cliché. But cases like ManorCare show just how risk-averse the big PE firms really are. The goal is not to profit from bold risks but to structure deals in such a way that they’ll be profitable regardless of the outcome. ManorCare’s real estate portfolio, whose market value was never really in question, was low-hanging fruit. And the Medicare payments were essentially guaranteed to come in even as the quality of care deteriorated. As one eldercare blog explains, “When people are in a vulnerable position, they may accept poor and inconsistent care without complaint.” Carlyle exploited this vulnerability, betting that nursing home residents would simply tolerate declining care standards. They—and their Medicare dollars—would stay put, Carlyle wagered, at least for long enough to allow it to sell off its stake in the company.
This ability to foist downside risk on others while capturing the upside is even more pronounced in housing and infrastructure, the focus of Brett Christophers’ impressively comprehensive study. Both sectors are departures from the traditional private equity business. (Strictly speaking, they are not “private equity” at all, and most big PE firms have rebranded as “alternative asset managers” to reflect the fact that they have moved into these fields.) Still, Christophers shows how the private equity model has been transplanted virtually intact. The fee structure, the institutional investment partners, and the imperative to extract immediate cash are all essentially the same.
In housing, the formula is simple: raise rents, cut maintenance, and avoid capital expenditure at all costs. After Blackstone—currently the world’s largest alternative asset manager and the largest landlord in the United States—bought some 40,000 homes in 2012 and 2013, for instance, it raised rents by more than 12 percent over two years (from an average $1,424 to $1,600), while cutting maintenance and repairs by 16 percent (from an average $1,362 to $1,146).
Aside from the sheer scale of Blackstone’s holdings, these were standard-issue slumlord tactics. Evictions—and eviction threats—were pervasive. Tenants were charged huge fees for late payments and threatened with immediate eviction if they didn’t pay, in person, the next day. In Charlotte, North Carolina, Blackstone initiated eviction proceedings against nearly 10 percent of its renters. Disrepair was also rampant. Leaky roofs, cockroaches, and toxic mold were mentioned in one lawsuit of a Los Angeles-area rental. According to one tenant, the company was “the worst landlord I’ve ever encountered.” Hundreds more complained to the Better Business Bureau about Blackstone’s astonishing disregard for basic contractual responsibilities. But no matter. After four years, Blackstone had exited its position entirely, selling off its holdings at a substantial capital gain.
It was the kind of windfall the firm would achieve with remarkable consistency in the early 2010s. This was not because Blackstone’s managers had unique insights into the housing market. They just happened to have enough cash after the 2008 financial crisis to hoover up distressed mortgages—which the Department of Housing and Urban Development (HUD), Fannie Mae, and Freddie Mac were auctioning off by the thousands at steep discounts. For cash-rich firms like Blackstone, it was as close to a free lunch as you could get. All they needed to do was foreclose on nonperforming mortgages, seize the underlying property, and then resell it when the market inevitably recovered. The downside risk was negligible. When asked, in a fawning interview, what gave him the courage to make such “bold moves into real estate,” Blackstone CEO Stephen Schwarzman responded bluntly: “If I had thought they were bold, I wouldn’t have done them! I viewed them as a business in which you couldn’t lose.”
Infrastructure investment, which typically involves negotiating monopoly contracts with cities, is even lower risk. Aside from the inherent benefits of monopoly—captive audience, no risk of losing market share to competitors—PE firms can leverage their substantial resources to strong-arm municipalities into one-sided deals.
Christophers recounts the story of Bayonne, New Jersey, which in 2012 sold a 40-year concession to run its waterworks to Kohlberg Kravis Roberts (KKR), a PE firm whose annual revenue was 36 times larger than Bayonne’s entire annual budget in 2022. KKR’s money and experience allowed it to ram through a complex, painstakingly lawyered contract ensuring that it would reap sizable rewards while shouldering none of the risk. “Our strategy,” as KKR’s website noted in the past, “is to seek infrastructure investments with limited downside risk.”
The Bayonne contract stipulated, among other things, that KKR would be paid a guaranteed minimum annual revenue regardless of actual water usage. If usage fell short of expectations—as it ultimately did—residents would have to pay more per gallon, even as they used less water. KKR also inserted a proviso putting Bayonne on the hook for any “unexpected repairs” that might arise. Combined, these clauses allowed the firm to impose steep rate increases on residents and make a 36 percent profit on its investment over five years. As rates skyrocketed, residents fell so far behind on water bills that the city had to place liens against 200 properties, edging their owners toward eventual foreclosure.
