ABOUT
The Private Equity State Risk Index is a tool for the public, policymakers, and regulators to assess the impacts of private equity on different states and develop solutions to address those impacts.
The private equity industry has grown from less than $1 trillion in assets to over $13 trillion today. Private equity firms control companies with more than 11 million workers across the US. Private equity firms are now some of the largest landlords in the country, owning millions of homes. Private equity firms have increasingly bought up US healthcare infrastructure, impacting millions of patients. Meanwhile, many state pension funds have increased how much they have invested in private equity.
Jump to:
– Background
– Risks
– State Policy Solutions
The Private Equity State Risk Index seeks to assess how private equity firms are impacting each state and the relative risks that states face from private equity buyouts by looking at 16 indicators in four key areas: (1) Workers and Jobs, (2) Healthcare, (3) Housing, and (4) Pensions.
The Private Equity State Risk Index is a project sponsored by the Private Equity Stakeholder Project (PESP), a nonprofit watchdog of the private equity industry and Wall Street. The mission of the Private Equity Stakeholder Project is to identify, engage, and connect stakeholders affected by private equity with the goal of engaging investors and empowering communities, working families, and others impacted by private equity investments.
PESP seeks to research and hold private equity companies accountable for the impacts they have on the people and planet—by uplifting the voices of people who are directly impacted by the private equity firms to press for change.
Background
Private equity is an alternative investment model in contrast to public equity or companies traded on the stock market. A private equity fund manager – think of Blackstone or KKR or Apollo Global Management or the Carlyle Group — develops an investment fund with money from wealthy individuals, endowments, and public pension funds. In the classic private equity business model, the private equity fund manager is the general partner as the fund purchases a company by putting in a small amount of equity and taking out a large loan. After the purchase, the private equity fund manager requires the purchased company to repay the debt. The private equity fund manager takes financial control of the company in a variety of ways, aiming to increase its worth or extract value before exiting the investment just three to seven years later. The private equity fund manager may typically require the company to meet performance goals within 100 days, pay a variety of fees to benefit the private equity fund manager, or make specific financial transactions, such as selling off assets, that deliver cash to the private equity fund manager.
All forms of ownership and investment carry risk. However, key features of the private equity business model bring particular risk to the employees in purchased companies and to the customers, patients, and homeowners and renters who they serve. The high amounts of debt and fees that must be paid by the purchased company, and the short time horizon and high expectations for returns for the investment partners, tend to drain the company of value. And unlike many other investments, the profit incentive for the private equity fund manager is divorced from the actual value of the company. With these 16 indicators, the Risk Index compares how the risks of private equity accumulate geographically state by state, so policymakers can assess the vulnerability of their health systems, housing markets, public pension funds, and state economies and consider policy action to protect their states from the threats of private equity.
Risks
Workers and Jobs
Evidence shows that private equity carries particular risks to workers and jobs. The expectations for high cash returns in short periods of time generally lead private equity-controlled companies to cut staffing levels and make reductions in overall wages and benefits (Private Equity at Work: When Wall Street Manages Main Street, Eileen Applebaum and Rosemary Batt, Russell Sage Foundation, 2014, 193). Private equity buyouts also carry a higher likelihood of bankruptcy. A study published in 2021, for example, tracked a sample of 484 public companies for ten years after they were purchased by private equity through a leveraged buyout (LBO) and found a bankruptcy rate of 20% — compared to only 2% for non-LBO public companies. (Leveraged Buyouts and Financial Distress, Finance Research Letters, Volume 38, 2021, Brian Ayash, Mahdi Rastad). The authors describe how the private equity business model facilitates bankruptcy, pointing out that “while suppliers, customers, local economies, pension funds, and state and federal government tax revenues all feel the burden when an LBO company goes under, the partners at the private equity funds do not share the burden.”
