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Many of these were legal, but some may not have been: class action lawsuits in Texas and California alleged that Blackstone’s Invitation charged illegal, excessive late fees to its residents.53 As of December 2022, the Texas case remains ongoing, but the court in California declined to certify the class of plaintiffs and dismissed the action. It did so in part because the lead plaintiff had signed his lease with Invitation’s predecessor companies, which Invitation absorbed through various acquisitions.54 In other words, the companies’ various mergers with one another had the incidental effect of insulating them from liability for their alleged past wrongdoing.
It is also important to understand where this is happening. Cities hit hardest by the Great Recession saw the largest increase in rentals.86 In fact, private equity firms concentrated their acquisitions not just on specific cities but on specific neighborhoods or what one executive called “strike zones.”87 In one Atlanta zip code, for instance, Blackstone’s Invitation Homes bought 90 percent of the homes sold over a year and a half.88 This should be no surprise: these were the places where Fannie Mae owned foreclosed homes, which Fannie auctioned off to investors in the process that started the entire rental boom. But it meant that the people who lost the most during the Recession were the ones who regained the least in the years that followed. In fact, according to one credit rating agency, Colony’s tenants were typically former homeowners themselves, people who could no longer afford a home but who often retained some ties to the neighborhood.89 By concentrating their purchases—by exercising control over local markets—private equity firms made it difficult for people to leave. Or as Jennifer St. Denis, a single mother and renter in Atlanta, told the Mercury News, “At this point I’m stuck in a renting pattern because rent increases keep going up and moving out is expensive.”90 She noted that Invitation owned most of the homes in the area that she would want to live in anyway.
Considering all this, it is helpful to see how private equity ownership worked in one specific mobile home community: Plaza Del Rey, in Sunnyvale, California. Sunnyvale sits in the center of Silicon Valley, and its largest employers include Google, Apple, Lockheed Martin, and Amazon. In 2015—the year that the Carlyle Group bought Plaza Del Rey—a typical home in the city cost well over $1 million.137 In such an environment, the mobile home park offered a pocket of affordability in a community of extraordinary expense, a place where middle- and working-class people could live and get to nearby jobs. For four decades, the park was owned by a single family, until 2015, when the granddaughter sold it to Carlyle for over $150 million.138 Residents already covered the utilities, property taxes, and cost of upkeep. But within its first year as owner, Carlyle raised rents 7.5 percent, the largest increase in the park’s forty-seven-year history. For new residents, Carlyle raised lot rents to $1,600, nearly 40 percent more than the park average.139 This didn’t just hurt people who moved in: it made it harder for existing owners to sell, eviscerating the equity in their homes that they might have built up.
crazy!
At the time, many commentators blamed Amazon. But this was, at best, only part of the story. Toys’ sales remained steady, even during the Great Recession, and in the year before it filed for bankruptcy, its $11 billion in revenue17 accounted for an estimated one-fifth of all toy sales in the country.18 The problem wasn’t market share; the problem was the debt. By 2017, Toys’ payment on the interest alone nearly matched its entire operating income: the company had $460 million in operating income and $457 million in interest expenses.19 Without money, the company couldn’t make the necessary investments to compete online, couldn’t hire the best people, and couldn’t keep its stores clean.
Sometimes the problem was simply that private equity firms understaffed their stores. For instance, after BC Partners bought PetSmart in 2015, it bragged on its website that it increased the company’s profitability by “improving corporate efficiency.”58 But in practice, according to employees, this meant dramatic layoffs, which left stores dangerously understaffed.59 As detailed by Vice News, this had a particularly gruesome effect. With too few employees to transport animals that died at the store, carcasses of dead animals literally piled up in PetSmart freezers across the country. One employee shared a photo she said was filled with two months’ worth of dead animals; another employee said their store had a freezer with ten months’. A third employee said that, for lack of time, she would simply throw bodies away. “Sometimes I was doing it weekly because we didn’t have staff to take a vet trip to properly dispose of them so I was instructed to dispose of them myself,” she told Vice.60 (A spokesman for PetSmart denied to Vice that the store’s standard of care had declined, while a law firm representing the company wrote to the publication that “PetSmart holds the health and well-being of its associates, customers, and pets as its top priority.”)61
lmao
At other times, private equity firms simply hired the wrong people. In 2012, Golden Gate Capital and Blum Capital bought the discount shoe seller Payless.65 As described in a detailed profile in the New York Times, through a series of owners, Payless tumbled through bankruptcy three times in four years. Part of the problem was that for every one dollar in profit Payless made, more than a dollar went to its private equity owners and another quarter went to its lenders. This made the company susceptible to crisis when, for instance, a work slowdown by longshoremen left Payless’s shoes waiting on boats for several weeks. But part of the problem was who these owners put in charge. After Alden Global Capital (which describes itself as a hedge fund but engages in private-equity-like buyouts) bought Payless out of bankruptcy, it installed as CEO, not an executive from footwear, fashion, or even retail, but an investment banker: Martin R. Wade III. Payless middle management felt that Wade and his team treated them with contempt: “They became convinced that, ‘You guys don’t know what you’re talking about,’” one former midlevel employee told the Times.66 And yet, despite their inexperience, the new management enthusiastically pushed its own ideas, such as a plan to buy millions of World Cup–themed flip-flops. The problem was that the sandals didn’t arrive until after the World Cup had ended and even then often with flags of countries like Mexico and Argentina, where Payless had no stores. Ultimately, the company had to sell the flip-flops at a deep discount. Another idea was to shift quality inspections from a dedicated facility to individual factories. As a result, Payless received many shoes that were defective in various ways: size six shoes labeled as size three, for example. A former employee said that “missing one shoe can wipe out whatever you think you’re saving.”67 Ultimately, Payless returned to bankruptcy and closed all its stores in the United States. (In a statement to the New York Times, Golden Gate Capital said that “[w]hen we exited Payless, we left it with a right-sized store footprint and meaningful earnings opportunities for future owners.”)
