Private Equity and Mega Profits

“They’ve taken money away from these hospitals that provide needed care and they’re using that money to line their own pockets.” Massachusetts Gov. Maura Healey told CBS News. “I’m disgusted. It’s selfish. It’s greed.”

Michael Kaplan, Jon LaPook, Sheena Samu, “A new mom died after giving birth at a Boston hospital. Was corporate greed to blame?”, CBS News, February 28, 2024, https://www.cbsnews.com/news/a-new-mom-died-after-giving-birth-at-a-boston-hospital-was-corporate-greed-to-blame/

Recently, I’ve read two articles about private equity firms and their running of companies. For some reason, they just sort of popped up in my feed.

Maybe back in the 90s or 2000s, I would periodically read about the depredations of private equity firms, leaving behind husks of companies after they swoop in to “save” the companies, load them up with debt, suck out the money, and then leave. Those articles seem to have been a little more frequent way back in the 90s and 2000s than in the last decade.

Now, if you haven’t noticed, I do have a bias against private equity or hedge funds, just because I used to read a lot of those articles with unsavory descriptions of such companies. It could very well be that because of such reputation, private equity owners are not known publicly.

The impressions I had received when I was younger was pretty much this: very wealthy guys coming in under the guise of saving the company and loading the company up with debt. The philosophy back then, and it doesn’t appear to have changed much, was that a heavy debt load really focuses management into doing what was necessary to turn around the business and get out of debt. After the company was turned around, the private equity company would sell the slimmed down and more profitable company. But the problem was, the company was actually a lot weaker.

The private equity firm made their money by charging “management fees” and some other fee that I seem to recall was about 20%. A quick Googling and use of CoPilot said the typical annual management fee to the investors (not the companies) was about 2% and the other fee – performance fee or carried interest – was the 20% upon sale of company. Again, the investors paid for those fees.

A good primer on the private equity industry and how it works is outlined in this ProPublica article, which also talks about the more unsavory practices of private equity firms. The article dovetails with my understanding of the industry in terms of its more rapacious behavior.

A point of interest from that ProPublica article is that the 1980s type of private equity was the one I remembered: leveraging companies with heavy debt, breaking them up into smaller pieces, and extracting cash out of them. The 2010s version is focusing more on operational improvements. So that version I didn’t know.

The ProPublica article also briefly outlines where these private equity firms are investing: healthcare (maybe mostly hospitals), housing (rentals) and fishing industry. The opening quote of this post is about the impact of a private equity firm on a hospital. Again, the description of the financial process was for owners to come in and siphon out the money, usually leaving a husk of a company. A typical description is as follows:

“…owners sold off the real estate of a group of suburban Pennsylvania hospitals to cover the debt they incurred when they paid themselves hundreds of millions of dollars out of the company’s coffers.”

Michael Kaplan, Jon LaPook, Sheena Samu, “A new mom died after giving birth at a Boston hospital. Was corporate greed to blame?”, CBS News, February 28, 2024, https://www.cbsnews.com/news/a-new-mom-died-after-giving-birth-at-a-boston-hospital-was-corporate-greed-to-blame/

Here’s an eye-opening quote from the same article:

“A filing with the Securities and Exchange Commission from 2021 shows Steward’s owners also paid themselves millions in dividends. Around the same time, Steward CEO Ralph de la Torre acquired a 190-foot yacht estimated to be worth $40 million.”

Michael Kaplan, Jon LaPook, Sheena Samu, “A new mom died after giving birth at a Boston hospital. Was corporate greed to blame?”, CBS News, February 28, 2024, https://www.cbsnews.com/news/a-new-mom-died-after-giving-birth-at-a-boston-hospital-was-corporate-greed-to-blame/

But what prompted me to write a post is that yet another article has come out about a company failing and facing bankruptcy. This time it is a large almond farming company that ran into trouble. Unfortunately, the article does not go into details as to how the private equity firm came in. The article is pretty low key about what is going on.

Trinitas disclosed in its bankruptcy filing that it had essentially run out of cash and plans to sell its farms and other assets. 

The company attributed its problems to its heavy debt load and low almond prices. It also cited lower yields at newer farms, making it impossible to produce profitable crops.

Daniel Kline, “Another huge food brand files Chapter 11 bankruptcy”, TheStreet, February 27, 2024, https://www.thestreet.com/restaurants/another-huge-food-brand-files-chapter-11-bankruptcy

The question that kind of arose in my mind was why the company went into bankruptcy when it had a very wealthy private equity firm to turn to. The private equity firm owns the farming company and presumably has a lot of money. Maybe it can corral their 2% management fee or their 20% performance fee from other sales and put in those money to bolster the cash flow.

I don’t know. It just seems like the private equity firm is again using other people’s money to bail them out.