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mostlysignssomeportents · 1 year

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Private equity ghouls have a new way to steal from their investors

Private equity is quite a racket. PE managers pile up other peoples’ money — pension funds, plutes, other pools of money — and then “invest” it (buying businesses, loading them with debt, cutting wages, lowering quality and setting traps for customers). For this, they get an annual fee — 2% — of the money they manage, and a bonus for any profits they make.

On top of this, private equity bosses get to use the carried interest tax loophole, a scam that lets them treat this ordinary income as a capital gain, so they can pay half the taxes that a working stiff would pay on a regular salary. If you don’t know much about carried interest, you might think it has to do with “interest” on a loan or a deposit, but it’s way weirder. “Carried interest” is a tax regime designed for 16th century sea captains and their “interest” in the cargo they “carried”:

https://pluralistic.net/2021/04/29/writers-must-be-paid/#carried-interest

Private equity is a cancer. Its profits come from buying productive firms, loading them with debt, abusing their suppliers, workers and customers, and driving them into ground, stiffing all of them — and the company’s creditors. The mafia have a name for this. They call it a “bust out”:

https://pluralistic.net/2023/06/02/plunderers/#farben

Private equity destroyed Toys R Us, Sears, Bed, Bath and Beyond, and many more companies beloved of Main Street, bled dry for Wall Street:

https://prospect.org/culture/books/2023-06-02-days-of-plunder-morgenson-rosner-ballou-review/

And they’re coming for more. PE funds are “rolling up” thousands of Boomer-owned business as their owners retire. There’s a good chance that every funeral home, pet groomer and urgent care clinic within an hour’s drive of you is owned by a single PE firm. There’s 2.9m more Boomer-owned businesses going up for sale in the coming years, with 32m employees, and PE is set to buy ’em all:

https://pluralistic.net/2022/12/16/schumpeterian-terrorism/#deliberately-broken

PE funds get their money from “institutional investors.” It shouldn’t surprise you to learn they treat their investors no better than their creditors, nor the customers, employees or suppliers of the businesses they buy.

Pension funds, in particular, are the perennial suckers at the poker table. My parent’s pension fund, the Ontario Teachers’ Fund, are every grifter’s favorite patsy, losing $90m to Sam Bankman-Fried’s cryptocurrency scam:

https://www.otpp.com/en-ca/about-us/news-and-insights/2022/ontario-teachers--statement-on-ftx/

Pension funds are neck-deep in private equity, paying steep fees for shitty returns. Imagine knowing that the reason you can’t afford your apartment anymore is your pension fund gambled with the private equity firm that bought your building and jacked up the rent — and still lost money:

https://pluralistic.net/2020/02/25/pluralistic-your-daily-link-dose-25-feb-2020/

But there’s no depth too low for PE looters to sink to. They’ve found an exciting new way to steal from their investors, a scam called a “continuation fund.” Writing in his latest newsletter, the great Matt Levine breaks it down:

https://news.bloomberglaw.com/mergers-and-acquisitions/matt-levines-money-stuff-buyout-funds-buy-from-themselves

Here’s the deal: say you’re a PE guy who’s raised a $1b fund. That entitles you to a 2% annual “carry” on the fund: $20,000,000/year. But you’ve managed to buy and asset strip so many productive businesses that it’s now worth $5b. Your carry doesn’t go up fivefold. You could sell the company and collect your 20% commission — $800m — but you stop collecting that annual carry.

But what if you do both? Here’s how: you create a “continuation fund” — a fund that buys your old fund’s portfolio. Now you’ve got $5b under management and your carry quintuples, to $100m/year. Levine dryly notes that the FT calls this “a controversial type of transaction”:

https://www.ft.com/content/11549c33-b97d-468b-8990-e6fd64294f85

These deals “look like a pyramid scheme” — one fund flips its assets to another fund, with the same manager running both funds. It’s a way to make the pie bigger, but to decrease the share (in both real and proportional terms) going to the pension funds and other institutional investors who backed the fund.

A PE boss is supposed to be a fiduciary, with a legal requirement to do what’s best for their investors. But when the same PE manager is the buyer and the seller, and when the sale takes place without inviting any outside bidders, how can they possibly resolve their conflict of interest?

They can’t: 42% of continuation fund deals involve a sale at a value lower than the one that the PE fund told their investors the assets were worth. Now, this may sound weird — if a PE boss wants to set a high initial value for their fund in order to maximize their carry, why would they sell its assets to the new fund at a discount?

Here’s Levine’s theory: if you’re a PE guy going back to your investors for money to put in a new fund, you’re more likely to succeed if you can show that their getting a bargain. So you raise $1b, build it up to $5b, and then tell your investors they can buy the new fund for only $3b. Sure, they can get out — and lose big. Or they can take the deal, get the new fund at a 40% discount — and the PE boss gets $60m/year for the next ten years, instead of the $20m they were getting before the continuation fund deal.

