How Private Equity Gave Rise to a New Power Elite

Today, the top 0.01% of the wealthiest people in America hold more of the country’s total wealth than that same group did during the Gilded Age, a time of unrestrained financial speculation — but also of grinding poverty, corruption, and racial strife. That extreme concentration of wealth is in large part attributable to the dominance of Wall Street over American life, and bankers and investors’ willingness to manufacture and exploit crises, when the spoils are greatest. The centrality of finance in the United States and across the globe arose through successive waves of neoliberal reform over the last half century involving the privatization of profits and externalization of risk.

The 2007 financial crisis led to widespread distrust of banks and government, but rather than creating a fairer economic system, it gave rise to new trends in finance that expanded speculators’ influence in the global economy and continued to facilitate massive accumulations of wealth. Since the crisis, the financial sector has witnessed the rise of private equity (PE) as a major-league wealth maker, such that founders of the largest PE firms have become multi-billionaires. 

In 2021, 25 members of the Forbes billionaire list made their money in PE, notably Kohlberg, Kravis, and Roberts (KKR) founder Henry Kravis (net worth $7.4 billion) and Stephen Schwarzman (around $30 billion net worth), the cofounder of the PE giant Blackstone, which manages about $1 trillion, a mammoth sum. 

PE is a rebranded form of the leveraged buyouts (LBOs) of the Reagan era, memorialized in Oliver Stone’s Oscar-winning film Wall Street—a fictionalized account of how real-life banker-predators like Ivan Boesky speculated on corporate takeovers in the go-go 1980s using illegal insider information, justified with survival-of-the-fittest ideologies and slogans like ​“greed is good.” In that dog-eat-dog world of risk arbitrage, insider information was both money and power. The racket involved buying stock in ​“target” companies, pushing up bids beyond their actual value, and forcing takeovers. 

In the 1980s, LBOs and mergers and acquisitions (M&As) were among Wall Street’s hottest techniques for making massive amounts of money. LBOs took public companies private by borrowing against their assets to pay off shareholders (usually at inflated stock prices), with financing from banks and junk bonds. They tended to involve incredibly high debt levels, which were used to justify shop-floor cost cuts at a time when unions were far too weak to prevent them. After pieces of target companies were sold and their workforces ​“streamlined,” the ​“re-engineered” companies would go public again with new and improved stock prices. LBO players claimed to be purchasing undervalued assets to unlock corporations’ value and ​“rescue” them, but the buyouts were not for innovation and product development — they were for getting rich quickly. 

For target companies, LBOs were rarely profitable, but they were big money makers for the bankers and cadres of lawyers and specialists who collected fees on the massively inflated buyout prices. Today, billion-dollar buyout and merger deals total in the trillions and PE has become a powerful engine of financialization, profoundly deepening the reach of wealthy investors in all parts of the economy. As of 2019, assets under PE management totaled more than $6.5 trillion, and in 2020, PE accounted for 6.5% of GDP, directly employing nearly 12 million workers and its suppliers employing an additional 7.5 million. By the middle of 2018, PE owned more companies than the number of businesses listed on all of the U.S. stock exchanges combined. 

How PE operates

In broad strokes, a PE fund is an unregulated pool of money operating outside of public markets that elite investors buy into. Given the size of the initial outlay, those investors tend to be classified as ​“high net worth” or are institutional investors, such as universities, insurance companies or pension funds. Enabled by low interest rates and a politically friendly climate, the pooled funds are used to invest in or buy a target company — toy stores, newspapers, hospitals, pretty much anything under the sun — and then load it up with debt (as much as 90% of the sticker price) to finance the purchase. The borrowed money is, theoretically, used as working capital to restructure the company and ​“unlock” its value, while paying large dividends and funneling profits back to investors. Then, the idea is, they sell the company at a profit. 

PE is so lucrative in part because of its generous ​“2 and 20” fee structure — 2% in annual fees, plus a 20% cut of the profits above a certain level. Under the current tax code, that 20% is considered ​“carried interest” and is thus classified as capital gains, which saves PE firms tens of millions each year in taxes. 

PE advertises itself as a benevolent force, as just a group of well-intended entrepreneurs investing in underperforming companies and restructuring them so they become more productive and efficient, and thus good for the economy. Some are. But most of the companies taken over by PE start off healthy and only become distressed after being raided for their value. The purpose is not to make companies productive citizens — it is to maximize the fund’s profits and increase a company’s appeal to buyers by cutting its operating costs, while shifting the risks associated with their investment onto shell companies and workers. 

Companies acquired through leveraged buyouts are more likely to lower wages, cut retirement plans, and have higher rates of bankruptcy. Instead of reinvesting profits, as someone trying to build a company would, PE strips them of workers and assets and saddles them with untenable debt repayment schedules to ​“discipline managers.” Such was the case with the dozens of large retailers that PE firms drove into the ground — including the otherwise profitable Toys-R-Us — wiping out millions of jobs and shorting workers of their severance pay. 

