Innovation Ecosystem

Private equity: an enormous shadow financial force

A talk with Mother Jones investigative reporter Hannah Levintova, and her reporting on the $7.3 trillion private equity investment industry

Photo by Richard Asinof

Hannah Levintova, Mother Jones reporter, who recently relocated to Providence.

By Richard Asinof
Posted 6/27/22
An interview with Mother Jones reporter Hannah Levintova, following up on her stories about private equity investments.
What kinds of private equity investments are being made in the real estate market in Rhode Island? How will R.I. Attorney General Peter Neronha evaluate potential future hospital acquisitions involving private equity financing? What kinds of private equity investments has Brown University made with its endowment? When will Rhode Island publish its own Index of the Rhode Island Innovation Economy?
Rhode Island made the national news over the weekend, when a Republican candidate for State Senate, Jeann Lugo, an off-duty Providence police officer, struck his opponent. Jennifer Rourke, a Black woman, twice in the head, at a State House rally organized by the Womxn Project to protest the U.S. Supreme Court ruling overturning Roe v. Wade. The incident was captured on video by Bill Bartholomew.
Rourke had been attacked while she was attempting to de-escalate and defuse a situation created when a small group of anti-protesters attempted to disrupt the rally. Unfortunately, the focus of the news media was on the violence, not on the content of the rally, in which more than 1,000 Rhode Islanders had rallied to show their support to keep the right to an abortion legal.
A previous rally, also organized by The Womxn Project, had been held at the State House in May. [See link below to ConvergenceRI story, “Meeting people where they are, as fight for abortion rights moves front-and-center.”]
“The anger and hate of counter-protestors is NOT more important than the very real threat to health are for so many,” The Womxn Project wrote, in a statement issued following the incident.
What also got lost in the act of violence against a Black woman running for the State Senate is the failure by the leadership of the R.I. General Assembly – and the Governor – to include the Equality in Abortion Coverage Act, or EACA in the state budget, which would allow Medicaid to cover abortion. Twenty-one members of the R.I. House implored Speaker Joseph Shekarchi to bring the proposed bill to the floor for a vote, to no avail, as reported by Steve Ahlquist.

PROVIDENCE – In its May/June issue, Mother Jones magazine put out an investigative edition called, “How Private Equity Looted America: Inside the industry that has ransacked the lives of working people everywhere.”

The 15 stories included: “The Smash-and-Grab Economy”; “Real Estate Predators Tried to Cash In on the Pandemic, Then Tenants Fought Back”; “Everything Everywhere All at Once: How Private Equity Rules Your World”; “My Newspaper was Gutted by Journalism’s Biggest Bogeyman”; and “It was Hard Enough to Get Treatment for Eating Disorders. Then Private Equity Took Over,” among others.

One of the Mother Jones reporters who worked on these stories was Hannah Levintova, who recently relocated from New York City to Providence.

“As COVID held Americans hostage, the nation’s private equity investors were trying to capitalize on the distressed New York City market,” Levintova wrote in her Mother Jones story about real estate predators. “The same cruelty that awakens after every financial crisis had reappeared: Everyday people suffer while a select world of financiers use the crash to acquire greater wealth.”

Through the voice of the tenants who were being displaced from more than 100 apartment buildings in Brooklyn, Levintova told the story in compelling fashion how tenants dug out the facts how a sovereign fund that was set up to finance public schools in Texas, the Texas Permanent School Fund, a $50 billion portfolio overseen by the state’s board of education to finance the state’s public school infrastructure, was the investment force behind the real estate predation in New York City.

The arrival of Levintova, an investigative reporter working for a national magazine, intrigued ConvergenceRI, because Rhode Island seemed to be fertile ground to explore the way that private equity investors had been reshaping the state’s economy – an under-reported story. For instance, how much of the current real estate boom in Rhode Island was being financed by private equity investments?

ConvergenceRI recently talked with Levintova about her reporting in the Mother Jones edition on private equity, meeting her for coffee at the L’Artisan Café in Wayland Square.

ConvergenceRI was curious to learn about Leinvtova’s strategic approach in reporting on private equity – and what kinds of research were required to uncover the details, given how opaque the details of private equity financing can appear.

What many folks didn’t realize, Levintova said, was the huge size of private equity investment in the U.S.

“In 2020, private equity funds managed $7.3 trillion in assets, which is roughly the value of Amazon, Apple, Microsoft and Tesla combined,” Levintova told ConvergenceRI.

Private equity investments, she continued, “had generated about 6.5 percent of U.S. GDP [gross domestic product] in 2021, which is up from 5 percent of GDP in 2020”— a 30 percent leap.

