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Plunder

Plunder

Brendan Ballou
2023
T3 368 pages · about 6h 8m to read Open Librarygoodreads

The prosecutorial case against the industry KKR created; read as counterweight.

Summary

Ballou, a federal prosecutor who served as special counsel for private equity at the Department of Justice antitrust division, wrote a critique of the private equity industry aimed at the legal and regulatory structures that permit its practices.

The argument is that private equity firms extract value from acquired companies while being insulated from the consequences. The mechanisms he identifies are specific. Dividend recapitalisations load the acquired company with debt to pay the sponsor. Sale-leaseback transactions sell the company's real estate and commit it to rent payments it did not previously bear. Management and monitoring fees charged to the portfolio company transfer cash to the sponsor regardless of performance. The limited liability structure means the fund and its partners are not liable for the portfolio company's obligations when it fails, including pension liabilities and tort claims.

He examines sectors where the effects are most visible: nursing homes, where he presents research associating private equity ownership with higher mortality; emergency medicine staffing and the surprise billing practices that followed; retail chains including Toys R Us and Sears; prison services; mobile home parks; and local newspapers.

His policy recommendations include holding sponsors liable for portfolio company obligations, changing the tax treatment of carried interest and of interest deductibility, restricting dividend recapitalisations, and enforcing existing antitrust and fiduciary law more aggressively.

The book argues one side and does not engage with the evidence that private equity ownership improves productivity in some settings, or with the returns delivered to the pension funds that are the industry's largest investors. Ballou selects cases where the outcome was bad, and the industry includes both. The legal analysis of liability structures is the strongest part and is where his professional background shows.

Key takeaways 7

  1. Limited liability insulates private equity sponsors from the obligations of the companies they control, including pensions and tort claims.
  2. Dividend recapitalisations transfer cash to the sponsor by borrowing against the acquired company, which raises its fixed costs permanently.
  3. Sale-leaseback transactions convert owned real estate into a rent obligation that the company did not previously carry.
  4. Management and monitoring fees charged to portfolio companies pay the sponsor regardless of whether the investment succeeds.
  5. Research associates private equity ownership of nursing homes with measurably worse patient outcomes.
  6. The tax deductibility of interest subsidises leveraged acquisition structures relative to equity-funded ownership.
  7. Existing legal doctrine could impose liability on controlling owners, and the failure to do so is an enforcement choice rather than a statutory gap.

Who should read it

Investors, limited partners and operators who want the legal and regulatory critique of private equity structures, read alongside evidence on the industry's returns and productivity effects.

Similar books 6

Chosen by shared topics, the entries that hold them, and the people who recommended both.

Private Equity at Work: When Wall Street ManPrivate Equity at Work: When Wall Street Manages Main Street
T2 Private Equity at Work: When Wall Street Manages Main Street
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Merchants of Debt: KKR and the Mortgaging ofMerchants of Debt: KKR and the Mortgaging of American Business
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KKR from 1976 through the RJR Nabisco buyout, and what debt did to its companies.

Two and TwentyTwo and Twenty
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Practitioner insider on how a modern buyout firm actually earns.

Barbarians at the Gate: The Fall of RJR NabiBarbarians at the Gate: The Fall of RJR Nabisco
T1 Barbarians at the Gate: The Fall of RJR Nabisco
Bryan Burrough, John Helyar · 1989
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The 1988 bidding war for RJR Nabisco, the largest leveraged buyout to that date.

Recommended by: Jim Collins, Mohnish Pabrai and 1 other

Corporate Ownership in France
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Antoin E. Murphy · 2004
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Cross-holdings, the state and who actually controls French companies.

Creating Value Through Corporate RestructuriCreating Value Through Corporate Restructuring
T3 Creating Value Through Corporate Restructuring
Stuart C. Gilson · 2001
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Harvard case studies in bankruptcy and workout situations.

Where it sits in the reference 2

KKR
Companies
Private equity
Business models

Topics

Finance and MarketsPolitics and GovernmentRegulation, central banks and public policy