| | | here is a follow-up freakonomics podcast on how PE firms operate in general rather than specifically in healthcare:
DUBNER: So, we’ve been doing occasional episodes on this show about private equity over the last several years. Often the downsides, not exclusively. We recently ran a two-part series on how private-equity firms have been buying up veterinary and other pet-care facilities. Now, I have several friends and acquaintances who work in private equity, and they complain to me that I’ve been alarmist, and that the negative associations with private equity are overstated. Of course, it’s in their interest to say that. But when I listened to their explanations — these are nice, prosocial, well-educated people who don’t beat their children or anything like that ( did he really just say this??) — I thought, “Well, maybe, maybe they’re right. Maybe I am becoming a little bit hyper about it, or paranoid or panicked.” And then, Brendan, I read your book and I thought, “Oh, my — I’m not nearly paranoid enough.” So let me hear just a sort of opening statement from you about the state of private equity in the U.S.
Ballou: Ultimately, at least one person died in ManorCare’s care, a woman named Annie Salley. And when her family tried to sue ManorCare and Carlyle, a really interesting thing happened. In court filings, the private-equity firm said, “Oh, no, no. We are not technically the owner of ManorCare. We, in fact, merely advise a series of funds whose limited partners through a series of shell corporations ultimately own the assets of ManorCare. We’re not the ones to blame here.” Now, that’s sort of a legal sleight of hand, because in public statements, Carlyle had said it bought it. In effect, it seems to have had operational control over the nursing home, and it certainly loaded up the nursing home with all the debt that led to the kinds of consequences that resulted in Ms. Salley’s death. But because of fairly obscure legal doctrines, like piercing the corporate veil, they were able to get the case against it dismissed. And so what I hope that example shows is that there are lots of laws out there, lots of regulations that essentially give private-equity firms operational control over the companies they buy but very little responsibility when things go poorly.
BALLOU: So, we already described what private equity is, or what the business model is. Let me try to lay out what the basic problem with that business model is. There are three issues with it. First is that private-equity firms tend to buy companies and hold them only for a few years. Second is that they tend to load the companies up they buy with a lot of debt, and then they extract a lot of transaction and management fees from the company. And then the third thing is they tend to be insulated — financially and legally — from the consequences of their actions. When the portfolio firm does something illegal or does something wrong, the private-equity firm itself is rarely held liable. What this means is, when you’ve got short-term thinking, when you’ve got a lot of debt, and a lot of fees, and when you’ve got insulation from responsibility — it leads to all sorts of bad consequences. And you were talking about the series that you’ve been doing on veterinary clinics. Well, my girlfriend actually is a veterinarian and she’s talking about — all these private-equity firms are buying up all the veterinary clinics in the area in which we live. And it leads to — at least as alleged by her friends and folks that I know — leads to diminished quality of care for pets, it leads to increased prices, it leads to less flexibility for workers. And all those are the sorts of things that happen when you own a business only for a few short years, and you don’t have responsibility for what happens in the long term.
KHAJURIA : And so I think you have to be a lot more nuanced than that, and say, look, if the argument is, “We found that in this, this, and this deal, that all happened to be private-equity deals, these practices were happening that didn’t benefit consumers, communities” — that should not happen. But it should not happen not as a function of being a private-equity investment, one hopes, but more as a matter of corporate life, in the same way that whether you look at Enron or whether you look at A.I.G. or whether you look at Lehman Brothers — none of these things are private-equity, and these things have caused enormous problems over the years. And so you’ve got to be pretty open about it and say, if you find a particular set of individuals or firms doing things they shouldn’t do — of course, that shouldn’t happen, and that should be addressed in the normal course of things. But I don’t think it’s the industry overall. I’ve never been in a meeting where somebody said, “Well, let’s do that. It’s good for us, but it’s bad for somebody else.” No way. ( uh, - - how many examples can be cited in each category?) |
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