Bad Company Quotes

“If it doesn't play a role in your life yet, just wait. Private equity is everybody's problem now.”
― Megan Greenwell, Bad Company: Private Equity and the Death of the American Dream

“Blackstone, which is both the world’s largest private equity firm and the nation’s largest landlord, is explicit about how America’s affordable-housing crisis benefits its shareholders: “a structural shortage of housing has resulted in pricing power for rental housing assets,” it wrote in a 2023 letter touting its growing investor returns. The firm has also poured millions of dollars into fighting ballot measures designed to expand rent-control protection in California. In 2019, a United Nations committee labeled Blackstone’s involvement in the housing industry a human rights concern, writing in a letter to CEO Stephen Schwarzman that the firm was “having deleterious effects on the right to housing” through buying up houses and apartment buildings and opposing regulation.”
― Megan Greenwell, Bad Company: Private Equity and the Death of the American Dream

“Apollo and other private equity firms were also applying lessons from other industries to health care. As had become common in retail several years earlier, firms that owned hospital chains were charging hospitals rent for the same land they once owned. This strategy, known as “sale-leaseback,” has become key to private equity profits because real estate has value independent from the business itself. Under a sale-leaseback agreement, a private equity firm divides a portfolio company into two parts: one for the company’s core business, and one for its real estate holdings. The firm then sells off the real estate assets to the highest bidder, pocketing the profits, and signs lease agreements on behalf of the company to remain in its headquarters. That gives the company a new, and costly, monthly expense, and leaves it with less money to improve its operations. Suddenly the company shoulders a greater risk of failure, while the private equity firm gets a little extra insulation from the need to make a profitable exit. Sale-leasebacks have proved particularly lucrative in industries like retail and health care, which generally require many individual parcels of land, as well as in the media business, where local newspapers once owned huge offices on prime downtown real estate.”
― Megan Greenwell, Bad Company: Private Equity and the Death of the American Dream

“Shortly after the company announced it was going out of business, Liz learned that she and the 33,000 Toys R Us employees across the country would lose their jobs—it wasn’t clear when—and wouldn’t receive a dime. It didn’t matter that Toys R Us employee contracts specified that laid-off employees would be paid severance. At some point in the next few months, the $14-an-hour job on which Liz had supported a family for four years would simply vanish. The injury was bad enough. But then came the insult. While the company was at death’s door, Brandon was awarding a final bonus to each of the company’s top executives: 75 percent of their base salary. For Brandon himself, that meant $2.8 million on top of his $3.7 million annual pay. The bonuses were paid out three days before the company’s failure was announced, which meant the $16 million total expenditure wasn’t subject to the bankruptcy order of operations. The estimated $348 million Toys R Us spent on lawyers, consultants, and bankers to orchestrate the seven-month restructuring effort between the bankruptcy and liquidation was safe too. But what of the private equity firms, the ones who ostensibly took on more than a billion dollars’ worth of risk in an effort to save a beloved American company? Losing $430 million is not entirely trivial even for a company as big as KKR (it managed $100 billion in assets at the time of the bankruptcy, about five times what it had when it acquired Toys R Us in 2005). Headlines bemoaned the $1.3 billion loss for KKR, Bain, and Vornado, fretting over what such a colossal failure would mean for the future of the private equity industry. Except: the firms didn’t lose money. Using SEC filings, journalist Dan Primack calculated that both Bain and KKR made more than they spent on the Toys R Us deal. Each had paid $430 million for their share of the company, but the vast majority of that money came from its limited partners, like pension funds and endowments. At the time of the Toys R Us acquisition, Bain general partners were required to commit 10 percent to a purchase, which meant around $43 million. Because these partners were the ones “doing the work” to manage the company, they also collected their industry-standard 2 percent fee each year, plus additional management and consulting fees. For Bain, that meant a total of $61 million in fees over the twelve years they co-owned Toys R Us, $18 million more than they paid. And that doesn’t include the fees and interest they earned each time Toys R Us refinanced its debt.”
― Megan Greenwell, Bad Company: Private Equity and the Death of the American Dream

“The Toys R Us saga also illustrates exceedingly clearly—perhaps more clearly than any other single private equity deal—how little private equity gambles when it steps in to “save the day.” Contrary to the story they told about themselves, there was no substantive risk to the firms that acquired Toys R Us. Each was on the hook for under half a billion dollars, a drop in the respective buckets of companies with billions of dollars in assets. And when their management fees were combined with the revenue from selling off the company’s real estate, plus dividends, performance bonuses, and tax loopholes, the risk of losing even that much wasn’t particularly high. The only threat was to the existence of Toys R Us—to an American institution, and to the 33,000 people who worked there. They were the people without the safety net of hundreds of other investments. They were the people scraping to make ends meet on near-poverty wages in twenty-first-century America. They were the only people involved who depended on Toys R Us for their survival.”
― Megan Greenwell, Bad Company: Private Equity and the Death of the American Dream