PE is devouring the productive economy and making the world’s richest people even richer. The one bright light? The FTC and DoJ Antitrust Division just published new merger guidelines that would make the PE acquire/debt-load/asset-strip model illegal:

https://www.ftc.gov/news-events/news/press-releases/2023/07/ftc-doj-seek-comment-draft-merger-guidelines

The bad news is that some sneaky fuck just slipped a 20% FTC budget cut — $50m/year — into the new appropriations bill:

https://twitter.com/matthewstoller/status/1681830706488438785

They’re scared, and they’re fighting dirty.

I’m at San Diego Comic-Con!

Today (Jul 20) 16h: Signing, Tor Books booth #2802 (free advance copies of The Lost Cause — Nov 2023 — to the first 50 people!)

Tomorrow (Jul 21):

1030h: Wish They All Could be CA MCs, room 24ABC (panel)

12h: Signing, AA09

Sat, Jul 22 15h: The Worlds We Return To, room 23ABC (panel)

If you’d like an essay-formatted version of this post to read or share, here’s a link to it on pluralistic.net, my surveillance-free, ad-free, tracker-free blog:

https://pluralistic.net/2023/07/20/continuation-fraud/#buyout-groups

[Image ID: An old Punch editorial cartoon depicting a bank-robber sticking up a group of businesspeople and workers. He wears a bandanna emblazoned with dollar-signs and a top-hat.]

#pluralistic #buyout groups #continuation fraud #pe #pyramid schemes #the sucker at the table #pension plans #continuation funds #matt levine #fiduciaries #finance #private equity #mark to market #ripoffs

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liberaljane · 2 years

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Representation is more important than ever, especially for the kids who are most marginalized.

Digital illustration of an older Latina teacher wearing an apple print dress. She’s standing in front of a blackboard that says, ‘inclusive curriculums benefit all students.’ There’s a variety of items around the image, including a pride flag, Black lives matter sign, globe, and plant.

#art #feminism #feminist #teacher #education #trust teachers #fund education #dei #inclusive #inclusivity #equity #inclusion #diversity equity and inclusion #teacher training #queer kids #kids #school #crt

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alwaysbewoke · 7 months

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phoenixyfriend · 1 year

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Ko-Fi prompt from @dirigibird:

I've been looking at investment options but I don't want to be messing around too much with the stock market, and a co-worker suggested exchange traded funds. Would love to know your opinions!

LEGALLY NECESSARY DISCLAIMER: I am not a licensed financial advisor, and it is illegal for me to advise anyone on investment in securities like stocks. My commentary here is merely opinion, not financial advice, and I urge you to not make any decisions with regards to securities investments based on my opinions, or without consulting a licensed advisor. I am also going to be talking this all over from an American POV, which means some of these things may not apply elsewhere.

So instead of letting you know what to pick or how to organize your securities, I'm going to go through the definitions of what various investment funds are, how they compare functionally, and maybe rant about how I disagree with the stock market on a fundamental ethical level if I have word count left over.

If you want more information, and are okay with jargon, I'd suggest hitting up investopedia. That is where I will be double-checking most of my information for this one.

I also encourage folks who know more about the stock market specifically to jump in! I like to think I'm good at research and explaining things, but I'm still liable to make mistakes.

Mutual Funds: A mutual fund is a pool of money and resources from multiple individuals (often vast numbers of people, actually) being put together and managed as a group by investment specialists. The primary appeal of these is that the money is professionally managed, but not personally so; it gives smaller investors access to professional money managers that they would not have access to on their own, at cheaper rates than if they tried to hire one for just their own assets. The secondary appeal is that, due to the sheer number of people, and thus capital, that is being invested at once, the money can be invested in a wide variety of industries, and is generally more stable than investing in just one company or industry. Low risk, low reward, but overall at least mostly reliable. Retirement plans are often invested in mutual funds by employer choice, through companies like Fidelity or John Hancock.

Hedge Funds: A hedge fund is a high risk, high reward mutual fund. Investors are generally wealthy, and have the room and safety to lose large amounts of money on an investment that has no promise of success, especially since money cannot be withdrawn at will, but must remain in the fund for a period of time following investment. It gets its name from "hedging your bets," as part of the strategy is to invest in the opposition of the fund's focus in order to ensure that there is a backup plan to salvage at least some money if the main plan backfires. Other strategies are also on the riskier side, often planning to take advantage of ongoing events like buyouts, mergers, incumbent bankruptcy, and shorting stocks (that's the one that caused the gamestop incident).

Private Equity: Private equity is... a nightmare that got its own incredibly good Hasan Minhaj episode of Patriot Act, so if you've got 20 minutes, an interest in comedically-delivered, easily-digestible, Real Information, and an internet connection, take a watch of that one. (If it's not available on YouTube in your country, it's originally from Netflix, or you can probably access it by VPN.) Private equity companies are effectively hedge funds that purchase entire companies, rebuild them in one way or another, and then sell them at (hopefully) a profit. Very often, the companies purchased by private equity are very negatively impacted, especially if the private equity group is a Vulture Fund. Sometimes, it's by taking it apart to sell off; sometimes it's by just bleeding it for cash until there's nothing left. Sometimes, it's taking over a hospital and overcharging the patients while also abusing the staff! (Glaucomflecken has a lot of videos on the topic of private equity in the medical industry, check him out.)