Researchers at Harvard Business School and the University of Chicago found varied effects of private equity buyouts on jobs, with an overall average job loss of 4.4 percent in the two years after a company was bought by private equity, compared to control companies, and average earnings per worker fell by 1.7% (The Economic Effects of Private Equity Buyouts, Davis, Haltiwanger, Handley, Lipsius, Lerner, and Miranda, revised July 8, 2021).
The Private Equity Stakeholder Project has documented a pattern of negligent and dangerous labor practices within the private equity industry, including fines paid for wage and hour law violations and violations of occupational health and safety laws (Private Equity Labor Scorecard, November 2023).
Health Care
Private equity has become increasingly active in the field of health care, buying hospitals, nursing homes, physician practices, and other health care facilities. This trend has raised numerous concerns about deteriorating patient care, rising medical costs, and shuttered facilities leading to loss of access to care. A review of 55 studies spanning different types of health care providers found private equity ownership was most consistently associated with increases in costs to patients or payers and mixed to harmful impacts on quality, including reduced nursing staff levels. No consistently beneficial impacts were identified (Evaluating trends in private equity ownership and impacts on health outcomes, costs, and quality: systematic review, BMJ, July 2023).
Nursing homes owned by private equity, on average, have higher Medicare costs and worse outcomes for patients. Research that analyzed Medicare data for more than 7 million patients found that the patient mortality rate is 10 percent higher at nursing homes owned by private equity fund managers. Patients at private equity-controlled facilities also experience a greater decline in mobility and increased levels of pain while paying charges that are more than 10 percent higher (Owner Incentives and Performance in Healthcare: Private Equity Investment in Nursing Homes, National Bureau of Economic Research, August 2023).
Evidence suggests that patients at private-equity controlled hospitals may also receive worse care. A recent study led by researchers at Harvard Medical School tracked patient complications. They found that patients are more likely to fall, get new infections, or experience other forms of harm during their stay in a hospital after it is acquired by a private equity fund manager. (Changes in Hospital Adverse Events and Patient Outcomes Associated With Private Equity Acquisition, JAMA Network, December 26, 2023).
Private equity purchases also leave communities vulnerable to entire hospitals, or critical hospital departments, being shut down due to the financial and real estate decisions of the private equity fund manager. (Apollo’s Stranglehold on Hospitals Harms Patients and Healthcare Workers, Private Equity Stakeholder Project, January 2024; How Private Equity Raided Safety Net Hospitals and Left Communities Holding the Bag, Private Equity Stakeholder Project, November 2022).
According to the Centers for Medicare and Medicaid Services, hospital readmissions are a known key quality of care indicator and account for billions of dollars in annual Medicare spending. A study published in 2017 examined hospital readmissions of more than 2.7 million Medicare patients and reaffirmed the connection between high quality care and low readmission rates. (Hospital-Readmission Risk — Isolating Hospital Effects from Patient Effects, New England Journal of Medicine, September 2017).
Another health care risk measure is the share of physician specialty practices controlled by private equity control within a metropolitan area. This market domination can lead to inflated costs for patients as well as decreased quality of care. A recent study estimates the impact of private equity acquisitions of physician services on prices in local markets. Private equity ownership was associated with significant price increases in 8 of the 10 physician specialties studied. Price increases are particularly high in metropolitan areas where a single private equity fund manager controls more than 30% of the market – such as an 18% increase for gastroenterology and a 16% increase for OB/GYN. (Monetizing Medicine: Private Equity and Competition in Physician Practice Markets,” American Antitrust Institute, University of California Berkeley Petris Center, 2023).
Another study of practices in dermatology, ophthalmology and gastroenterology reveals that when private equity fund managers purchase them, they experience greater replacement of the workforce and rely more heavily on providers other than physicians — such as physician assistants and nurse practitioners (Workforce Composition In Private Equity–Acquired Versus Non–Private Equity–Acquired Physician Practices, Health Affairs, Vol. 42, No 1, January 2023).