“For the first few years after the deal, Toys R Us’s revenues ranged from $11 billion to just under $14 billion, with about 3 percent earnings after business expenses. But now it was having to pay interest expenses of more than $400 million per year, according to SEC filings. In other words, in any given year, between 80 and 120 percent of earnings were going straight to interest payments. That meant less money spent on improving stores, updating the company’s strategy, or even paying down the loan’s principal. “If they didn’t have the debt, they would be making $500 to $600 million a year in profit,” an industry analyst said later. The Toys R Us deal also included one more element that kept the risk off the private equity firms’ books: the company’s real estate holdings. This was where the third partner came in. Vornado Realty Trust is not a private equity company, but a landlord that pays dividends to its shareholders. Vornado couldn’t have cared less about selling toys. What it did care about was the huge potential profit from Toys R Us’s 700-plus physical stores across the U.S. Historically, Toys R Us owned almost all of its own real estate, which helped establish the company’s reputation as a well-run, fiscally conservative operation. Rather than paying rent to a mall owner or commercial real estate firm on every store, every month, the Toys R Us of Lazarus’s day preferred to buy as many store locations as possible outright, spreading the cost out over the life of the mortgage while the value of the properties increased. When KKR, Bain, and Vornado bought the company, they upended that strategy via what is known as a sale-leaseback agreement. Within a few months of the acquisition, much of Toys R Us’s real estate was sold to two newly created property companies, or “PropCos,” controlled by Vornado. Now, in addition to its loan payments, Toys R Us also had to pay rent on the very same properties it had once owned. This left even less money for strengthening the business. For KKR, Bain, and Vornado, meanwhile, selling the properties allowed them to recoup part of their initial investment up front, then continue earning more through monthly rent payments from their own portfolio company. Their interests were exactly opposed to those of Toys R Us, the company whose success they were supposed to be working toward. Charging higher rents meant more money for the firms—and yet more crushing expenses for the company they’d bought. It is true that without involvement from private equity, Toys R Us likely would have eventually shrunk to a tiny fraction of its glory days. But it is also true that the company was much healthier financially before it was acquired than afterward. Anyone who put in the effort to look beneath the surface of Toys R Us’s purported success post-acquisition would have noticed red flags almost immediately. From the very beginning of its life under private equity, the company was drowning in debt payments that made it close to impossible for it to survive long-term.”
― Megan Greenwell, Bad Company: Private Equity and the Death of the American Dream

“Public companies generally maintain a ratio of about 30 percent debt to 70 percent equity, which includes cash, real estate holdings, inventory, and investments. If they take on much more debt than that, they’re likely to run into problems with board members and other shareholders. When a private equity fund acquires a company, though, the ratio flips: 70 percent debt and 30 percent equity on average, scholars Eileen Appelbaum and Rosemary Batt have found. Just before the company was acquired, about 70 percent of Toys R Us’s assets were in equity and 30 percent—$1.86 billion—in debt. By the time the deal was completed and the $5 billion in loans had been signed for, Toys R Us had 78 percent debt and 22 percent equity. On one level, it’s baffling that “turnaround specialists” like those at KKR and Bain Capital would load their own portfolio company down with so much debt. Spending more money on interest payments leaves less for operations, increasing the risk of failure. But such elementary math only applies when the parent firm’s interests align with those of the company it owns. Private equity firms themselves don’t borrow money to fund their acquisitions. Rather, they have the company they are acquiring do it on their behalf. When KKR, Bain, and Vornado borrowed money to buy Toys R Us, they did it in Toys R Us’s name, not their own. Even though the firms owned the company, even though their executives took out the loans, they would not be legally responsible for paying that $5 billion back.”
― Megan Greenwell, Bad Company: Private Equity and the Death of the American Dream

