The American Prospect: Taking on the Buyout Guys

Taking on the Buyout Guys

As private equity firms gain more power in the U.S. economy, SEIU wants to make sure unions -- and the rest of America -- get a piece of the profits.

Kate Sheppard | November 13, 2007 | web only



Any day now, private equity firm The Carlyle Group will complete a $6.3 billion buyout of nursing home provider HCR Manor Care. But for the 60,000 workers at Manor Care facilities across the country -- as well as the residents of those facilities -- there are still outstanding questions about what that buyout will mean.

For the Service Employees International Union (SEIU), one of the country's largest and fastest-growing unions, the deal is an entry point into a larger conversation about private equity, a way to raise critical questions about its role in the nursing home industry, workers' lives, and the future of the American economy.

The Carlyle buyout comes in the wake of a September New York Times piece chronicling the gross neglect at homes where cost-cutting measures on the part of private equity firms have jeopardized the quality of care. In one Florida nursing home the Times investigated, the number of registered nurses was cut in half in the year after the buyout, and overall, staffing at homes owned by private equity firms was 35 percent below the national average. The investors made millions off the deal, but staffing levels and patient care took a severe hit.

In the past few years, private equity firms have made deals to purchase six of the ten largest nursing home chains in the country. More than 200,000 nursing facility beds in the United States are now under the control of private equity firms. Now, with Carlyle's purchase of Manor Care, 37,000 more beds will be owned by a private equity firm, one whose properties include everything from Dunkin' Donuts to the Hertz rental car corporation. In many ways, Carlyle's purchase of Manor Care gives SEIU the perfect platform to strike up a conversation about the impact of these big buyouts.

Private equity is an investment model that, though it has existed in one form or another for 25 years, is beginning to play a major role in the U.S. economy. In 2006, private equity firms accounted for roughly a third of all mergers and acquisitions in the United States, and they are on track to shatter that record this year. The firms operate by leveraging debt to buy large, public companies and take them private, where their profits can be classified as capital gains and taxed at a rate of 15 percent rather than the 35 percent rate on corporate income. Under a typical buyout, the private company firm will take on a portfolio company, spend three to five years working to cut costs and make the company more profitable, and then resell.

For the most part, these deals have gone down with little public scrutiny; as private companies, the firms are excused from filing with the Securities and Exchange Commission and are subject to a lesser level of examination from both the federal government and shareholders. Private equity fund investors and partners, as well as the executives of the companies they buy up, turn high profits on the deals, while the firms pay significantly lower taxes and often make their money at the expense of workers and the quality of service they provide. Firms have spent millions on lobbyists to protect their tax loopholes, with Carlyle and its portfolio companies alone dropping $23 million in the past five years, according to SEIU figures.

In several high-profile cases, the owners of private equity firms have denied knowledge or responsibility when their portfolio companies are criticized for neglecting worker rights or declining service standards. As these firms have started to enter into the nursing industry, where cost and staff cuts are a very immediate concern, questions about the efficacy of that model have started to come from citizens and law makers alike. On the heels of these questions, SEIU seeks to turn the private equity model into something that actually benefits workers, citizens, and the economy. ......(more)

The complete piece is at: http://www.prospect.org/cs/articles?article=taking_on_the_buyout_guys

They are getting an unearned advantage in the tax laws.

the investors expect to make a profit, the profit is made by selling the business again at an inflated price. At some point, like all these bubbles, a "bigger fool" can't be located & the thing collapses.

Many buyout firms take the company and drain all it's cash, then float it onto the stock exchange loaded with debt (since they have no cash).

off so much wealth that they could actually cause an economic collapse. I talked about the growing control of wealth before http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=103&topic_id=320063&mesg_id=320144">Here

I see the private equities as just another loophole for a subset of the same controlling elites to control more with fewer restrictions. They are, after all, no longer responsible to stockholders.

My biggest concern about this trend is the eventual effect on the overall global economy. These in aggregate, are the biggest leveraged buyouts in history. They are financed in the main by loans from the pension funds that are supposed to pay for the retirements of the labor force. The Equities hope to repay the loans from breaking up the buyouts and selling the parts. But what happens when they can't find buyers? Loans don't get repaid, the pension funds collapse, workers get no retirement checks, and the economy dies with a whimper and a bang. And anyone can guess how that will effect the world economy.

Meanwhile those private investors - like the Bush family, major holders of Carlyle - are left holding a major part of all the wealth in the nation.

I can see the results of all this causing a major societal rage against the nobility, and as I've said before history would be a good survival tool for them.

But then I'm and optimist.