How Private Equity Kills Companies and Communities  ## Metadata - Author: [[Decoder with Nilay Patel]] - Full Title: How Private Equity Kills Companies and Communities - Category: #podcasts - URL: https://share.snipd.com/episode/9c5543a7-d8d5-4bb0-bed5-5f29433a4f33 ## Document Notes ## Highlights - **Deadspin's Private Equity Takeover** - Megan Greenwell experienced firsthand how private equity took over Deadspin and tried to micromanage editorial content. - The private equity firm forced changes that disconnected Deadspin from its original identity, leading to its decline. Transcript: Nilay Patel And now defunct sports and culture website. Deadspin was part of Gawker, and Gawker was taken over by a private equity firm called Great Hill Partners, which began to immediately micromanage Deadspin's content. This was when Megan first began to realize that the goals and financial results of a private equity firm were very disconnected from the goals and financial results of the companies Which they had taken over. In her book is a deep dive into how private equity works, as expressed in four parts of the economy. Media, of course, retail, housing, and maybe the most maddening of all, healthcare. My family has a lot of doctors in it, and I have heard so much about how private equity has changed healthcare in America. And you'll hear Megan connect the dots between the financialization of the healthcare industry and the poor experiences many people have with healthcare today. Megan and I also spent some time talking about the history of private equity and the cultural throughline from the New York City real estate world that gave rise to Donald Trump all the Way to the private equity industry of today. There's a lot of history there that really does help explain how the incentives of finance have come to dominate the American way of life, and now seeped into the highest levels of government. Perhaps most surprisingly, you'll hear Megan take great pains to differentiate private equity from venture capital, which is very different and comes with very different problems. I always really enjoy talking to other editors, especially about something they're so obviously curious about. Let me know what you think about this one. I suspect you will have a lot to say. Okay, Megan Greenwell, author of Bad Company, Private Equity, and the Death of the American Dream. Here we go. Megan Greenwell, you're a journalist. You're the author of Bad Company, Private Equity, and the Death of the American Dream. Welcome to Decoder. Megan Greenwell Thank you for having me. Nilay Patel I feel like the book is really important. It's really good. It's fun to read in an infuriating way. But I should say, journalist is important. You were the editor of Deadspin. You were at Wired for a minute. You have a long history as a journalist. Megan Greenwell Yeah, been around the block a few times. Nilay Patel We've talked about private equity a bunch on the show. It's a force in American business. It's a rising force in technology, which is often the focus of this show. We've talked about it in the context of media a lot. And you had a very direct private equity in media experience at Deadspin. I came up as a blogger on the other side of the Gawker equation. We were ferocious competitors to Gizmodo and I ran Engadget. And we would always look at Deadspin as this amazing, vibrant force, not only in American sports media, but in political media and cultural media. Just for our audience who doesn't remember what Deadspin was like in that moment, just give a sense of what it was. Megan Greenwell I mean, Deadspin was like so many things because it was so fun and so weird. As the 2010s went on, there were fewer and fewer publications that were doing fun and weird, but Deadspin just never lost that ethos, but it added on all of this other stuff, right? So it added on serious investigative work and big, beautiful features, pretty ambitious videos and all of that stuff. We had a nice events business going. When I got there in 2018, it was absolutely my dream job. Like that was the job I wanted was editor of Deadspin. And I was sort of like, great, I'll stay here until they kick me out. And them kicking me out came a lot sooner than I expected it to because of private equity. But yeah, it was just, I think, one of the most distinctive sites on the internet in a way that really made it the place I wanted to work. ([Time 0:01:43](https://share.snipd.com/snip/4329597d-c250-46a0-827c-f3db36d66c4b)) - **Financialization Over Product Success** - Private equity profits by making money from financial maneuvers rather than company success. - The rise of KKR in the 80s exemplified leveraging debt and hostile takeovers to extract value. Transcript: Nilay Patel The company. And that is a system that is everywhere. It's like an invisible cloud for the American economy. And you ran right into it. Talk about that a little bit. Megan Greenwell One frequent confusion that people have is that they mix up venture capital and private equity. And to me, they are so diametrically opposed because venture capital, you know, faults though it has, the point is to invest