EXTREME CAPITALISM OF PRIVATE EQUITY FIRMS DOES GREAT HARM Part 2

This post provides an overview of how the private equity financial model works. It includes two examples of its detrimental effects, one in the chemical industry and the other in communications services for the 500,000 deaf people in the U.S.

(Note: If you find my posts too long to read on occasion, please just skim the bolded portions. Thanks for reading my blog!)

My previous post provided a high-level summary of the harm being done by private equity (PE) firms. It then focused on the Stop Wall Street Looting Act in Congress as an important step to stop the harm being done to patients, consumers, employees, and communities by the PE financial model.

Here’s an overview of how the private equity financial model works. The PE firm, using mostly borrowed money, buys a company. The debt and interest of the borrowed money are then made the responsibility of (and often an overwhelming burden on) the purchased company. The PE owners also pay themselves exorbitant fees (usually for “management”) and pay large dividends to themselves and their other investors. They often sell the company’s assets, such as real estate, to raise money to pay for these payments or to make debt payments. Typically, the company’s real estate is leased back to it at an exorbitant cost.

All this forces the purchased company to engage in (often severe) cost-cutting to be able to make the payments on the debt, the lease, and to the PE owners and investors. This cost-cutting often involves major layoffs and cuts in compensation for employees. Abusive employment practices, union busting, and unsafe workplaces are not uncommon. The quality of the company’s products or services is often compromised to reduce costs. Despite all this cost cutting, the companies often go bankrupt, leaving employees without jobs and often without owed pay and benefits, including retirement benefits.

U.S. laws and policies aid and abet this process by granting tax and other benefits to elements of this model. PE firms are much more loosely regulated than publicly-owned companies or mutual funds that sell shares to the public. Given their private ownership, PE firms have basically no requirements for public disclosures or transparency. The Stop Wall Street Looting Act (see this previous post for an overview) would change this, regulating PE firms and holding them accountable.

Previous posts have reported on PE ownership and its effects in pet care, retail, and health care (here, here, here, and here). Here are two additional examples.

EXAMPLE #1: Centerbridge Partners, a PE firm, bought KIK Custom Products, the parent company of BioLab Inc., in 2015 for $1.6 billion. In late September, 2024, a BioLab chemical plant in Conyers, Georgia, had a massive explosion. Toxic clouds of smoke spread over the area and 17,000 residents had to be evacuated and another 90,000 were told to shelter-in-place. In 2020, an explosion at another BioLab plant in Georgia released a cloud of toxic chlorine gas and there was also a major fire at a plant in Louisiana. Under PE firm Centerbridge’s ownership, BioLab has a long history of explosions, fires, and workplace safety violations. [1]

Centerbridge and its investors have gotten at least $3.45 billion in dividends; a return of more than double their investment – in dividends alone. In the last four years, Centerbridge has added over $2.6 billion in debt to BioLab, primarily to pay for dividends paid to Centerbridge and its investors. In addition, in July, 2024, it sold off a separate subsidiary of KIK for $850 million, which was used to pay Centerbridge and its investors another large dividend and had the effect of increasing the debt load on BioLab. With interest rates rising, this significantly undermines BioLab’s financial stability and makes bankruptcy more likely.

If this most recent plant explosion pushes BioLab into bankruptcy, the company’s workers, including their pensions, as well as contractors and suppliers, will end up losing money that is owed to them. Furthermore, if BioLab goes bankrupt, anyone suing BioLab for personal or environmental harms from the toxic explosions will likely get nothing. It will be left up to the government and the taxpayers to pay for the harm and damage done, as well as the clean-up.

EXAMPLE #2: Two companies, Sorenson Communications and ZP Better Together, separately owned by PE firms, run the service that allows deaf people to communicate by phone using sign language via the Video Relay Service (VRS). The phone companies are required by the Americans with Disabilities Act to make the VRS available for free to the 500,000 deaf people in the U.S. A small fee on all phone calls pays for it and the funding is funneled through the Federal Communications Commission (FCC). The FCC pays a fixed rate per minute for the video calls. The VRS must be available 24 hours a day, seven days a week, and must answer 85% of calls within ten seconds.

The VRS companies were targeted for acquisition by the PE firms because of their steady cashflow with effectively guaranteed profits. [2] Furthermore, the two companies have pushed the FCC to increase reimbursement rates and, in 2023, it announced a new five-year deal with rate increases of 30% to 49%. The rate for the first million minutes of calls will now be $6.27, up from $3.92. After the first million minutes, the rate declines.

Sorenson’s annual revenue is projected to be $2.1 billion and ZP’s about $400 million. Nonetheless, the two PE-owned firms have presided over declining service quality and deteriorating working conditions for employees in their efforts to maximize profits. There have been layoffs, under staffing, and under-training of staff. For example, some staff are specially trained to handle difficult calls, such as notifying a deaf person of the death of a loved one. Some are specially trained to handle translation and communication of legal documents. However, because of staff and training shortages, interpreters are being asked to do work they are not trained for. Workers typically have quotas for the number of minutes per hour they must be on calls to get paid. In some call centers, quotas have been increased because of labor shortages.

The companies have engaged in unfair labor practices and have aggressively resisted efforts to unionize. Labor representatives report that the FCC has not responded to a request for a meeting to discuss working conditions for months, while FCC staff and Commission members have met with the companies’ executives 16 times in the last two years.

Most of the sign language interpreters are part-time employees, with lower pay and benefits than full-time employees, who are usually managers. Although the FCC said that pay for interpreters would increase 65% over five years due to the rate increase, interpreters haven’t received wage increases and therefore are pushing to unionize. Several months after the 2023 rate increase, ZP closed two call centers in Minnesota after workers tried to unionize. ZP also closed two centers in California after settling a case of wage theft and retaliation for $320,000.

Sorenson has laid off workers, including middle management, many of whom were deaf people who had started as interpreters and worked their way up. The middle managers are some of the few employees who are typically full-time workers with decent pay and benefits.

More examples of PE ownership and its detrimental effects, including the Steward Health Care fiasco, will be shared in future posts.

[1]      Tkacik, M., & Goldstein, L., 10/2/24, “A toxic explosion in private equity payouts,” The American Prospect (https://prospect.org/power/2024-10-02-conyers-biolab-explosion-private-equity/)

[2]      Goldstein, L., 9/30/24, “Private equity is taking your calls,” The American Prospect (https://prospect.org/power/2024-09-30-private-equity-is-taking-your-calls/)