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Episode 7 - Private Equity Unregulated: Flagship of our Rigged System Private Equity 101Welcome back to Toil Episode 7. Today is finally time to talk about private equity. And we have an interview today from a county council member in Pennsylvania who has witnessed private equity harm her community. Before we get to the interview, let's better understand private equity. Like many things, it is a tool that can be used for good or harm. But let's first just define it for any listeners not quite sure what it means.Let's start with what each word means private and equity. Private just means we're talking about investments into companies that are not public. They're not listed on the public stock exchange. You and I can't just go to a public website and buy equity or shares in these companies. They're private companies. But really wealthy people in Wall Street firms can buy shares of them.Equity is when an investor actually owns a portion of a company. So when any of us as individuals own a share in a company, a public company, that is us owning equity in the company, though obviously a very small non-voting share of equity. In the show shark tank, you'll see the sharks negotiate for a percentage of equity in the company. That means they own that portion of the company.So, private equity, by its pure definition, just means owning some portion of a private company. That's not necessarily bad, and in some cases is really needed by companies and quite useful in helping them grow. The problem is that today, when you hear private equity, it probably means a leveraged buyout or LBO is what has happened. And this is incredibly harmful to companies. In finance, the word leverage means debt.So a leveraged buyout is when a private equity firm takes out usually a massive amount of debt from a bank to fully buy out either an entire company or at least a majority of it, which gives it control. And the PE firm is not liable for that debt. Only the company they're buying is. And that debt actually finances the vast majority of their purchase, sometimes as much as 90% or more.So only 10% or less of actual equity capital is coming from investors. So they don't have much of their own money or their investors' money at risk. This model incentivizes PE firms to run the company not with an eye towards long-term health and creating the best company for customers, employees, and the public, but rather with a focus on how it can extract as much money as possible.PE firms do this because they exist to make money for their investors. That's their mission. They are paid by their investors to make a return. And they get a share of the returns they make as well. And because of the debt they use to buy their stake, they are not actually risking much of their own money. So they have every reason to try to extract profits. And if the company collapses, they don't lose much anyway becauseThey don't have to pay back that debt that they took out to buy their stake in the company. We'll get into this later.Is it corporate greed? Absolutely. It's also just fulfilling the purpose of their business, which is to make money. That is the service they are selling. Not company stewardship, not job creation, just money. We can change this. We, the people, through our government, can force the PE industry to honor what is also in the public's best interests. And they can still make lots of money.They just can't cause harm to the rest of us in order to do so. I linked in the notes to a great report authored by an expert on this, Audrey Stienon from Open Markets Institute, outlining how we could do this, how the government could provide these guardrails to protect us from PE's profit at all cost model. Because, sure, it's possible for good and moral actors.To deploy beneficial private equity and not strip their companies for parts and drive them into bankruptcy. And there are some private equity investors out there who focus more on what's called growth equity investments and truly adding value to companies and helping them grow rather than using the leveraged buyout model.But we have no government guardrails to ensure this happens across the industry. We're just trusting people to care about more than just profit when there are no incentives for this. And we know that on the whole, this isn't happening because the LBO model is still alive and well and driving companies into bankruptcy. So until the government steps in and finally does its job to protect us. We the people are not protected from this behavior.So, what is this behavior specifically that I'm referring to? These extractive tactics that PE is increasingly becoming well known for? One, fees, fees, fees, fees, and more fees. PE firms charge the portfolio companies that they control millions and millions and hundreds of millions of dollars in fees as a way to siphon off funds from the company to the PE firm.For example, a monitoring fee to monitor a company that they have control over, or a transaction fee for any time the company that again they control engages in a transaction, like acquiring another company, which is a whole other can of worms we don't have time for today, or spin off part of the company, or refinance its debt, which are almost always things the PE firm wanted them to do.Why are we letting private equity firms charge the very companies they control for this kind of support? And there are even examples of companies still being charged these fees as they're going bankrupt.A second tactic, dividend recapitalization. This is when private equity firms are allowed to add even more debt onto the company they control for the sole purpose of paying dividends to themselves. They literally take out a loan that they don't have to pay back just to give themselves dividends. Can you imagine any world in which this is legal outside of a world?Where the private equity firms have influence over our legislators to prevent them from making this kind of behavior illegal? I can't. Here's another doozy. Sale leasebacks. This is when a company sells their assets and then leases them back. This could be land, buildings, machinery, vehicles. Now, sale lease backs can serve a purpose for a company that really needs some cash. The company sells some of their assets, gets that immediate cash, and then over time pays rent for those same assets. Obviously, in the long run, this is more expensive for the company, but it does give them immediate money in the short term if they're in a pinch.The difference here when private equity firms make a company do this is that the company doesn't get to keep that cash. The private equity firm takes all those profits from the sale, and then the company has to now lease or rent back those exact assets. And the company has to pay that rent from its balance sheet, not the private equity firms. And of course, there are the more well-known tried and true PE practices of firing staff, cutting corners on quality, and raising prices. All of this helps them cut costs and raise revenues, so they increase the profit margins that they, as owner or controller of the company, can take. Even if this money comes at the expense of workers, customers, suppliers, the public, or the long term health of the business itself.So it should be no surprise that all of these extractive tactics drive a company into bankruptcy. I link in the notes to a study that found that 20% of large companies acquired through LBOs go bankrupt within 10 years. The bankruptcy rate for comparable companies that were not acquired by private equity? 