in people who are making something, right? The point is give the founders the money. Sort of the opposite because A, you're not investing, you're buying companies outright typically, but B, the ways you make money just don't have anything to do with making the product In a lot of cases. So financialization can mean any number of things, but at its core, what it means is you're making money not from making the thing, you're making money from making money. You're investing the money. You're selling off the real estate, which is a big thing in private equity. You're collecting your management fees. You're making strategic investments and selling things from one of your funds to another one of your funds to collect the dividends. It's really the game is simply making money. The game is not making money off of a product or a service or whatever. Nilay Patel There's a moment or maybe several moments for the last 30 to 50 years where the American economy shifted from industrialists and people who are known for their products to billionaires Who make money by having a lot of money. What would you describe those moments as? Megan Greenwell So the rise of private equity started in the 60s. But in the 60s, it was sort of taking over companies, a lot of family-run companies, they called them bootstrap deals, where you would take over a family-run company that showed the Potential to expand, but didn't have the capital to expand. And so it did start almost from what we now think of as a VC type of ethos. And then in the 70s and 80s, private equity turned into this different beast. The rise of KKR, Colbert, Kravis, and Roberts was a big moment for this wave of financialization and for the rise of private equity. So essentially, they said, great, let's take these little bootstrap deals and let's take them to massive, massive companies, right? And so Barbarians at the Gate, you know, to my mind, maybe the best business book ever written, chronicles the RJR Nabisco deal, which was a KKR deal and which was the largest ([Time 0:12:16](https://share.snipd.com/snip/9d45f676-49d8-4db8-9b84-8c3851d4df94)) - **80s Culture Shaped Private Equity** - The 1980s New York real estate and corporate raider culture influenced private equity's ruthless financial approach. - This ethos also shaped Donald Trump's transactional worldview and dominance of American finance. Transcript: Nilay Patel There's a modern gloss on it. But that worldview seems to persist. Megan Greenwell Yes, absolutely. And Donald Trump himself, obviously not a private equity guy. But what he is is a real estate guy. And the marriage between, you know, big corporate real estate and private equity has always been extremely tight knit, right? A lot of the people in Donald Trump's close orbit have always been private equity guys. I think you're right that that ethos of just don't worry about anything else, don't worry about any downstream effects, like just do what we want to do in this exact moment without ever Thinking about ramifications. Yeah, it very much unites them. And that really was all the same world in New York in the 80s, for sure. Nilay Patel Many things have happened since New York in the 80s and now. Among them, the rise of the tech companies, among them the 2008 financial crisis. There was a lot of free money floating around in a zero interest rate environment that created companies like Uber ([Time 0:16:41](https://share.snipd.com/snip/a73743d4-dfd9-451e-9597-82527146e050)) - **PE’s Impact on Four Key Industries** - Megan focuses on private equity's impact on four industries: media, retail, housing, and healthcare. - She highlights how these sectors’ core operations and communities are damaged by private equity ownership. Transcript: Nilay Patel Retail and healthcare and media and housing. Those are all industries that have been just completely upended by private equity in ways that I think normal people can just feel, right? Your experience as a consumer at a retail store is shaped by private equity in ways you can just feel. Certainly in healthcare, which I want to talk about at length. Lots of people have talked about it in housing. We can just see the wreckage of the media economy around us, particularly newspapers. The pro case for private equity that I've heard on the show is these industries were failing or would have failed on their own. The PE companies come in. They apply a ruthless operations model to some businesses that we're going to go under. They extract the profits. Sure, maybe they cut some deals on the side to improve their own financial welfare. But then you have these like lean, mean operating companies that can go off and do things. Has that played out? Do you see those success stories? I can think of one. I don't want to give it away. But have you seen other success stories? Megan Greenwell Sure. There are certainly success stories. I do not want to say that private equity deals always end badly. That is certainly not the case. The private equity's main lobbying group loves to cite the statistic. I forget the exact number, but the majority of private equity deals are actually for small family-run companies. And