"Cutting and cutting and cutting is the name of the game."

Over the past several decades, one of the big developments in the American economy has been the growth of private equity: an investment strategy in which wealthy individuals and managed funds get together to buy out companies, strip them of costs, and sell them for a profit. It’s a complicated scheme, and it depends on favorable treatment in both state and the federal tax code. It’s also led to untold heartache and—in some cases—local catastrophe, as family businesses and historic firms have shut down, workers lose jobs, and communities are devastated as a result. The growth of private equity in public service provision—especially health care, education, and services for children like youth sports—is especially troubling. It’s tough stuff, and I wanted to talk to an expert about it all. So I reached out to the journalist Megan Greenwell, author of Bad Company: Private Equity and the Death of the American Dream. Megan has written for most of the prestige outlets of American journalism—including the New York Times and the Washington Post, has been an editor at Wired, and is the former editor of Deadspin, the influential sports site that itself fell victim to the private equity model. We chatted about a variety of topics—what private equity is, what it does, and where it’s all going. A Conversation with Megan GreenwellTell me a bit about your own background. You were editor of the sports site Deadspin for awhile, you’re a journalist and author. What are the kinds of stories that interest you?I spent a lot of my career as a magazine editor at various places: Deadspin, ESPN, Wired Magazine, New York Magazine, bunch of places. More recently, I’m a freelance writer, so I wrote this book [Bad Company].And I’m in the early stages of working on another book. I like to define what I do by saying that I write articles and books about how systems affect people, and that was very much my interest in this topic. I had worked for Deadspin, which had a fairly disastrous private equity takeover. But it really just made me interested in like, okay, how does this affect other people in other industries—industries that are frankly more important to the functioning of our society than snarky sports blogs? So, yeah, that was really why I got into it. It felt like there was a lot of writing about private equity and not a lot of writing about the people who are affected, so I really wanted to take a narrative nonfiction approach and tell the stories of actual people whose lives were upended after one of these PE acquisitions.The thing that I think most people don’t really understand about how private equity works, even though it is fundamental, is that when they take out those loans, the debt is assigned only to the portfolio company. That means if you’re the firm, you can drive a company out of business and even if there are billions of dollars in loans, you don’t have to pay those loans back.—Megan GreenwellI want to ask you about some of those lives in just a second, but just from a level-setting, definitional perspective: a lot of the folks who read me, listen to this type of conversation, have a lot of thoughts about privatization of public services and lots of other different things, but private equity is a pretty specific thing. Can you just give us a working definition for our purposes for the conversation.This is exactly who I was before I started the reporting for this book. I had never covered business before, and so it felt really important to me to reach an audience who is well-educated enough to know that private equity is big and important in our economy and maybe having some negative effects. But they don’t necessarily know exactly how that works. So you are my target audience if you are one of those people. The way I define private equity is it is a funding mechanism through which private equity firms bundle together money from all sorts of outside investors to buy companies and the outsized investors can include pension funds, sovereign wealth funds, ultra wealthy individuals, etc. But all of that money put together only makes up 20 to 30% of the average private equity deal.The rest of it is straight bank loans. And the thing that I think most people don’t really understand about how private equity works, even though it is fundamental to how it works, is that when they take out those loans, the debt is assigned only to the portfolio company.The private equity firm itself has no responsibility for that debt, which means it screws up the incentive structure, right? It means if you’re the firm, you can drive a company out of business and still not lose very much money, because even if there are billions of dollars in loans, you don’t have to pay those loans back. That was the piece that really kind of woke me up going back over your book a second time. The fact that the loans stick with the original company seems like that’s the linchpin that makes some of this all work. Now getting back to your book Bad Company: Walk us through the four sets of stories there in the damage private equity can cause and why folks should be alarmed moving ahead.I think what you see from these four stories is just how many people truly have their lives tossed into chaos, and not just individual people, but entire communities. So I’ll talk about one of the examples