llmaooo
But why go through this whole process at all? Why would Friendly’s declare bankruptcy, just to be sold from one Sun Capital fund to another? The answer was simple: pensions. At the time of bankruptcy, Friendly’s had $115 million in pension liabilities.92 By selling Friendly’s to one of its affiliates, Sun Capital was able to reacquire its own company free and clear of those liabilities. Instead, they were transferred to the Pension Benefit Guaranty Corporation. The PBGC was chartered by Congress to rescue underfunded pension plans and paid for itself in part through insurance premiums that healthy pension plans paid to it.93 But it was always meant as the destination of last resort, not as a convenient sucker for strategic bankruptcy reorganizations.
After she was laid off, Reinhart became active in the Dead Giraffe Society, a Facebook group of former Toys “R” Us employees named for the company’s mascot, Geoffrey the Giraffe.121 With the assistance of the organizing group United for Respect, Reinhart and others began to advocate for better treatment of the company’s former workers. They met with members of Congress, who, at their urging, wrote to Bain, KKR, and Vornado and demanded to know why their employees hadn’t been paid severance.122 They convinced Senators Cory Booker and Robert Menendez, along with Congressman Bill Pascrell, to protest with them.123 They held a march through Manhattan, carrying a coffin for the mascot Geoffrey,124 and rallied outside the penthouse home of the CEO, David Brandon.125
cute bit of color
As described in the introduction of this book, most of the $6.1 billion that Carlyle paid for ManorCare—$4.8 billion—was borrowed, while the firm and its investors put up the remainder. Carlyle’s first major move, in 2010, was to sell ManorCare’s real estate to another investment firm for over $6 billion.45 ManorCare then rented back the facilities that it once owned. This was the sale-leaseback tactic, described in Chapter 1, that is a hallmark of so many private equity deals. As Peter Whoriskey and Dan Keating of the Washington Post later recounted, by selling ManorCare’s real estate, Carlyle was able to recover the money that it had put into the deal.46 In other words, with this sale alone, Carlyle had basically broken even and still owned an enormous nursing home chain.
But selling ManorCare’s property put a terrible strain on the business. ManorCare needed real estate to operate, and with the sale, ManorCare was obligated to pay nearly half a billion dollars a year in rent to occupy the buildings it was already using.47 On top of this, under the terms of the deal, ManorCare was still responsible for paying the buildings’ insurance, upkeep, and property taxes. This meant that ManorCare now had all the obligations of owning its properties, with all the costs of renting them.
crazy
Republican and Democratic administrations both worked eagerly for forty years to make possible the growth of private credit and private equity firms’ role within it. In 1982, for instance, the Securities and Exchange Commission (SEC) under President Reagan issued Regulation D, through which companies could generally borrow from “accredited investors”—shorthand for wealthy or sophisticated lenders—without registering with the SEC.16 This created a new class of firms from which companies could borrow money. Then, in 1990, the SEC allowed for the syndication of private capital to certain institutional buyers. Investors could now make loans on the private market and then bundle the promises of payment on those loans and sell them to other investors. This Rule 144A, in essence, created a new, secondary market for private credit.
These regulations were issued under SEC chairmen appointed by Presidents Reagan and Bush, respectively. But Democratic administrations got in on the game too. In 1996, Congress passed, and President Clinton signed, legislation that lifted the requirement that private funds—funds that made loans on the private credit market—be limited to one hundred or fewer investors.17 This created the opportunity for investors to build vast stores of capital with which to make private loans.18 The legislation passed overwhelmingly in the House (just eight members voted against it) and by unanimous consent in the Senate.19 Then, in 2012, Congress passed, and President Obama signed, the JOBS (Jumpstart Our Business Startups) Act, which further expanded the private credit market by permitting borrowers to make general solicitations for money.20 This meant that private credit sales could be advertised publicly and essentially obviated the purpose of going public. The legislation passed with bipartisan majorities in both chambers of Congress.21