The Private Equity Model: A Synthesis of “Plunder” by Brendan Ballou
Executive Summary
This document synthesizes the central arguments and evidence presented in Brendan Ballou’s book, Plunder, which contends that the private equity industry’s fundamental business model is systematically extractive and poses significant risks to the American economy and society. The book argues that private equity is not merely an “extreme form of free-market capitalism” but a system that thrives by creating and exploiting legal and regulatory gaps, often in partnership with the government. This model redistributes wealth from productive companies, their employees, and their customers to a small cadre of ultra-wealthy firm executives.
The core of the private equity model is defined by three fundamental problems:
1. Short-Term Ownership: Firms typically buy companies to sell them within a few years, incentivizing rapid, often destructive, cash extraction over long-term health and investment.
2. High-Risk Leverage and Fees: By using vast amounts of borrowed money (debt) placed on the acquired company’s books and charging exorbitant fees, firms are encouraged to take huge risks for which they bear little consequence.
3. Insulation from Liability: Through complex legal structures, such as legally separate funds and shell companies, private equity firms are consistently insulated from the legal and financial fallout of their portfolio companies’ actions, including bankruptcy, negligence, and fraud.
These principles manifest through a series of recurring tactics, including sale-leasebacks, which strip companies of their physical assets; dividend recapitalizations, which force companies to borrow money to pay their private equity owners; and strategic bankruptcies, which are used to shed pension and debt obligations. The impact of this model is detailed across numerous sectors, including the hollowing out of the retail industry, the transformation of homeownership into a rental market, the degradation of care in nursing homes and hospitals, and the exploitation of incarcerated populations. The book posits that this is enabled by a government that is “extraordinarily solicitous of private equity firms,” a relationship fostered by a powerful revolving door, extensive lobbying, and a legal system increasingly favorable to corporate interests. The author concludes that these abuses are not inevitable and proposes a comprehensive agenda for reform through litigation, regulation, and legislation at the state and federal levels.
I. The Fundamental Business Model of Private Equity
The private equity industry’s approach is distinct from other financial sectors. Its unique structure creates incentives for high-risk, short-term strategies that often prove disastrous for everyone except the private equity firms themselves.
The Three Foundational Flaws
As explained by experts Eileen Appelbaum and Rosemary Batt and detailed in the source, the industry’s model contains three core problems:
1. Short-Term Horizon: Because firms own companies for just a few years, they are incentivized to “extract money from them exceedingly fast,” with little regard for the long-term health or sustainability of the business.
2. Encouragement of Extreme Risk: Firms invest little of their own money but receive an outsized share of profits (typically 20% of profits above a certain hurdle, plus a 2% annual management fee on all assets). This asymmetrical risk encourages loading companies with debt and extracting fees, as the firm stands to lose little if the investment fails but gains enormously if it succeeds.
3. Lack of Accountability: Through the use of legally separate funds and complex corporate structures, firms are “rarely held responsible for the debts and actions of the companies they run.” This insulates them from both financial and legal consequences.
“These facts of short-term, high-risk, and low-consequence ownership explain why private equity firms’ efforts to make companies profitable so often prove disastrous for everyone except the private equity firms themselves.”
The Impact on Economic Inequality
This model facilitates a massive wealth transfer from productive companies to financial executives. The leaders of the largest private equity firms are among the wealthiest individuals in the country.
Name (Firm)
Reported Net Worth
KKR Cofounders
$7 billion
Apollo Cofounders
$9 billion
Stephen Schwarzman (Blackstone)
$29 billion
This wealth accumulation is staggering; in 2021, the CEO of Blackstone made over $1 billion, more than ten times the compensation of the CEO of JP Morgan. The finance industry now captures a quarter of all corporate profits, up from a tenth in the 1980s.
II. Core Tactics of Wealth Extraction
Rather than improving operational efficiency through superior management, private equity firms often use a set of financial engineering tactics to extract cash from the companies they acquire.
Tactic
Description
Example(s)
Sale-Leasebacks
Forcing an acquired company to sell its real estate and then lease it back, generating immediate cash for the PE firm but saddling the company with permanent rent obligations.
Shopko was forced to sell most of its stores for $815 million, locking it into expensive 15- and 20-year leases. HCR ManorCare sold its real estate for $6.1 billion, leaving it with all the obligations of ownership but all the costs of renting.
Dividend Recapitalizations
Forcing a company to take on new debt to pay a special “dividend” to the PE owner. The author likens this to “using someone else’s credit card to pay yourself.”
Hertz was forced to borrow $1 billion to pay a dividend to its PE owners. Staples was forced into a $1 billion dividend recap by Sycamore Partners, resulting in $130 million a year in interest payments alone.