Here is the ConvergenceRI interview with Hannah Levintova, investigative reporter, who is discovering how Rhode Island could serve as fertile ground for her reporting skills.

ConvergenceRI: What is it that people need to understand about private equity?
LEVINTOVA: I think the first thing to learn about private equity is the extent of its investment in our lives – and the ways in which that growing investment has a real-life impact, and what that looks like.

I think the reason that the Mother Jones package generated a lot of interest is because a lot of people have heard the term, private equity, but they don’t’ necessarily know what it means, or how private equity really works, and where it falls within the financial infrastructure, and who invests in it – things like that.

The first thing people need to understand is how private equity works. Which is something you provably know, but a lot of readers maybe don’t.

Private equity pools money from really big investors, such as pension funds. Those are typically the biggest investors in private equity funds, [along with] university endowments and sovereign wealth funds.

So, for example, in one of the stories that I wrote for the [Mother Jones] package, a sovereign wealth fund in Texas that funds the public school system there was investing in real estate in New York City.

These big investors are very wealthy individuals, but they hand their money over to private equity funds, and the private equity funds charge them pretty high fees to invest their money, with the promise that “we’re going to get you better returns, we’re going to get you better gains” than you would get by investing as a normal person.

So, then, the question becomes: How are they going to get those better gains?

And, they do it by restructuring the assets that they buy to extract maximum profit, as quickly as possible.

So, if they are buying a piece of real estate, it might be by kicking out market-rate tenants, quickly flipping the units, and marketing them as luxury rentals at double and triple the rent, as quickly as possible.

If you are buying a company, it might be essentially stripping that company for parts.

So, [the goal is] lowering costs as quickly as possible, as much as possible, to extract maximum profit, quickly. By laying people off, pushing down benefits, busting the union, and hiring cheaper personnel.

You were talking about health care [a discussion about a Kaiser Health News story, “Buy and Bust: When Private Equity Comes for Rural Hospitals, by Sara Jane Tribble,” in which Tribble wrote: "Financially distressed rural hospitals … are targets, putting vulnerable communities at the mercy of firms whose North Star is profit, not patient health.”]

That happens often in private equity investments in health care. So, instead of hiring a hundred RNs, a hundred nurses, we going to hire half that number…

ConvergenceRI: …What happens is that the focus becomes on making a profit.
LEVINTOVA: Exactly

ConvergenceRI: …versus then creating a good product wanted by consumers.
LEVINTOVA: It’s about the focus might be on creating a good as well, but it’s about making a profit, quickly, rather than investing in the longevity of the enterprise.

If you are a small business owner, you are not trying to end your company. You are not trying to gut it, you’re trying to build it; you’re trying to grow. Maybe, OK, we need to cut some costs, so that we can invest in expansion, which is going to make our product better, or make our service better, right?

[With private equity], the incentives are not aligned, because it is not about longevity or about improving a service or a product. It is about exacting a return, fast.

ConvergenceRI: Trying to write about private equity, do you find that people are willing to talk to you about this? Or, do they tend to give you a song and dance? Do you get direct answers, or do you find yourself having to find the answers in the paperwork, rather than talking with the corporations involved?
LEVINTOVA: I think it is a mix. Private equity funds, different than a traditional bank, are not subject to [the same transparencies], with a real paper trail. With private equity funds, their filing requirements are minimal, compared to others.

There is some paperwork, which I did use in my reporting, particularly in the story I did about private equity investing in New York real estate.

In that particular story, the reason I focused on it was because this private equity firm had bought more than 100 apartment buildings in Brooklyn, mostly during the pandemic, so it was a very direct investing in pandemic-distressed real estate strategy.

And, they were kicking out thousands of tenants, in a very hot real estate market, in a place where affordable housing is so hard to come by. You really can’t get worse than New York City. Providence isn’t great; rent here is going up, too. But New York is just really bad.

So, in that case, the firms did not want to speak to me. But I talked to a number of academics and policy people who had analyzed private equity, who were extremely helpful and forthcoming.

There was a study done by a group of business school professors: one at NYU, another at Penn, and a third at the University of Chicago. These are academics at reserved institutions; they are not political advocates with a particular agenda. Theirs was a data-gathering operation where they looked at the causal effect on private equity ownership of nursing homes.

And, they were able to get around some of the transparency issues with private equity, because of Medicare data. They used Medicare data to compare, over a 12-year period, a sample of private equity-owned nursing homes, versus those not owned by private equity.

And, they found that private equity ownership of nursing homes, over the 12-year period that they studied, had a 10 percent increase in mortality, as compared to other ownership structures of nursing homes.