that is, A, true, as best I can tell, and B, it is also true that more of those deals are successful than is true for the biggest companies, right? And I do focus on the more disastrous stories in my book. While it is true that most deals are for small companies, most of the money is for the big companies, right? And so the larger leveraged buyouts just have much greater effects on ([Time 0:21:26](https://share.snipd.com/snip/8234e31d-e79e-4df0-a90a-091a3ae61102)) - **Healthcare's Broken Model Exploited** - Private equity targets healthcare due to guaranteed revenue from policy changes like the Affordable Care Act. - They strip services to cut costs, hurting rural hospitals and patient care while profiting financially. Transcript: Nilay Patel Money you're talking about. You need a lot of money to just wholesale change the nature of healthcare in America. That money arrived. We can feel it. I think people can really feel it right now. But there's no market pressure to make it better. But that's the thing that kills me about it, is everyone knows it's bad. And the idea that you could provide a better service in ultra-capitalist America and make more money by providing the better service is just short-circuited. Why do you think that is? Megan Greenwell Part of the reason that a ton of private equity money flowed into healthcare in particular was the Affordable Care Act. The Affordable Care Act obviously had all sorts of positive benefits for society, especially for people who couldn't get insurance otherwise. It also meant, again, that there was a new source of guaranteed money for private equity firms. Because all of a sudden, you know, worst case scenario, like the government's going to pay a lot more people are insured than previously were. And so the problem of healthcare, which is not a problem that private equity created, is that everybody needs it. Many people can't pay for it. The government reimburses terribly for it. And so it really is a broken business model in a way that will require, you know, if anybody ever gets serious about fixing it, will require tearing it down to the studs and starting over. And that's a very difficult thing to do. And so private equity, you know, understandably, to some extent, kind of came in and said, well, you know, this is real broken, but we see a way for it to work for us. And working for them generally did mean kind of the stripping it for parts model. You sell off the real estate, you cut back the services. And so all of a sudden, you know, I focus on rural hospitals in the book where people genuinely don't have other options. And that when you take away more and more and more of the services they do have at their local hospital, yeah, that's great for the private equity firm, right? That's just cutting costs. And then you kind of ruthlessly consolidate to cut more costs. And then, you know, if people don't have a place to deliver their baby anymore, okay, that's unfortunate, but here we are. Did that actually answer your ([Time 0:24:40](https://share.snipd.com/snip/aa2e7103-d184-42a7-a5f7-d6a42caf1e64)) - **Doctors United Against Private Equity** - Doctors have lost autonomy and are treated like workers after private equity's entry into healthcare. - There is widespread doctor discontent across political beliefs, uniting them against private equity. Transcript: Nilay Patel You say people don't think of doctors as workers and private equity has made them workers. They still have the status and they're still doctors, but PE has made them workers. Talk about that a little bit. Is that – does that seem tenable? Because it's really hard to be a doctor and then to be a doctor and then to feel like an employee of a machine. It's destabilizing just from the experiences I've had with my own family and from the people that write in every time we do a PE episode. Megan Greenwell He wanted to go into community medicine because his beloved uncle, who was his role model, was a community doctor. And his uncle was a community doctor in like, you know, the 30s, 40s, 50s, at a time when being a community doctor meant you just worked for yourself, right? You could set whatever prices you wanted. If the market would bear them, the market would bear them. If not, deal with it. You could barter. You know, you could treat people who couldn't afford to pay, whatever choices you wanted to make. And then as medicine in the U.S. Professionalized, everybody got pulled into the kind of hospital and clinic system. And then when private equity came in, you know, it was just game over for doctors having any autonomy to themselves. And one thing that I think is really interesting is that it's not actually just private equity, right? So academic medicine, my husband works in academic medicine, uses that same philosophy of ruthless consolidation as well. There's a story in the book about Yale, which just bought up everything across Connecticut. And what you saw was patient satisfaction went way down and the costs patients pay went way up. That's Yale, right? That's in some sense the opposite of a private equity run hospital. But it's all the same problems. The doctors at