“Unlike venture capital firms, which make investments in exchange for minority ownership stakes, private equity funds typically purchase companies outright, assuming full control over their operations. The investors, meanwhile, cede control to the firm. If the leaders of a pension fund are dissatisfied with the performance of a company their money helped buy, they cannot sell their shares; they must wait until the private equity firm makes its “exit”—either taking the company public or selling it to another buyer—or until a specified termination date in their contract. Most of the money used to acquire a given company, though, doesn’t come from these endowments, pensions, and the like. The vast majority of it comes from bank loans—the “leverage” in a leveraged buyout. Between 2013 and 2023, 74 percent of the purchase price for the average leveraged buyout deal was funded by loans. Large amounts of debt, of course, make for riskier investments. If a company is responsible not just for increasing profits, but for paying back massive loans and then increasing profits, the path to success begins to look more like a tightrope over a canyon. The threat of bankruptcy and liquidation increases exponentially. With those kinds of odds, it might seem like a wonder that the private equity industry exists at all. Why would the smartest guys in finance choose to work in a system where the risk of catastrophic failure is so high? The answer is that the risk of catastrophic failure is high—but not for private equity. When a firm acquires a new company, it borrows money in the company’s name, not its own. Even though the firm is the company’s sole owner, even though its executives are the ones who decided to take out the loans, it is not legally responsible for paying the money back. If the acquired company runs into financial trouble, its owners need not bail it out. Even in bankruptcy, when a company declares in court that it cannot pay all of its creditors, the private equity firm that owns it—a firm worth orders of magnitude more than the company itself—won’t step in to cover the costs. As secured creditors, banks are the first to be paid back with the money that remains after a bankruptcy, so the threat to them is low too. The company and its employees shoulder the risk.”
― Megan Greenwell, Bad Company: Private Equity and the Death of the American Dream

“Milton Friedman had outlined his objections to managerialism in his 1962 book Capitalism and Freedom, but it was his New York Times essay eight years later that popularized his “shareholder theory,” revolutionized MBA curricula across the country, and set the stage for the rise of private equity. “The social responsibility of business is to increase its profits,” the headline announced; the three thousand words that followed warned that any corporate executive who concerned himself with any factors other than making his business more profitable—including “providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers”—was a socialist with no place in American capitalism. The sole interest of shareholders is to make money, he argued; the sole job of the CEO is to carry out their wishes. The interests of workers, suppliers, customers, and communities, much less any larger mission, were unworthy of consideration. Taken to the extreme, this logic—arguably the most important economic theory of the twentieth century—means a company doesn’t even need to exist at all. If driving it out of business while selling its real estate and collecting its management fees will make more money than actually producing goods, liquidation is not just the best option, but indeed the only one.”
― Megan Greenwell, Bad Company: Private Equity and the Death of the American Dream

“Today, less than four decades later, private equity firms control $8.2 trillion in assets—more than the gross domestic product of any nation on earth except the United States and China.”
― Megan Greenwell, Bad Company: Private Equity and the Death of the American Dream

“HCA’s rise was a tiny early sign of what would become a drastic change in the American economy in the late twentieth century”
― Megan Greenwell, Bad Company: Private Equity and the Death of the American Dream

“And while the pensioners make for a tidier narrative, the reality is that no one benefits nearly as much from private equity as private equity itself. The system is designed so that firms put in less money and shoulder less risk than anyone else, yet reap the lion’s share of the profits. Benefiting retired teachers and firefighters might be a desirable side effect, but the point is to earn returns for private equity executives. Stephen Schwarzman didn’t earn $37 billion by putting teachers’ and firefighters’ interests first.”
― Megan Greenwell, Bad Company: Private Equity and the Death of the American Dream

“Private equity and other investment firms spent $42 million on congressional races in the 2020 election cycle, two-thirds of which went to Democrats. Just four senators and sixty-two representatives didn’t get any private equity donations, a mere 12 percent of all elected members. In 2022, New York Democrat Chuck Schumer, the Senate majority leader, pulled in more than $1.2 million in industry contributions, three times more than the runner-up. Kyrsten Sinema, the Arizona Democrat-turned-independent who killed the 2022 provision that would have closed the carried-interest loophole, received more than half a million dollars in private equity donations in the previous election cycle. The industry’s primary lobbying group, meanwhile, has long boasted about its ability to stave off efforts to regulate private equity’s favored strategies. The American Investment Council spends as much as $3 million a year lobbying”
― Megan Greenwell, Bad Company: Private Equity and the Death of the American Dream

“[They] grow agitated about how difficult it can be to convince other people of the severity of the private equity crisis....as if they're pointing to the monster looming just outside the window but everyone else thinks they're hallucinating.”
― Megan Greenwell, Bad Company: Private Equity and the Death of the American Dream

“carried interest,” a structure unique to the finance industry.”
― Megan Greenwell, Bad Company: Private Equity and the Death of the American Dream