Strategic Bankruptcies
Pushing a company into bankruptcy to shed debts, particularly pension obligations, which are then passed on to the government’s Pension Benefit Guaranty Corporation (PBGC).
Sun Capital pushed Marsh Supermarkets, Indalex, and Friendly’s into bankruptcy, offloading pension obligations onto the PBGC. The former head of the PBGC called this “pension laundering.”
Rollups
Acquiring many small companies in a fragmented industry (e.g., veterinary clinics, dermatology practices) to consolidate them, gain market power, raise prices, and cut costs.
Six PE firms now own over 5,000 veterinary practices (over 10% of the industry). In dermatology, PE ownership has led to pressure on doctors to meet quotas for procedures.
Forced Partnerships
Requiring a portfolio company to work with another company also owned by the PE firm, creating a conflict of interest that benefits the firm at the expense of the retailer.
Sycamore Partners forced its retailers, like Talbots, to use its supply agent, MGF Sourcing, ensuring Sycamore profited on clothing purchases whether or not Talbots could sell them.
Tax Avoidance
Utilizing loopholes like “carried interest” (taxing managers’ performance fees at the lower capital gains rate), “fee waivers,” and “blocker corporations” in tax havens to minimize tax burdens.
The IRS investigated Thoma Bravo for its use of fee waivers for four years but made no adjustments. KKR, Apollo, and TPG Capital have all used fee-waiver provisions.
Operational “Efficiencies”
Often a euphemism for mass layoffs, quality reductions, and price hikes.
Toys “R” Us fired 33,000 employees upon liquidation. Over the past decade, PE-owned retail companies laid off nearly 600,000 people at a time when the industry added over a million jobs.
III. Sector-Specific Impacts
The application of the private equity model has had profound and often devastating effects across a wide range of industries, particularly those serving vulnerable populations.
Retail: Profiting from Bankruptcy
Private equity ownership has been a key driver of the “retail apocalypse.” Firms load retailers with debt, making it impossible to invest in e-commerce, and then extract wealth through fees and dividends before pushing them into bankruptcy.
• Toys “R” Us: Acquired by Bain, KKR, and Vornado for over $6 billion, most of it debt placed on the company. The PE owners extracted an estimated $464 million in fees over 13 years. The crushing debt of nearly half a billion dollars a year in interest prevented necessary investments, leading to liquidation and the loss of 33,000 jobs. An independent analysis suggested the PE firms themselves likely profited from the deal despite the company’s collapse.
• Shopko: After its acquisition by Sun Capital, the retailer was forced into a sale-leaseback, saddled with debt to pay its owner “dividends,” and ultimately liquidated. A former employee, Trina McInerney, stated, “Sun Capital left me jobless, with nothing.… The devastation was real.”
Housing: Ending Homeownership as We Know It
Following the 2008 financial crisis, private equity firms, aided by government policy, bought up hundreds of thousands of foreclosed single-family homes and converted them into rentals.
• Government Enablement: The Federal Housing Finance Agency (FHFA), under Acting Director Ed DeMarco, resisted calls for principal reduction for homeowners but launched a program to sell foreclosed homes in bulk to large investors like Blackstone’s Invitation Homes and Colony Capital. Fannie Mae later provided a $1 billion credit facility to Invitation Homes, using its government backing to help a PE firm acquire more homes.
• Impact on Tenants: PE landlords are associated with sharp rent increases (averaging 9% annually in Los Angeles), a proliferation of fees (utility conveyance fees, landscaping fees), poor maintenance, and high eviction rates. An Atlanta Fed study found corporate landlords were 68% more likely to file eviction notices than smaller owners.
• Mobile Home Parks: PE firms like The Carlyle Group have aggressively bought mobile home parks, targeting them as ideal businesses with a “captive” resident base who cannot easily move their homes. At the Plaza Del Rey park in California, Carlyle raised rents by 7.5% in its first year—the largest increase in the park’s history—and made it harder for residents to sell their homes. Carlyle sold the park four years later for a 58% profit.
Healthcare: Deadly Care and Financialization
Private equity’s foray into healthcare has led to a focus on cost-cutting and profit extraction that has demonstrably worsened patient outcomes.
• Nursing Homes (HCR ManorCare): After being acquired by The Carlyle Group, ManorCare was loaded with $4.8 billion in debt and its real estate was sold in a massive leaseback. Staffing hours were cut, and care shifted to lower-skilled workers. A comprehensive academic study found that PE ownership of nursing homes was associated with a 10% increase in short-term mortality, which translates to an estimated 20,000 deaths over a 12-year period.