The volatility that PE has introduced into the workforce is matched by high-risk lending to companies with poor credit and already high debt loads. PE’s incentive structure is such that the more debt one raises against a target company, the less cash that is needed to pay for it, and the higher the returns once the company is sold. PE has also introduced dangerous levels of corporate concentration and monopoly by driving target companies out of business or merging them with other firms in the same industry. 

After the 2007 financial crisis, for example, Blackstone bought up chunks of ​“troubled” real estate assets and used them to found a large single-family home rental company, Invitation Homes Inc. After ​“streamlining” its operations, Invitation Homes went public, then merged with another PE-backed business to create the United States’ largest single-family rental company — all on the backs of millions of people forced out of their homes due to a crisis that the banks created. As of 2022, giant PE firms continue to buy up real estate — fostering an epic housing bubble and major affordability crisis, especially for renters — and create increasingly high-risk, shadowy, complex investment vehicles and shell companies to profit off overvalued or worthless assets. 

Profiting off sickness

PE’s raiding of the U.S. healthcare system — one of the country’s most essential industries, accounting for a fifth of GDP — has proven disastrous. As a decentralized and fragmented industry composed of small operators, healthcare was ripe for investors looking to churn profits of mergers and by controlling markets. In 2020, large PE firms invested more than $340 billion to buy healthcare-related operations around the world, including rural hospitals, nursing homes, ambulance companies, and healthcare billing and debt collection systems. 

This concentration has led to price gouging, hospital closings, predatory billing, cuts in hospital infrastructure and workforces, and declining quality of care. According to a study of PE-owned nursing homes, researchers found ​“robust evidence of declines in patient health and compliance with care standards” after PE firms took over the facilities. Moreover, despite receiving at least $1.5 billion in interest-free loans from Covid-relief funding streams, PE-backed healthcare providers cut workers’ pay and benefits to make up for lost profits due to the emergency suspension of elective surgeries. They also contributed to shortages of ventilators, masks, and other equipment because their managers did not want to lose potential profits by keeping such equipment on the shelves in their hospitals. 

PE managers have been caught grossly overcharging for medical treatment. In 2020, NBC News reported that while the median cost for treating a broken arm in an emergency room was about $665, Blackstone’s TeamHealth charged almost $3,000. In a typical emergency room, NBC found, a physician group might charge three to four times the Medicare rate, but TeamHealth charged six times the rate. There is also the problem of ​“surprise billing” — when a patient’s hospital is in their insurance network, but not the doctors who are treating them. PE firms found that, especially in emergency rooms, they could squeeze out profits by moving doctors out of network and then extracting higher prices from patients unaware that they are being treated by out-of-network providers.

Naturally, when Congress tried to thwart this criminal behavior, PE lobby groups spent a fortune protecting their interests, including a benevolent-sounding organization called Doctor-Patient Unity, which spent more than $28 million on ads funded by PE-backed companies. The bill did not pass, and to the Biden administration’s credit, its Health and Human Services Administration passed a rule in July 2021 banning this egregious practice. 

The other big three

The years since the financial crisis also witnessed the rise of just a handful of asset management firms as a dominant force in the world economy. Asset managers are companies that run investment funds for a variety of retail, institutional and private investors. While traditionally, ownership of corporate shares has tended to be dispersed across many diverse investors and owners of assets, this vast pool of corporate equity has become increasingly controlled and owned by a small, concentrated group of intermediary financial institutions. 

Today, a ​“big three” of asset management firms — BlackRock, Vanguard, and State Street Global Advisors — together are the largest shareholder in almost 90% of the companies in the S&P 500 index, including Apple, Microsoft, ExxonMobil and GE. As of 2020, they were also the largest shareholder in 40% of all publicly listed U.S. companies, employing 23.5 million people, and with combined assets of over $15 trillion — an amount equivalent to more than three-quarters of GDP. The largest of these firms, BlackRock, not only controls shares in all of these companies but also has been hired by leading governments and central banks to advise them, in some cases making decisions about institutions in which BlackRock is a shareholder. 

This infrastructural power and concentration of ownership, largely unknown to the public, allows BlackRock and these other ​“big three” firms enormous influence over nearly every industry in the world. Among fossil fuel companies alone, in 2020 BlackRock managed more than $87 billion worth of shares, giving it a major hand in decision making over how to combat the climate crisis, or not combat it at all. 

Political economist Benjamin Braun termed this concentration of ownership ​“asset manager capitalism” to indicate the systemic effects of this acute consolidation and the novel corporate and financial architecture it has fostered. With a small group of financial companies controlling this architecture and an already large and still growing amount of wealth, they are on course to one day hold voting control of every major corporation and wield an immense, systemic level of power over governments and the global economy.

This piece was adapted from The New Power Elite by Heather Gautney (Oxford University Press, 2022).