‘A lot of what they’re doing is working the levers of power to their benefit.’
Part Two of a conversation with Brendan Ballou, author of ‘Plunder: Private Equity’s Plan to Pillage America’
This is the second of a two-part conversation with Brendan Ballou, the author of Plunder: Private Equity’s Plan to Pillage America.1 You can read the first part of our conversation here.
The excerpts below have been condensed significantly and edited for clarity. Brendan spoke with me in his personal capacity, and his views don’t necessarily represent those of the U.S. Department of Justice.
ADAM: One of my big takeaways from your book was the extent to which observers and critics of private equity misunderstand the industry. We often think of it as rapacious capitalism—what happens when winner-takes-all markets are left unregulated and uncontrolled. But what you portray in this book is something closer to rapacious capture—everything from lobbying and campaign spending, to hiring influential ex-politicians (and sometimes future politicians) and government officials, to shifting pension obligations onto taxpayers. You call it the “private equity-government complex.” I was really struck by this theme showing up in case study after case study.
BRENDAN: It’s really interesting because private equity firms often don’t dominate unregulated “Wild West” industries. You don’t see private equity particularly dominant in the tech industry, for instance.
But you do see private equity dominant, or at least very interested in, industries that are often highly regulated or that involve a lot of government money: healthcare, ambulances, emergency staffing facilities, nursing homes, and so forth. These are industries that have a lot of government regulations, and, importantly, they’ve got a lot of government money going their way. And private equity firms are attracted to these industries, I think, because they see this as a game that they can win.
Private equity firms are enormously well resourced in terms of lobbying and government advocacy. They have in their employment cabinet members, a vice president, speakers of the House, any number of senators and congresspeople. So they have a very deep bench to draw on when it comes to pushing for their particular agenda in the various arms of government.
I think private equity firms would like to describe themselves as a superior form of capitalism. But, in fact, a lot of what they’re doing is working the levers of power to their benefit.
I wanted to talk about a slightly more intangible aspect of the revolving door and of government influence. You tell the story of David Rubenstein, the now-billionaire co-founder of the Carlyle Group, the firm whose alums also include Federal Reserve chair Jerome Powell. You write that “Rubenstein illustrates private equity’s entwining of money and power and how the latter can legitimize how the former is made.” Tell us a bit about Rubenstein and his company, and how their power has helped legitimize their money and their business model.
He comes up in this working class neighborhood in Baltimore, goes to college and law school, ingratiates himself with Democratic politicians, and by age 27 is an adviser to President Jimmy Carter. Just this absolutely meteoric rise.
He lost his job in government when Ronald Reagan was elected president. He spent several years in the career wilderness until he and several others formed what became the Carlyle Group. Their real innovation, because they’re based in Washington, DC, not in New York, was to hire former government officials. Their first was Frank Carlucci, the former secretary of defense [to Reagan]. What they realized was that there was an appeal for investors to have access to these government officials. They would bring the government officials out and have them wine and dine investors, and it sort of legitimated the work that Carlyle was doing.
Carlyle’s basic idea here was, if we hire a deep bench of government officials, we’re going to bring money into the firm that way. And then we’re going to be able to use all those different connections to potentially enhance our business interests.
You write that “all of Rubenstein’s ventures fed into a single, larger project: creating an aura of respectability for himself and, even more importantly, for Carlyle.” This “aura of respectability” strikes me as such an important way of articulating and understanding the influence of this industry, particularly in the power corridors of DC. It’s such an effective tool for generating elite influence and support.
That aura of respectability is important for any investment project: Investors want to know that their money is going to be well spent. But it’s particularly important for private equity firms, which often engage in projects that, on closer inspection, may be less desirable than others. Carlyle’s foray into the nursing home industry, in particular, I think would strike many people as particularly unfortunate.2
Look at what Rubenstein has done. He is most famous not for what he’s done at Carlyle, but for his philanthropic and civic work here in the DC area. He’s given millions to help refurbish the Washington Monument. He is broadly seen as a philanthropist, of the Gilded Age sort of style.
I think one of the really interesting things is, private equity firms have managed to make their work and their political agenda seem incredibly boring. And that’s unfortunate—not just for me because I’m trying to write a book about it, but because I think it obscures the impact that it has on ordinary people’s lives. I don’t begrudge anybody giving to worthy and charitable causes. But I think our coverage of the work that these people do sometimes misses the importance and the impact of what they’re doing and how it affects ordinary people.