from the book.I love them all, but this one might be my favorite. It’s a rural hospital in Wyoming, and it’s the only hospital for 30 miles, and it had always been a for-profit hospital, right? It’s Wyoming, it’s a very red county in a very red state.And so, you don’t have a lot of people marching in the streets for Medicare for All. They were perfectly happy to have a for-profit hospital, and it worked! It, like, made a little bit of money, it was a pretty functional system.Then it got rolled up into a chain of rural hospitals that were taken over by Apollo Global Management.And what you saw happen was all of the services were just stripped and stripped and stripped until there was essentially nothing left. They were in no real sense a hospital, so they stripped general surgery, they stripped the ability to give birth at that hospital. At one point, somebody in the community took his little kid in because he was dancing on the coffee table and split his forehead, and they couldn’t give a kid a couple of stitches after 5 o’clock.So this was in no real sense a hospital. And so what you see there is not only the lost jobs, not only, you know, people getting sicker and more likely to die because of this, but the ripple effects that a hospital plays throughout a community. Right? So I was talking to the CEO of a small company in town. And he was saying, “I can’t hire anymore because who’s going to move their family here if there’s nowhere to get basic hospital treatment? The nearest hospital is 30 miles away through a very treacherous canyon in the best of circumstances, much less a Wyoming winter.”So what ended up happening was the number of air ambulance flights out of that county increased over 600%. Air ambulances are very, very expensive for patients—and also a big takeover target for private equity. So what you see is step by step by step. This community is just devastated. Not only by the disappearance of the actual healthcare, but then by all of the ripple effects that come from it.The private equity ethos is consolidate at all costs, and do as much as you can with as little as you can. That’s not usually what parents want from education, right? Private equity wants to centralize everything and spend as little money on human people as possible, and that doesn’t work very well with education.—Megan Greenwell Can we talk a bit about private equity and public services? You wrote about an example with health care. And a big thing right now is private equity getting into the business with universities, especially athletic departments. You’re seeing private equity get into the charter school and the tutoring game. What are the top concerns here, what should we watch for?As you point out, private equity has become huge in education. And there are a couple of big attractors for private equity in that space. One is just—it’s a captive market, right? Parents want to spend money getting their children the best education possible, and the more money they have, the more money they’re willing to spend. That dovetails with private equity, which loves a subscription model, right? Because it’s just like easy recurring revenue. And so if you can have something like a tutoring service like an Ed tech platform that requires a monthly subscription fee: those all just feel like absolute easy money from an audience that’s really willing to pay.One thing I thought about a lot while writing the book is Milton Friedman. Milton Friedman is, you know, his ideology is very much at the heart of the private equity industry.But even Milton Friedman, in his famous essay about shareholder value theory, specifically carved out exemptions for hospitals and for education. He said those are charitable enterprises. Those should not be something where shareholder value theory is in the market.So I think what you see is real threat because the private equity ethos is consolidate at all costs, and do as much as you can with as little as you can.That’s not usually what parents want from education, right? Private equity wants to centralize everything and spend as little money on human people as possible, and that doesn’t work very well with education. So yes, I certainly think there are like social justice factors at play here. But private equity is by definition a short term game. You know, they’re looking to get in and get out within 5 to 7 years. And so, when they are in a space like education, and profit is the only goal, you just end up with a real mismatch when you’re financializing education to that point.And cutting and cutting and cutting is the name of the game.The idea of financializing things that are fundamentally about child development, I think, is just especially worrisome. Anything you can think of that is a service that your kids use, if you are a parent, probably private equity is either in it or coming in.