Private Equity Firms Are Major Cause of Inflation

By Darrell Berkheimer, As published in The Union

Why have we seen prices rise so quickly in such a short period of time? I believe a huge cause is increased ownership of many businesses by private equity firms.

And they are becoming a growing danger to our economy as a result of how they operate – secretively, and without regulations that control public-traded stock companies.

Private equity (PE) firms control huge amounts of our housing, including apartment complexes and mobile home parks as well as single family homes.

They operate hundreds of hospitals, nursing homes, veterinary clinics and doctors’ offices. Even many private colleges and nearly half of all newspapers are owned by these funds.

In addition, they own hundreds of retail stores and food marts, and they have been buying many pharmacy outlets the past few years.

There are few types of businesses that haven’t been owned or controlled by one of the 18,000 private equity firms now operating in the U.S. And that number represents a 60% increase in private equity funds just during the last five years, according to data compiled by the staff of Massachusetts Senator Elizabeth Warren.

When a PE acquires an independent business, it begins with restructuring. That translates to reducing staff, demanding remaining staff members increase service and sales, and raising prices.

The fund may keep the company as long it can maintain high profits to repay high debt leveraged to purchase it. But often, the plan is to show that the business is making gobs of money, more than previously, so it can then be sold at a higher price, usually as a result of inflated claims of service and high profits.

The problems arise as a result of the secretive way that PE funds operate as private corporations. They attract private investors, often with unsubstantiated claims. They are not open to public stock purchase. Public corporations must disclose information about their finances, operations, business risks and legal liabilities. Private corporations are exempt from those requirements.

In a housing industry example, PE funds can announce plans for renovations that force occupants to move. After minor renovations, new occupants can move in at much higher prices. That circumvents governmental rent controls that would not have allowed such high increases on previous occupants.

And when PE funds purchased mobile home parks, higher rents forced low-income occupants in older units to move out. Sometimes service improvements are provided.

Last year, the largest mobile home park landlord was Sam Zell, who operates Equity LifeStyle Properties (ELS), which owns 165,000 units across the country. That asset was listed as the key to Zell’s $5.2 billion fortune.

That provides an indication of “how pension funds and other PE investors are being fleeced,” according to the Sen. Warren report. It noted the high earnings go to the PE fund executives because “the typical PE fund has failed to outperform stock market returns since at least 2006.”

But the nursing homes scandal of a couple years ago perhaps provides one of the worst examples of how PE funds operate.

That scandal is noted in an article by Roge Karma, published last October by The Atlantic magazine, titled “The Secretive Industry Devouring the U.S. Economy.” It reports that “A 2021 study concluded private-equity ownership was associated with about 22,500 premature nursing-home deaths from 2005 to 2017.”

Also noted are stories “of patients being rushed to the hospital after being overprescribed opioids, of bedside call buttons poorly attended” as residents suffered while waiting for help as a result of staff reductions.

The article adds that similar PE tactics can be noted in “any number of industries, including higher education, newspapers, retail and grocery stores. Across the economy, private-equity firms are known for laying off workers, evading regulations, reducing the quality of services, and bankrupting companies while ensuring that their own partners are paid handsomely.”

The Atlantic article also issues a lightly-veiled warning that continued growth of private equity funds, lacking appropriate regulatory control, is a recipe for economic instability similar to what caused The Great Depression, when unregulated and highly leveraged companies operated without transparency.

After reading several analytical reports on private-equity companies, which indicate a skimpy few business successes, it appears they are organized simply to make a few partners and management executives wealthy by cutting employees and raising prices while offering little improvement in quality, quantity or service.

So I agree with Sen. Warren’s data conclusion that “the costs to consumers, families and communities have been massive,” and can be expected to simply grow worse unless appropriate regulations are enacted.

It’s unnecessary inflation to give wealth to a few.