As the chapters in this book explain, private equity firms also hasten the “financialization” of the American economy through the increased power of banks and other financial institutions over companies that make and sell useful products and tangible goods. Today, the finance industry gets a quarter of all corporate profits, up from a tenth in the “greed is good” 1980s. At the same time, it employs just 5 percent of the country’s workforce and largely fails to deliver a useful product for many Americans: a quarter of households, for instance, don’t have access to a bank account. By controlling the operation of companies in the rest of the economy, private equity hastens this trend toward financial control.

Most private equity firms are paid on the 2-and-20 model: a 2 percent annual fixed fee on all the money it invests and 20 percent of all profits above a certain threshold. The United States taxes money made from investments—so-called capital gains—at a lower level than money made through ordinary labor, whether at a factory or in an office. The distinction is ambiguous and unfair, but even more so, private equity firms have convinced the IRS that their 20 percent income should be taxed at the lower capital gains rate than at the higher ordinary income rate.109 This means that many private equity executives often pay a lower effective tax rate than the retail employees, secretaries, and factory workers they employ. But the industry as a whole has fought hard, and successfully, to defend this imbalance.

Private equity firms use so-called management fee waivers to give more of their income this preferential treatment. Here, private equity firms waive some or all of their 2 percent management fee (which is taxed at a higher rate) in exchange for a priority claim on the profits earned (which is taxed at a lower rate). Through a variety of tactics, however, the firms virtually guarantee that they will make this money back.110 Some of the biggest firms—KKR, Apollo, and TPG Capital—used these fee-waiver provisions.111 Many of these schemes might violate the spirit, if not the letter, of the law. The IRS investigated fee waivers during the Obama administration but very little came of it. An audit of Thoma Bravo for use of the tactic, for instance, took four years and resulted in no actual adjustments to the company’s tax returns. In 2015, the Obama administration proposed regulations to bar the most aggressive forms of fee waivers. But nothing came of that either: the regulations were never finalized. Ultimately, both of President Obama’s treasury secretaries—Tim Geithner and Jack Lew—left the government to work for private equity firms.

Consider the case of cheerleading competitions. Varsity Brands is the country’s leading organizer of these events. As alleged in a class action complaint, between 2015 and 2018, Varsity bought its three largest rivals, all of which are now owned by Varsity, which in turn is owned by Bain Capital.119 By controlling 90 percent of the cheerleading competition market, Varsity gained control over the sport’s governing body and now decides which events entitle winners to participate in the country’s premier competitions. Varsity also allegedly increased participation fees and made money by, for instance, forcing competitors to wear only Varsity-approved uniforms and equipment and stay only in Varsity-approved hotels. “Cheerleading uniform prices have gone through the roof,” one local gym owner complained to the Federal Trade Commission. “Competition costs are so high that many athletes have to quit the sport.”120 Varsity and Bain largely deny the allegations of the class action complaint, and the lawsuit remains ongoing.121

How did Schwarzman afford to fete himself in this way, welcoming celebrities to his home and building literal temples to celebrate himself? In part, the answer lies in housing. Over the past fifteen years, private equity firms like Schwarzman’s have helped to lead what one commentator called “the biggest land grab since the Manifest Destiny.”8 In 2011, no landlord in America owned more than a thousand single-family home rental properties.9 By 2013, Schwarzman’s firm, Blackstone, bought more than that in a single day, at a cost of over $100 million. One of Blackstone’s companies, Invitation Homes, became the largest renter of single-family homes in America.10 More generally, in just two years, private equity firms and hedge funds bought about 350,000 bank-owned homes11 and, with the industry’s help, between 2006 and 2017, 5.4 million single-family homes transitioned from owner occupied to rentals.12 Now, nearly a third of all rentals in the United States are single-family homes.13 These statistics help to explain how Schwarzman was able to celebrate himself as he did. And they help to explain how the very nature of homeownership in America is changing, and how private equity has helped to lead the way.

In 2012, the FHFA launched a series of auctions of foreclosed homes, with the intention that the purchased houses be converted into rental properties.34 Investors developed new software that estimated the best purchases based on a neighborhood’s schools, crime, and nearness to transit, as well as possible maintenance costs. Such software allowed investors to participate in thousands of auctions and identify those properties likely to make the most money.

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.

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