Which translated to about 20,000 additional lives lost in those 12 years. Which are pretty staggering numbers

These were business school professors. They are working at institutions, some of whose graduates go work in private equity. One of those professors actually testified before Congress about her findings. She spoke to me.

That was a long-winded answer but, yes, I found that there was small community of academics who are really digging into this space. Another one is Eileen Applebaum, an economist, who co-wrote a book about private equity, [Private Equity at Work: When Wall Street Manages Main Street]. Sen. Elizabeth Warren, who is the primary critic of private equity on Capitol Hill, also relied on Eileen’s research. Eileen was very willing to chat with me. The people who were studying this were really eager to chat and to get this information out.

I think that the people who are studying private equity are eager to talk to journalists. And, I am trying to do my best to translate this wonky, jargony stuff into a story that hopefully engages in a readable, digestible way, one that communicates the real impact of private equity.

To answer your first question, what else should we be communicating, what else is important to communicate, is the scale of private equity investment, to quantify it.

In 2020, private equity funds managed $7.3 trillion in assets, which is roughly the value of Amazon, Apple, Microsoft and Tesla combined. They generated in 2021 about 6.5 percent of U.S. GDP, which is up form 5 percent of GDP in 2020. It is a really enormous shadow financial force.

 A lot of people don’t understand [the size] of private equity. It is not necessarily held to the high transparency standards that other financial institutions in our economy like banks, are held to.

ConvergenceRI: Here in Rhode Island, we are at risk of seeing an entire nursing home industry collapse. Many smaller nursing homes are going out of business. I liken it to what happens with forests, when they become stressed, trees can become infested by beetles, and then become more susceptible to drought – and wild fires.
There have been a series of developments with nursing homes – low Medicaid rates, a badly managed move by the state to a new technology platform that did not wok properly that forced the state to make emergency payments to keep the nursing homes out of bankruptcy, new staffing requirements during a time when there is a workforce crisis, and then, add the COVID pandemic to the mix, which makes them vulnerable to private equity buyouts, in my opinion.

But unless you are an old person, or have family members residing in nursing homes, it is story that is hidden…
LEVINTOVA: I think what you are describing here in Rhode Island is happening at nursing homes around the country – and not just at nursing homes but other kinds of elder care like hospice facilities – is why they have become a prime target for private equity funds, and why their investments in that space have grown.

Whatever the specifics, there is simply not enough public money to run these institutions properly and with dignity for patients. And, when you have these funds that manage more money than anyone could imagine, they can come in, without much competition at all, and buy up these struggling nursing homes. But then the question is: Are they actually going to make it better?

ConvergenceRI: When they asked Willie Sutton, an infamous bank robber, why he robbed banks, he said: “Because that is where the money is.” If you are a university, and you have an endowment, you are looking to get the highest possible return on your investments.
LEVINTOVA: It is "a rock and hard place" [situation].

ConvergenceRI: Is private equity your beat? Do you have other beats? Are you trying to develop this work on private equity as a beat?
LEVINTOVA: I am definitely going to keep writing about private equity. There are a lot more stories. In this package that we did at Mother Jones, we had 15 stories total about private equity, analyzing private equity investment in a whole bunch of different industries,

I did the story about housing, a colleague of mine did a story about a trailer park in Colorado, that was bought by a private equity-backed firm. We talked about newspapers, where there has been a lot of private equity backed investment in the gutting of those newspapers.

We did a story about anorexia treatment centers that had been bought by private equity, and one on motorized wheelchair companies, which is a market that is majority-owned by private equity funds. It has resulted in major delays in repairs. These wheelchairs are tools, the key to mobility for people who depend on them. It is not like an optional item.

We looked at so many different industries. We could have done 15 more stories, but we didn’t have the time or the space. So, I definitely what to keep writing about private equity, And, the entire space around investments in innovation.

ConvergenceRI: When you say innovation, can you define what you mean?
LEVINTOVA: There are lots of startups backed up by venture capital investing in tech. Venture capital is kind of a subset of private equity; it’s a form of private equity that invests in startups, as opposed to established companies.

I think there is a lot of room to dig further into that world, where there are millions and millions of dollars that are being moved around to invest in new ideas – sometimes without enough due diligence, I would say, about what will happen next. I am definitely go to stay on that beat.

Comments

No comments on this item Please log in to comment by clicking here

© convergenceri.com | subscribe | contact us | report problem | About | Advertise

powered by creative circle media solutions

Join the conversation

Want to get ConvergenceRI
in your inbox every Monday?

Type of subscription (choose one):
Business
Individual

We will contact you with subscription details.

Thank you for subscribing!

We will contact you shortly with subscription details.