2%.That's 10 times the rate of bankruptcy for private equity owned companies. Now, the PE industry and its defenders will tell you that private equity firms target struggling companies that were already in trouble. But the research that found this 20% versus 2% result specifically controlled for this. They studied healthy companies that were taken private. It's the debt load and extractive tactics that kill them. And the private equity firms walk away just fine. PE firms have this bankruptcy protection.Because they claim they're not responsible for the management decisions of the firm. But because they bought a majority stake in the company, that gives them the power to have a majority vote on the board and appoint the kind of leadership they want and impose incentives like bonuses to motivate those leaders to do whatever the PE firm, whatever makes the PE firm the most money, regardless of whether it's good for the company, its customers, suppliers, or the general public.Even if those decisions drive a company into bankruptcy, because the PE firm is protected from liability when this happens. The PE firm walks away unscathed from a bankruptcy while the employees of the company suffer, suppliers who relied on that company as a buyer suffer, customers and communities who needed that company suffer. Because sometimes that company that goes bankrupt is a hospital.This leads us to our interview today with a county council member in Pennsylvania who saw this happen in her community.Private Equity in Pennsylvania: Interview with County Council Member Dr. Monica TaylorClaire (Toil Host) (11:44)I am so grateful to be joined today by the former chair of the County Council, still serving on the council through 2027, in Delaware County, Pennsylvania, where over the last several years, private equity has bankrupted four of their six hospitals. Dr. Monica Taylor has been serving on the County Council since 2020, where she served four years as County Council Chair and helped champion the effort to create the county's first Health Department. Doctor Taylor, thank you so much for joining us today.Monica Taylor (12:18)Thank you so much for having me.Claire (Toil Host) (12:20)Before we jump into private equity, I've been trying to spread the word about how important local politics are. So I'm curious, why were you drawn to county government? And what might you tell listeners about how important work at that local level is?Monica Taylor (12:35)You know, well, I definitely didn't run for office because of private equity, though it has certainly become a really big part of what I'm focused on now. You know, if you would have asked me 10 years ago if I would be in politics, I would have been like, no, you know, I'm a professor, I'm a full-time professor still at Temple University. And I had like my eyes set on, you know, I'm gonna be in public and education administration andThen I decided that I wanted to run for school board. I have little ones and you know they're all gonna be in Upper Derby School District for a while. And I thought education was my space and I really wanted to make a difference there.Monica Taylor (13:11)I was really focused on helping students who were going out to into the workforce but really didn't have access to family sustaining wage jobs and trying to make sure that they knew all the options that were out there for them. So I really started to work with the surrounding counties, work with the city of Philadelphia, building a workforce development program for our students at our at our high school.And that really opened my eyes to the opportunities that were there and you know, working with the building trades, working with the community college, working with the local businesses, the tech companies, and really getting that into the guidance counselors so that they knew what was what was out there and how students could go. you know, the research from our school was telling us that the students who were going directly into the workforce were really getting, you know, jobs that weren't that were, you know, maybe restaurant jobs or retail jobs. And so it really wasn't that type of family sustaining wage. And so through this work, I realized the other counties were doing so much more than us in Delaware County. And I was like, okay, well, where are the programs in our county? And I started to look more into it and realize we just really didn't have a robust program. And we were at the time giving back almost a million dollars in federal funding that could have been going towards programs.And so the more I looked into the county, then I realized we were the largest county in the country that didn't have a health department. And we were also the only county in the Commonwealth that had a private prison. And those issues just really spoke to me. And I was and so I I decided to run for office. I was like, maybe I can make a difference in these areas. and so fast forward, ran for office. We were able to create a health department, we were able to deprivatize the prison.We've actually expanded our workforce development program. We were no longer sending money back. We actually are going out for more grants and providing more programming. So it's just really been it's it's been a wonderful experience and I love serving my community and the work we've been able to do.Claire (Toil Host) (15:08)that's so fantastic. And and the de-privatizing too. You know, not the topic of today, but I've been learning a lot about how privatization is just such a problem. And so that is really exciting to hear that you were able to de-privatize a prison. Okay, that's great. So, listeners, take note of all the things that you can do at the local level. Not everything's in Washington. but but diving intoMonica Taylor (15:22)Yes.Claire (Toil Host) (15:34)our main topic for today, which as you said was not even why you got involved, but has become a huge part of your work now that you've been on the council, is private equity. And your county has lost four of its six hospitals under private equity ownership. What is going on? Can you can you catch us up on on what's going on here and how this happened?Monica Taylor (15:58)yes. So, you know, first of all, once again, thank you so much for having me here today. and for really what you're doing to drive this conversation because it's really just so important for people to understand more what's happening in this space. I want to set the stage here for how we understand this problem. In Delaware County, like so many communities, corporate greed was basically allowed to ransack an industry that all of us need to survive.That greed has literally cost lives in my county. We had a nonprofit, wonderful healthcare system that started with Chester Hospital in 1893. That's how long the system had been serving our county. And it grew to a total of four hospitals in Delco out of six that we had. And in 2016, the system was sold to the private equity-backed Prospect Medical Holdings.And of course, you know, they they promise that the system would be better, it would be invested in, patients would be protected, you know, executives who knew how to run businesses would be brought in to really help the hospital thrive. And so you could probably guess what happened next. Yeah, within years, the land was sold out to investors and then leased back to the hospital at exorbitant rates.Services were then cut, you know, one at a time, year by year. Workers started to be laid off because those services were cut. but private equity executives made $424 million. And then in 2025, Prospect closed the last of their hospitals in Delaware County. They fired 3,000 workers. And all of this happened almost overnight.And our county lost one of our largest employers. And we were down to two hospitals serving 575,000 residents. Only one birthing hospital left in our county. And patients were basically thrown into chaos.I'm proud to say that we have rallied around each other and we're climbing out of the ashes of this disaster. But it's a dis…
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