Housing
Starting in the years following the 2008 financial crisis, private equity and other larger investors have become increasingly active in the market for single family homes. They have tended to purchase homes in neighborhoods with larger Black populations, lower home values, and higher rents. Because of their financial strength and ability to pay in cash, larger investors can often out-compete first-time homebuyers, making it harder for families to buy homes in neighborhoods where these investors are active. In addition to crowding first-time homebuyers out of the market, private equity landlords pose threats to renters. Since they can gain market power in geographic areas with few other options for renters, they can charge high costs and offer minimal repair and upkeep. In 2022, aCongressional subcommittee found that “renters in institutionally-owned single family rental homes often experience higher rent increases, inflated fees, and diminishing quality of housing over time.” (June 28, 2022 Memo, U.S. House of Representatives Subcommittee on Oversight & Investigations hearing entitled, “Where Have All the Houses Gone? Private Equity, Single Family Rentals, and America’s Neighborhoods.”)
Public Pensions
Prior to the Great Recession, public pension systems invested almost exclusively in stocks and bonds. As returns on stocks and bonds began declining in late 2007, pension systems looked for alternative investments to maintain profitability and reduce the contribution costs for government employers and employees to keep the pension funds healthy. Private equity investments promise, and sometimes deliver, good returns. However, a high share of assets invested in private equity can bring greater risk, because these funds use high levels of debt, are not valued at regular intervals in the same transparent way that stocks are valued, and because these investments are less liquid. State pension fund policies can impact risks to the teachers, police officers, prison guards, public health nurses and other public servants who rely on these funds for their retirement security. These policies also impact risks to all state taxpayers who finance the pension systems.
Private equity funds typically charge very high fees that may not be fully disclosed, including management fees, carried interest (or performance) fees, and fees they collect from the companies they control. When some fees go unreported, pension plans lack a full picture of the true profitability of their private equity investments. Without this full picture of profitability net of fees, those responsible for pension plan investments cannot make informed investment decisions.
Pension fund responsible contractor policies require certain companies they invest in to ensure that their contractors (such as janitorial services, security, and construction trades) pay fair wages and benefits and comply with all local, state, and federal labor laws. These policies have two related benefits that protect employees and taxpayers from risk. First, they help ensure that workers have fair compensation and a safe working environment. Second, they increase the stability of investments. Businesses that treat workers fairly tend to produce higher quality products and services and be more stable and more profitable in the long-run. They tend to have less turnover and fewer unnecessary labor disruptions. In this way, responsible contractor policies make for more stable and profitable investments.
State Policy Solutions
This Private Equity Risk Index also includes information about 12 state-level policy solutions that can help protect workers, taxpayers, patients, renters, and customers from the risks of private equity. Each state profile includes a checklist showing which of the policy solutions that particular state has adopted. Click here to download an overview of which states have adopted which policy solutions.
Workers and Jobs
Severance for mass layoffs: For mass layoffs, require 90 days advance notice and require employers to pay one week of severance pay for each year of employment
Bonding for unemployment insurance: Require private equity-controlled companies with high debt ratios to post a bond to the unemployment insurance system to cover unemployment insurance taxes in the event of a bankruptcy
Healthcare
Review of health care mergers: Require notice, public review or approval process for hospital and other health care mergers
Medical debt collection: Regulate medical debt collection
Nursing home staffing: Require specific percentage of Medicaid or overall revenues in nursing homes to be spent on staffing costs for patient care
Hospital fees: Limit hospital facilities fees
Housing
Good cause evictions: Prohibit evictions of tenants for reasons other than specified causes, such as non-payment of rent
Rental cost caps: Cap annual rent increases statewide at inflation plus a small percentage or allow local jurisdictions to cap rent increases
Tenants’ right to purchase: Give tenants of mobile home parks and multi-family housing advance notice of sales and first right of refusal to purchase
Landlord registry: Create a mandatory registry to identify beneficial ownership of all corporate landlords with multiple holdings
Public Pensions
Fee disclosure: Require disclosure of all fees paid to each private equity fund by state pension funds
Compliance with all state laws: Require signed affirmation from private equity fund managers that all of their portfolio companies comply with state labor laws, environmental laws and health codes