[In the book] I really tried to stay away from trying to moralize about the people in private equity. A lot of the popular coverage around private equity has perhaps overly focused on the executives that are running these firms. To their critics, they’re cartoon villains. To their supporters, they’re masters of the universe.
But in both framings they’re essentially seen as the reason for why private equity is the way it is. And what I’m trying to explain is, it’s not about the people that are running these firms. It’s about the incentives that we have created through our laws and regulations that push private equity firms towards short-term thinking, that push private equity firms to load companies up with debt, that push private equity firms to avoid legal responsibility. It’s because of those incentives that we’ve created, that we’ve had all these bad consequences across industries.
It’d be so much easier to reform the system if it were just a matter of getting rid of “bad people” and putting good ones in their place. It would be an easier story to tell, and it’d be an easier problem to solve.
Exactly. It’s not about the people. It’s about the incentives.
I want to ask you about the rising role of sovereign wealth funds investing in American private equity. I wonder if you can talk a bit about why that’s happening, and why it matters.
Sovereign wealth funds are so active in private equity in part because a number of foreign countries just have so much money, and they need to invest it somewhere. This has had really interesting consequences for private equity because it means that firms are getting a lot of their money from countries that may or may not have the interests of the United States and its people at heart.
Blackstone, for instance, has received significant investments from China’s sovereign wealth fund, as well as from Saudi Arabia’s sovereign wealth fund. Other firms have, as I understand it, gotten investments from other Middle Eastern sovereign wealth funds. There’s nothing necessarily illegal or fraudulent about that. But it does raise interesting questions about to whom or what are private equity firms allied.
For instance, Blackstone received a significant investment from the Saudi sovereign wealth fund. After Jamal Khashoggi was assassinated, Blackstone separated itself in name, but not in finances, from Saudi [Arabia]. They [Blackstone] did not participate in the so-called “Davos in the desert” the first year, but they also didn’t stop Saudi investment in Blackstone. In fact, Stephen Schwarzman, the head of Blackstone, ultimately returned to a future “Davos in the desert” event and at various times has praised MBS [Mohammed bin Salman], the [de facto] leader of Saudi Arabia, publicly.3 Now, again, there’s nothing necessarily nefarious about that. But it suggests that some private equity firms’ interests or alliances may be broader than those of just the United States.
Sometimes private equity firms have almost taken on quasi-government roles. It’s been well reported about, for instance, Stephen Schwarzman’s role in the Trump administration in helping to broker a trade agreement with the Chinese government.4 Again, it’s not illegal. It may not even be wrong. But if Blackstone has financial interests in both the United States and with the Chinese government, it’s hard to see its leaders as acting on behalf of the United States alone.
You write at one point that “private equity is metastasizing into new businesses and new pools of money.” What do you mean by that?
A lot of private equity firms won’t even describe themselves as private equity anymore. They describe themselves as “alternative asset managers.” And that’s partly, I think, because of the increasing public disapproval of private equity. But part of that is just because they’re expanding into a lot of new businesses.
One is the private credit market, which is making loans to businesses outside of the public stock market, which is enormous and significantly less regulated than the stock market and, potentially, could be the cause of future financial instability.
On the other side of things, private equity firms need more money just to invest in their own projects. To buy a company, you need a certain amount of money. So private equity firms are working hard to offer their funds to ordinary investors through 401(k)s. Thanks to significant lobbying work, private equity firms may be getting access to people’s [retirement] funds in the coming years.
https://www.plunderthebook.com
https://www.washingtonpost.com/business/economy/opioid-overdoses-bedsores-and-broken-bones-what-happened-when-a-private-equity-firm-sought-profits-in-caring-for-societys-most-vulnerable/2018/11/25/09089a4a-ed14-11e8-baac-2a674e91502b_story.html
https://www.nytimes.com/2022/10/24/world/middleeast/saudi-davos-in-desert.html; https://www.nytimes.com/2017/05/25/business/dealbook/blackstone-saudi-arabia-investments-infrastructure.html
https://www.nytimes.com/2021/01/19/business/schwarzman-blackstone-trump.html