Plunder
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
- Limited liability insulates private equity sponsors from the obligations of the companies they control, including pensions and tort claims.
- Dividend recapitalisations transfer cash to the sponsor by borrowing against the acquired company, which raises its fixed costs permanently.
- Sale-leaseback transactions convert owned real estate into a rent obligation that the company did not previously carry.
- Management and monitoring fees charged to portfolio companies pay the sponsor regardless of whether the investment succeeds.
- Research associates private equity ownership of nursing homes with measurably worse patient outcomes.
- The tax deductibility of interest subsidises leveraged acquisition structures relative to equity-funded ownership.
- 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.
Where it sits in the reference 3
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