Why Are So Many American Companies At Risk of Bankruptcy

In 2023, 296 American companies declared bankruptcy, the highest number since the Great Financial Crisis of 2008. Bankruptcy. A stunning fall. Major restructuring. Debt is piling up. Companies are filing for bankruptcy now at the fastest rate since 2020. But what's even more surprising is that these firms own nearly everything around us. Auntie Anne's, and Cinnabon, and Subway, and Baskin-Robbins, and Dunkin', and dozens of other iconic brands from the Cheesecake Factory, to Arby's, to Sonic, to the Bar Method, to the actual School of Rock, are all owned by the same company. Private equity-owned companies are 10 times more likely to go bankrupt. The problem is, 1 in 14 workers in the United States gets their paycheck from a private equity-owned company. General Motors is laying off more than 1,000 employees worldwide. Dozens of employees at Aera Energy got the news. They were dreading. Managing nearly $1.4 trillion in assets, private equity firms have enormous influence over the economy of all Americans. But what is private equity? How do they have more money than Apple, Microsoft, Amazon, and Tesla combined? And what are they doing to the U.S. economy? In the last decade, private equity firms, or PE firms, have gained significant influence in the global economy. This chart shows the value of assets held by private equity firms in the United States. Since the early 2000s, these firms have been managing vast sums of money, and this figure has increased alarmingly. 2021 was a banner year for private equity. EY's latest PE Pulse shows that we had our first-ever trillion-dollar year of deal value. By 2023, entities like Blackstone, the Carlyle Group, and Vista Equity Partners managed approximately $12 trillion in assets, surpassing the combined value of some of the country's largest companies. But this exponential growth has negatively impacted countless industries. In 2016, Los Angeles-based Prospect Medical Holdings purchased Delaware County Memorial. By 2018, with the help of private equity investors, the company had acquired 20 hospitals in six states. In Pennsylvania, Prospect Medical promised to dramatically increase service to the community. But last November, the hospital shut down. From manufacturing to health care, every sector where private equity has intervened has seen costs rise by nearly 26 percent. Private equity firms have revolutionized the way companies are structured and managed. Traditionally, a PE fund has three main objectives— By 2023, this approach has enabled private equity firms to control around 20 percent of the total corporate capital in the United States, compared to just 4 percent in 2000. Rental prices increasing more than 30 percent in major cities across the U.S. There's a handful of reasons for the surge, but experts say one in particular is key—private equity firms. The difference between a publicly traded company and a private equity-owned company is that public companies are required to comply with SEC regulations and publish their quarterly performance. In contrast, private companies are not required to disclose information about their operations, owners, or even if they are profitable. Since 2005, about 3,457 public companies have been acquired by private equity firms, leaving them out of public scrutiny. Toshiba will consider a buyout offer from a foreign private equity firm that includes the option to go private. Private equity firm CVC Capital Partners has proposed to purchase a large number of Toshiba's shares and go private to avert pressure from activist shareholders. This exponential growth has made one-fifth of the market practically invisible, leaving companies that manage a massive amount of American money without any scrutiny or control. The leveraged buyout, or LBO, is a key aspect of private equity firm operations. This strategy involves borrowing a significant amount of money to acquire a company, with the peculiar twist that the debt falls on the acquired company, not the PE firm. A historic example of this practice is the acquisition of HUD Industries in 1978 by KKR, where less than 1% of the total deal value was financed by the PE firm, while the rest was covered through bank loans. Toys R Us is one of the most recent examples. In 2005, a group of investors led by the KKR fund made a leveraged buyout of the chain for nearly $6.6 billion. Since then, the company has been burdened with $400 million in interest debt every year until it declared bankruptcy in 2017. The largest toy store chain in the U.S., Toys R Us, has filed for bankruptcy protection. The Chapter 11 filing overnight is among the largest ever by a specialty retailer. This is a balance sheet issue, not a business issue, with their overall operations as they seek to restructure more than $5 billion in total debt. The strategy of leveraged buyouts and the subsequent restructuring of acquired companies have had profound and often negative repercussions on the U.S. economy. In the case of Toys R Us, the assumed debt led to the sale of company divisions and the loss of nearly 30,000 jobs. This pattern has been repeated numerous times, affecting not only individual companies, but entire industries. So our third story has to do with private equity getting into dentistry. Car wash industry is growing like never before, thanks to private equity from New Jersey to California. Between 2001 and 2007, investment in leveraged buyouts multiplied. Rising from $62 billion to $775 billion, resulting in more than 2,500 acquisitions in 2007 alone. The problem is, companies acquired by P.E. firms are 10 times more likely to go bankrupt, negatively impacting employees, suppliers, and entire communities. In the last decade, private equity firms have expanded their reach into key sectors like education and health care, with alarming consequences. And some are even more alarmed by private equity's tactics in the health care industry. They just want to monetize it. They just want to get more wealthy. But it's at the price of the health of every citizen in our country. This graph shows the relationship between health care costs and the expansion of private equity firms in recent years. In the education sector, these firms have acquired nearly 1,000 universities and colleges. And a study revealed that students at these institutions are 133% less likely to graduate and earn 5.8% less in the labor market. In health care, private equity investment in nursing homes has grown from less than $5 billion in the early 2000s to $100 billion in 2023. Acquisitions in this sector have resulted in cost-cutting, layoffs, and worse outcomes for patients. A study showed that nursing homes owned by private equity firms experienced a 10% increase in patient mortality, translating to the loss of an additional 22,500 lives over a 12-year period. Today, it's estimated over 40% of the nation's emergency departments are overseen by for-profit staffing companies, all of them owned by private equity. These Wall Street firms look for a return on their investments on a shorter timeline, and academic researchers tell us the largest profits are often in the ER. The growth and consolidation of private equity pose serious challenges for the U.S. economy and society. These firms have influenced the consolidation of industries and the creation of monopolies, allowing them to raise prices and reduce the quality of services offered. A recent study found that anesthesia companies backed by private equity increased prices by 26% without any justification compared to independent practices. The lack of transparency and regulation in private equity operations exacerbates these problems, making it difficult for the public and regulators to oversee and mitigate potential negative impacts. Although these firms have generated enormous financial profits, they have done so at the cost of the stability and viability of many companies, especially those acquired through leveraged buyouts. Today, private equity firms continue to absorb all types of industries, from entertainment to sports. The owners of the NFL have voted to allow some private equity funds to invest in teams. Among the firms approved are Ares Management and a consortium including major investors like Blackstone and Carlyle. The pressure to maximize profits has led to business closures, mass layoffs, and in critical sectors like education and healthcare, a notable decline in the quality and accessibility of services. As these firms continue to expand their influence and redefine industries, crucial questions arise about the balance between profitability and social welfare. The answer to these questions will be key to determining the country's economic future and the role private equity will play in it. Let us know what you think in the comments below.