• Hospitals and Emergency Rooms: Staffing companies like Envision (owned by KKR) and TeamHealth (owned by Blackstone) now staff about a third of all U.S. emergency rooms. This has been linked to aggressive “surprise billing” tactics and understaffing. Dr. Raymond Brovont was fired from an EmCare-staffed hospital after formally complaining that understaffing violated the law and endangered patients. An EmCare executive replied to the concerns by stating, “Profits are in everyone’s best interest.”
• Rollups and Antitrust: The federal government has largely failed to challenge PE-led rollups of physician practices (dermatology, anesthesiology, etc.), leading to increased market concentration, higher prices, and worse care.
Prison Services: A Captive Audience
PE firms are drawn to prison services for their steady government contracts and a “literally captive audience” that cannot object to price hikes and quality cuts. Firms own companies providing prison phone calls, food, commissary services, and healthcare.
• Prison Phones: Companies like Securus (owned by Platinum Equity) have charged exorbitant rates for phone calls (up to $25 for 15 minutes), funded by the families of incarcerated individuals. The business model relies on paying “commissions” or kickbacks to the correctional facilities, creating a perverse incentive for high prices.
• Prison Food: H.I.G. Capital’s Trinity Services has been accused of serving rotten food, maggot-infested meals, and meat labeled “not fit for human consumption” in multiple states. The company’s contracts often pay a flat rate per inmate, incentivizing cost-cutting by reducing food quality and quantity.
IV. Mechanisms of Influence and Power
Private equity has advanced its agenda by embedding itself within every arm of government, ensuring favorable laws, lax regulation, and a legal system tilted in its favor.
The Government-Private Equity Complex
There is extensive cross-pollination between senior government ranks and the private equity industry, creating a powerful network of influence.
Former Official
Former Government Role(s)
Private Equity Firm
Timothy Geithner
Secretary of the Treasury
Warburg Pincus (President)
Jacob Lew
Secretary of the Treasury
Lindsay Goldberg
Paul Ryan
Speaker of the House
Solamere Capital (Partner)
Newt Gingrich
Speaker of the House
JAM Capital
David Petraeus
General & CIA Director
KKR Global Institute (Chairman)
Leon Panetta
Secretary of Defense
Cerberus Capital Management
Jay Clayton
SEC Chairman
Apollo Global Management
Shaping Laws and Regulations
• Lobbying: The industry has spent over $896 million on congressional candidates and members since 1990. This influence was on display in the successful, multi-year fight to protect the carried interest loophole and in the effort to weaken the No Surprises Act (banning surprise medical bills), where PE-funded groups like Doctor Patient Unity spent millions on attack ads.
• Favorable Courts: Firms exploit “forum shopping” to bring bankruptcy cases in preferred jurisdictions, like Delaware, which are seen as more favorable to corporate debtors. They use expedited “363 sales” and “credit bidding” to retain control of companies while shedding pension and other debts, as Sun Capital did with Friendly’s.
• Forced Arbitration: PE-owned companies increasingly use forced arbitration clauses to prevent customers and employees from pursuing class-action lawsuits, a trend supported by Supreme Court decisions and the congressional repeal of a CFPB rule that would have limited the practice.
V. An Agenda for Reform
The book concludes that the industry’s worst excesses can and must be stopped, drawing a parallel to the Progressive Era reforms that tamed the Gilded Age trusts. A comprehensive, multi-pronged agenda is required.
Key Legislative Proposal: The Stop Wall Street Looting Act This bill, introduced in Congress, would address the core flaws of the private equity model by:
• Giving workers higher priority in bankruptcy.
• Ending the carried interest loophole.
• Banning dividend recapitalizations within the first two years of ownership.
• Making private equity firms jointly liable for the debts of their portfolio companies.
A Multi-Institutional Approach
In the absence of congressional action, the author proposes a series of reforms that can be enacted by various governmental and private actors:
• Federal Regulators:
◦ DOJ/FTC: Revise merger guidelines to challenge rollups more aggressively and investigate interlocking directorates.
◦ Department of Labor: Reverse Trump-era guidance allowing PE investments in 401(k) plans.
◦ SEC: Increase transparency through Form PF, establish fiduciary duties for PE firms, and limit incentive-based pay that encourages excessive risk.
◦ HHS/CMS: Set minimum staffing levels in nursing homes and require disclosure of ultimate parent ownership.
• State and Local Governments:
◦ End contracts with abusive prison service providers.
◦ Strengthen corporate practice of medicine laws to prevent non-medical professionals from controlling physician practices.
◦ Extend rent control and tenant protection laws to single-family rentals.
◦ Limit the debt that locally headquartered companies can take on during an acquisition.
• Investors and Activists:
◦ Public pension funds, which provide nearly half of PE firms’ money, should be pressured by activists to divest from the most predatory firms.
◦ Activists can build coalitions across affected industries, publicize the harms, and support litigation that seeks to pierce the corporate veil and hold firms accountable.
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