Tuesday's 2-Minute Tip

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Private equity and its public impact

The private equity industry has grown at a rapid rate over the last decade. Between 2016 and 2021 the number of private equity funds grew 58% to over 18,000 funds, far outnumbering other types of private funding, such as hedge funds and venture capital funds. However, any rapid business growth – especially one that expands into more and more industries – inevitably comes with more scrutiny and calls for regulation and reform. Here are a few things to know about the current state of private equity firms.

Investigations into private equity firms

Private equity firms have been at the center of numerous investigations in the last year – ranging from accusations of artificially inflating the housing market, profiteering in healthcare and potential antitrust violations. Recent research has also looked at the impact of private equity in higher education, retail, prisons and nursing homes. The overall finding appears that while the company may benefit from the private equity funding, consumers tend to be the cost of those increased profits.

For example, in a current investigation, several federal agencies are working together to determine whether private equity deals in healthcare are boosting corporate profits while increasing healthcare costs and reducing the quality and access to care for patients. In a workshop last week, the top enforcers from the Federal Trade Commission (FTC) and Antitrust Division of the Department of Justice stated that the structure of private equity models is “short-term, high-risk, and low-consequence ownership” that encourages a “flip and strip approach.” The relationship between this model and mortality was highlighted in the discussion. FTC Chair Lina Khan stated, “one study estimated that private equity takeovers of nursing homes and the staffing cuts that followed have led to increased mortality rates—specifically around 20,000 excess deaths among nursing home patients over the course of just 12 years.”

Diverging interests

As private equity firms begin pulling their funding from one industry – whether due to scrutiny or diminishing returns – they find alternative, and often new, markets to invest in. One of those hot new markets includes law firms in Arizona. While most states require the owners of law firms to be attorneys, an Arizona Supreme Court decision in 2021 began allowing nonlawyers to apply to open firms in the state. It is estimated that as many as 40% of legal businesses approved so far by these ‘Alternative Business Structures’ are backed by private equity or hedge funds.

The idea behind this unconventional model was to “address the dearth of lawyers available to help people with critical services such as evictions, divorces and immigration law.” However, critics raise the concern that these businesses would prioritize health over the interest of clients as well as invite dark money into the industry.

As noted by The Wall Street Journal, “Efforts failed in California and Florida to create similar plans. Only Utah and Washington, D.C., allow comparable structures.”

Private equity and newsrooms

Just last week, Gannett and McClatchy made statements that they would be ending their content relationship with The Associated Press to cut costs and focus on their own newsrooms claiming that “it made better financial sense to save the money and hire local reporters to produce more of what readers want.”

This is the exact topic of a new book by Margot Susca – Hedged: How Private Investment Funds Helped Destroy American Newspapers and Undermine Democracy. In this book, Susca investigates the last 20 years of private equity investment in American newspapers. Susca argues that local news bore the brunt of the new owners’ choices to minimize costs. In 2019, 23% of newspapers were owned by private equity, up from 5% in 2001.

In response to the Gannett statement, Susca told the Washington Post, “For [the Gannett CEO] to say that Gannett wants to provide robust local news, when over the course of four years that company has cut more than half of his staff as the largest newspaper chain in America, it’s laughable.”

Her book may be worth adding to your summer reading list.

Author

  • Julianne Culey

    Julianne is the Assistant Director of the Reynolds Center with expertise in marketing and communications and holds a master's in Sociology from Arizona State University.

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