—Megan GreenwellHow about youth sports? Black Bear owns all these leagues. Arenas and rinks now. I think this is a huge source of stress for families and they don’t even know private equity is involved. Can you explain why this is happening in the youth sports space? Any other areas for kids and families we really need to watch for when it comes to private equity?Yeah, youth sports is a newer area of investment for private equity and it’s very surprising to me that it took so long because once you start thinking about how private equity works and how youth sports works from the perspective of a private equity firm, it does seem really perfect. So again, there’s like a subscription model thing at play and there are a lot of parents who will pay because they want their kids to be competitive for scholarships, for college admissions, and that now requires year-round training, going to all the travel tournaments, private coaching. And so those are the areas where you’ve seen private equity get really involved. So you mentioned Black Bear. Their model is on some level, incredibly impressive to me, because they did buy up all the rinks. They bought up a lot of the, like, training programs, online training programs, but also the, like, staffing agencies for private coaches. I think I read that you now have to pay $37 a month for these video services that mean you can’t just like pull out your iPhone at the youth hockey game and record your kid. It’s a pretty remarkable pipeline that they’ve built. And you know, there are all sorts of problems here if private equity runs as much of the youth sports industry as it does. The cost escalation is going to continue to get more and more out of hand, right? And there aren’t going to be lower cost alternatives.And then, of course, you’re pricing out lower income kids. You end up with a situation where the only kids who can afford to play at an elite level and thus compete for those athletic scholarships, etc, are the wealthier ones.And so the idea of financializing things that are fundamentally about child development, I think, is just especially worrisome. And it’s also one of the biggest areas of investment. Right? So you see, not only youth sports, not only education, but a lot of, like, autism therapy providers, preschools—private equity is huge in preschools. Anything where private equity firms can kind of take advantage of parents’ deep-seated desire to take good care of their kids. So basically, anything you can think of that is a service that your kids use, if you are a parent, probably private equity is either in it or coming in.What can be done about any of this? Let’s say I’m the sort of listener who is alarmed by what you say but also doesn’t use words like “a billionaire shouldn’t exist!” I just want things to be fair. You write about closing the carried interest loophole as one pretty sensible short term fix. Can you explain that and take us into the future here?So the carried interest loophole basically means that profits in private equity firms and other kinds of big financial firms are taxed as theoretical rather than real profits.The history of this is super interesting. It comes from actually what you carried on a ship. I got really fascinated by that history, but what it means is that the top tax rate is 22% compared to 37% for ordinary businesses. The idea of closing the carried interest loophole has been relatively popular with both Democrats and Republicans for years.George W. Bush proposed closing the loophole. Obama, Trump in his first term proposed closing the loophole. Joe Biden, and Trump has now mentioned it again in his second term. And yet, it has never gone through, in large part because 88% of members of the House and Senate take private equity donations, and they just have no interest in pissing off that industry. And so the last time it came close to being closed was in 2021 as part of one of the pandemic relief bills and Kristen Sinema, who at the time was a Democrat, and at the time was a Senator almost single-handedly made sure that got stripped from the bill in exchange for her vote. So [closing] that would be a great start. On the other end of the spectrum, Elizabeth Warren has proposed what she calls the “Stop Wall Street Looting” bill over and over and over again since 2018, and that would fundamentally undermine how the private equity world operates.That’s never going to get through without a pretty dramatic change in the composition of Congress. And I don’t actually think it has to. If I could wave a magic wand and make one change, I probably wouldn’t even start with the carried interest loophole.I would just say, if you’re a private equity firm and you take out loans, you have to share responsibility for those loans. I have talked to so many people in private equity land who have never really been able to articulate an objection to that other than that, you know, it would cut into our profits, which is itself not really an objection. I’ve talked to many people who without reading my book, sort of think that it’s like a socialist screed. My argument would be a change like that would actually get us back much closer to what free market capitalism was supposed to be.What’s next for you? Like, what are you up to now?So I’m a contributing writer at Bloomberg Businessweek. I have a brand new story out this week about community health workers and how they save the economy a lot of money, but are being threatened by public health funding cuts. So I remain interested in these questions of how systems affect people, and I’m canvassing around. I think I might have a next book idea. But I’m still working on it.Megan Greenwell, the author of Bad Company: Private Equity and the Death of the American Dream, thanks so much for having this conversation today. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit joshcowen.substack.com/subscribe