Harvard's hospitals, the internists are unionizing right now because they're so overworked, they don't have any autonomy, and they're just sick of it. And so, though private equity didn't create these problems, it certainly took advantage and made doctors into a cog in the machine in the same way that they had for years treated retail Workers, for example, as cogs in the machine. And so, yeah, doctors are furious. They're the most common group of people I hear from, too. There are all these groups of doctors wanting to organize against private equity. And what's interesting to me is, like, these are not all leftist doctors. These are a lot of folks who think that, you know, unions are exactly the wrong answer ([Time 0:28:11](https://share.snipd.com/snip/f6680069-4100-4309-af8a-e2d657e44d50)) - **Healthcare Defies Free Market Rules** - Healthcare does not function like a typical free market due to government limits and structural flaws. - The system has been broken from the start, making fixes complex and requiring deep reforms beyond private equity's scope. Transcript: Nilay Patel Like they did with my parents in the 70s and 80s. Why do you think that's been so short-circuited in health care? Megan Greenwell Yeah, I mean, there are a couple of reasons. One is that there's an imposed limit on how many doctors there can be because there's an imposed limit literally imposed by the federal government on the number of residency slots, Right? So there is a shortage of doctors, but it is also true that you have everybody fighting for this number of residency slots. But the other thing is healthcare is an industry that breaks what we think of as the rules of free market capitalism in so many ways, because there's more government involvement than In a lot of industries, but also because there's this book that is like the definitive history of American medicine as a business. It's called The Social Transformation of American Medicine. It's by this Princeton professor named Paul Starr, and it came out in the 80s. I picked it up in like 2022, expecting it to feel incredibly dated. And in fact, it felt so prescient, because it traced exactly step by step how we went from this system of doctors treating their own communities to, okay, now we're starting to get professional Hospitals. That's great. We're able to save more lives. But also, now we're putting doctors into this system without really thinking about how do we design a system that makes sense. And so from the very beginning, it was super broken, right? There was never a time where this system worked well and we could just say, like, let's go back to that. It's a ([Time 0:32:10](https://share.snipd.com/snip/12c335af-5987-47dc-9a82-00fb4ecb2e1b)) - **PE's Invisible Power Shield** - Private equity operates hidden from public scrutiny, unlike health insurance executives who face more visible backlash. - The lack of transparency insulates PE executives from consequences despite their negative impact. Transcript: Nilay Patel Was shot on the street in New York City. Luigi Mangione is in prison awaiting his trial for what appears to be that murder. That is a very bad outcome. You don't want what feels like political violence to correct the excesses of the private equity market in healthcare really anywhere else. Has the industry seen, oh, this is – we've squeezed it so hard that there are shootings in the street? That feels like, OK, like it's time to pull the ripcord and maybe actually think about the outcomes here. Megan Greenwell It's such an interesting question. What I understand to have been the main reaction in healthcare circles to that shooting was, you know, let's get more security. Let's make sure these people are better protected, not maybe we need to change the system so the anger isn't so palpable. I also think talking about private equity specifically, and Brian Thompson, not a private equity guy, health insurance guy, those folks get to feel a little safer because of the knowledge That few people understand their influence, right? So most people do not know if their local hospital is run by a private equity company. Most of the workers I talked to, you know, a couple hundred people didn't know that their company was owned by private equity, even if they had worked there for years. And so private equity loves to operate in the shadows. And when you start to think about, like, yeah, is the anger so intense that it's going to result in political violence? Maybe until December, health insurance executives felt like they were in that group. But I think that private equity executives probably still feel like they're in that group, even after the Brian Thompson shooting. Because like, you know, who can name a private equity executive, right? Nilay Patel Well, anyone, you just walk around New York, their names are on all the buildings. That's true. Megan Greenwell I mean, yes, if you're paying enough attention to who's on the board of any art museum or who the Children's Hospital is named after, or whatever, yes. But, you know, I don't think most people, if told, you know, see the Kravis Children's Hospital over there, could tell you who Henry