Bayonne, Christophers notes, is not an outlier. In 2011, Carlyle bought several water systems across the American West, in one case siphoning profits so mercilessly that the city sued to get out of the contract, claiming Carlyle “skimped on upkeep and repairs while enriching itself.” Beyond water, private equity is coiling its tendrils around everything from municipal parking meters to fire departments and 911 dispatch services. In all these cases, you find the same pattern: higher prices for gutted services and municipalities trapped in contracts that do little more than line PE firms’ pockets.
How do we fight these assholes?
Appealing to Congress is one option. Elizabeth Warren, who calls PE executives “vampires,” gained some traction in Congress with her anti-private-equity “Stop Wall Street Looting Act” in 2021. And several attempts have been made to close the carried interest tax loophole—which allows PE firms to book their performance bonuses at a preferential rate. But so far these efforts have foundered against intense opposition from corporate Democrats who take hundreds of millions in donations from the industry. (Fun fact: Chuck Schumer’s son-in-law is Managing Director of Government Relations for Blackstone.)
Administrative measures could be another possibility. The Biden administration’s antitrust wing—led by Lina Khan’s Federal Trade Commission and Jonathan Kanter’s Department of Justice Antitrust Division—has taken a notably hostile stance toward private equity firms’ anticompetitive practices. Brendan Ballou himself is a federal prosecutor who served as special counsel for private equity at the Department of Justice and is part of the antitrust push against the industry. His book offers a detailed reform agenda that also extends well beyond antitrust, including clever ideas for administrative actions that could bypass congressional foot-dragging. The IRS, for instance, could use existing statutory authority to unilaterally end the carried interest tax loophole. Or the Securities and Exchange Commission could impose fee disclosure requirements and fiduciary duties that would make it harder for PE firms to rip off the pension funds that invest in them.
Such concrete and modest changes, aimed at mitigating private equity’s worst abuses, would certainly represent a marked improvement upon the status quo. Ballou’s agenda is worth embracing in full. Still, piecemeal reforms that treat the noxious symptoms of private equity’s increasing power in the U.S. financial sector don’t quite get at the disease: a system that funds retirement for a relatively privileged subset of workers by gutting nursing homes, squeezing tenants, and pillaging municipal water systems.
Why not address our broken retirement system head-on?
After all, this system is failing miserably. Social Security benefits are not nearly enough for retirees to live on. Often, they don’t even cover rent. If everyone had a pension, or at the very least a 401(k), to supplement Social Security, this might not be such a problem. But over the past 40 years or so, many employers have stopped providing any retirement option whatsoever. Today 69 million workers—56 percent of U.S. workforce—have no access to a retirement plan through their employer. Even those that do are probably not contributing enough to retire comfortably, either because they don’t understand how to navigate their complex plan, or, more likely, because they simply don’t make enough money to do so. This has left a huge swath of seniors behind—“too poor to retire and too young to die,” as one reporter put it.
If we want to get the private equity industry out of our retirement system, our first impulse might be to shore up public funding for state and local government pensions so they wouldn’t have to make risky PE investments in the first place. But this might be difficult to achieve. Republicans have spent years successfully demonizing public-sector employees—attacking their unions and their pensions as unproductive drains on taxpayers. This is complete bullshit, of course. But it has a certain intuitive political appeal that is hard to dispel. If you’re not a teacher, and you’re not a city worker, it’s easy to think, “why should my tax dollars pay for their pensions?”—especially if your own job provides no retirement plan at all.
A better bet would be massively expanding Social Security. Unlike public sector pensions, Social Security is overwhelmingly popular among both Democrats and Republicans of all ages. One survey found that more than 70 percent of Americans thought Social Security benefits should be raised—and that they’d be willing to pay more taxes to make it happen.
A push to modestly expand Social Security benefits is already underway in Congress. But to dislodge predatory financiers from the retirement system, we’ll need something much, much bigger. We need to expand Social Security so much that workers simply don’t need to supplement it with private alternatives. We need this because dignified retirement ought to be a right—not a reward for making sufficiently predatory investments. But we also need this because Social Security is simply more efficient than private (or quasi-private) alternatives. Whereas pension funds waste hundreds of billions of dollars paying private equity’s exorbitant fees, the Social Security trust funds invest exclusively in government debt, which comes with zero management fees. The program’s simplicity and universality also make its administrative overhead very low. Social Security taxes pay for Social Security benefits—not for pension fund administrators to manage complex financial portfolios, and not for Blackstone CEO Stephen Schwarzman’s $20 million birthday parties.
Other than institutional inertia, the disjointed patchwork of IRAs, 401(k)s, pension plans, and Social Security that comprises our current retirement system doesn’t have much going for it. It’s not just that pensions make abhorrent investments in private equity. 401(k)s and IRAs also mainly benefit the rich. Social Security is the one retirement program we have that reliably reduces poverty and inequality. Building on that success—and sidelining private equity in the process—is a moral imperative.