Kravis is and why he matters, right? There's like this interesting divide between like, our perception of private equity guys as philanthropists, benefactors of cultural institutions, all of that, and private equity Guys as private equity guys. And so if you don't know, I think this is a real fundamental problem with private equity is that nobody understands who they are or how they work. And that probably does give them a little bit of a better sense of security in the age of Luigi Mangione. ([Time 0:34:28](https://share.snipd.com/snip/39e8ab6e-c572-479e-bd70-7bbb5566647d)) - **Ways to Fight Private Equity** - Fighting private equity requires multifaceted strategies including regulatory efforts and nonprofit media models. - State-level healthcare regulations after PE disasters show signs of gaining momentum against private equity influence. Transcript: Nilay Patel That's the last bit of the book. It's the after section. You talk about ways forward. The vignettes in your book, the main characters have all fought against P.E. In some way. How do you see that playing out? Megan Greenwell So I felt strongly that I didn't want to end the book on like, well, this system sucks. I'm out, you know. And the most natural way to do that in that I also didn't want to do something prescriptive because I'm not an activist, the most natural way to do that felt like it was to look at people Who were doing something after the fact. About changing this system, it's going to have to be so multifaceted an approach. So the four characters in my book are, you know, quote unquote, fighting back in several ways. The woman who worked at Toys R Us, like, flew around the entire country for the first time in her life, speaking in front of these pension boards, trying to convince pension funds no longer To invest in private equity, or at least to exert more pressure on the private equity funds they do invest in. The media example in the book to me is really interesting because that's not something where like, there's no regulatory situation that is going to get private equity out of local newspapers. That's just that you have to rebuild the business model from scratch. And so the person I focus on works for a local nonprofit startup of which there is, you know, a big wave right now. And that is not itself a silver bullet to anything, but is like an interesting experiment. And the fact that there are people making these experiments is, I think, a useful thing to shine some light on. There are also court cases and there are proposed bills. You know, I don't think in our current political climate, there's going to be a lot of regulation of private equity on the federal level, but there are lots of interesting things happening In various states right now, especially in health care, because after big private equity disasters in Massachusetts and Pennsylvania, those states, you know, both blue states, Real quick got very serious about doing some regulation. And so I didn't come away from the book feeling totally hopeless about the chances of clawing a little bit back from private equity. I don't think the system ([Time 0:42:10](https://share.snipd.com/snip/7935f70d-41d3-4e4d-8207-e8362d1ba8cf)) - **Hold PE Firms Financially Accountable** - A key reform is making private equity firms legally responsible for the debt they impose on portfolio companies. - This policy would align incentives, reducing risk-taking that bankrupts companies and harms communities. Transcript: Megan Greenwell I mean, I'm just going to essentially plagiarize Elizabeth Warren here. She, for several years now, has introduced this Stop Wall Street Looting Act, which would regulate P.E. All told, would probably regulate P.E. Basically out of existence. But the part of it that I find... Nilay Patel The magic wand is making it go away, just to be clear. Megan Greenwell I mean, yes, but the single part of that bill that I find the most, I find the case for it the most compelling is actually pretty simple. So the basis of leveraged buyouts is you borrow all this money and you as a private equity firm are not responsible for paying the money back. Only the portfolio company itself is. And so what ends up happening is you bury your own portfolio company under this mountain of debt. And one component of her bill is you can't do that anymore. You have to have skin in the game. And again, you know, going back to my distinction between private equity and venture capital, nobody would ever think that if you're a VC and you invest money in a company, that you don't Have something on the line there. But if you're a PE firm, you really don't have much on the line. There's a limit to how much you will make if you drive the company out of business. But it's also pretty hard to lose money because you're just not responsible for those loans. And so I think if there were one policy change I would make, I would just say, great, okay, you are legally responsible for the loans that your portfolio company takes out. Nilay Patel I feel like you definitely have to write your next book on the ([Time 0:45:43](https://share.snipd.com/snip/3ad3a3ac-ccf0-4fc3-9284-fb560429970a))