Venture Capital: In contrast to private equity, which purchases more mature companies, venture capital is focused on startups, or small businesses that have growth potential. These are the kinds of hedge funds that are like a whole group that you'd see some random tv character calling an Angel Investor (they're not actually the same thing, but they overlap by a lot). I'd hesitantly call these less ethically dubious than private equity, but I'm still suspicious.

And finally, to answer your question on what ETFs are and how they fit into the above.

Exchange Traded Funds: ETFs are... sort of like a mutual fund. Sort of. You are, to some extent, pooling your money... ish.

An ETF is like a stock that is made out of partial stocks. So instead of paying $100 for stock A, and not getting stocks B/C/D that all cost the same, you buy $100 of the ETF, which is $25 each of stocks A/B/C/D. You are getting a quarter of a unit of stock, which isn't normally an option, but because you are purchasing through an ETF that officially already bought those Whole stocks, you can now purchase the partial stocks through them.

They buy the whole stocks, then they resell you mixes of those stocks. They still officially own the whole stocks themselves, but you now own parts of the stocks. Basically, you own "stock" in a company that owns stock in other companies, and in that process you own partial stocks in those other companies.

I'm going to re-explain this using fruit.

Imagine you can buy apples, oranges, melons, grapes, etc. You can also buy fruit cups. You can only buy the individual fruits in big batches or you can pool your money with a few other people, hand it to a chef. The chef will decide which fruits look like they'll taste the best by lunch time, buy a bunch of those fruit pallets with your combined money, and plan out the best possible fruit salad for you to share with a bunch of people once lunch rolls around.

You could also buy a fruit cup. You don't have a lot of control over what's already in the fruit cup, but there are a few different mixes available--that one has strawberries, but that one over there uses kiwi, and the other one that way has pineapple--and you can pick which mix you want. It's a pretty small fruit cup, and it's predesigned, but you can choose the one you want without having to pool money with everyone else. You just first have to let someone else design the fruit cups you choose from, and you don't know which ones are probably going to survive the best to lunch time unless you ask a chef (which defeats the purpose of buying a fruit cup instead of pooling your money, and asking the chef costs money).

That's the ETF. The ETF is the fruit cup.

The upside is that you can now just track the prices of your fruit cup, instead of tracking the prices of four different fruits, and so if the price of one fruit drops, you can just... let the other three buoy it.

Of course, in the real world, there are more than just four stocks involved in an ETF. This part of the Investopedia article lists a few examples, and they're usually themed and involve anywhere from 30 (DOW Jones) to thousands (Russell) of shares by stock type, or by commodity/industry. So with the ETF, you can invest in an entire industry, like technology, and just keep track of that single "stock" in the industry game.

They do cost less in brokerage/management fees than regular mutual funds, and they have a slightly lower liquidity (slower to cash out). There also exist actively managed ETFs, which are basically mutual funds for ETFs. You are paying the chef to buy you premade fruit cups.

(Prompt me on ko-fi!)

#economics #stock market #etfs #etf #mutual funds #hedge funds #venture capital #private equity #capitalism #phoenix talks #ko fi #ko fi prompts #economics prompts

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justinspoliticalcorner · 3 months

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Molly Redden at HuffPost:

A group at the center of conservative judicial activist Leonard Leo’s network funneled $750,000 to an influential new lobbying operation that pushes anti-LGBTQ+ legislation around the country, new tax records show. Do No Harm presents itself as a grassroots association of doctors against gender-affirming care and diversity efforts in the medical profession. The group, which was founded in 2022, does not disclose its donors. But newly disclosed tax filings provided to HuffPost by Accountable.US, a progressive watchdog, show that the Concord Fund, the funding arm of Leo’s network, donated $750,000 in 2022 to Do No Harm Action, the group’s official lobbying effort. Do No Harm also received more than $1.4 million from a nonprofit, the Project on Fair Representation, run by conservative activist Edward Blum, new records show. Blum, a conservative activist who helped engineer two Supreme Court cases that struck down affirmative action and major sections of the Voting Rights Act, is now a Do No Harm board member.

HuffPost previously revealed that Do No Harm received $1 million in seed funding from Joseph Edelman, a billionaire hedge fund CEO, and his wife, Suzy Edelman, who has said she considers “transgenderism” “a fiction designed to destroy.” Leo is best known as the kingpin of a decades-long effort to pack the federal judiciary with conservative judges. As the leader of the Federalist Society, Leo assembled a vast and secretive network of wealthy donors and nonprofits to amplify the power of the conservative legal movement, culminating in Leo handpicking the list of former President Donald Trump’s potential nominees to the Supreme Court. While some of his efforts are highly public, others, like the funding of Do No Harm, occur with little fanfare. The medley of conservative groups channeling money to Do No Harm underscores the growing belief on the right that attacking trans rights is “a political winner.”

[...] After Trump left office, Leo vastly expanded his efforts to target a wide spectrum of conservative policy goals and hobby horses. Powered in part by the largest known political donation in U.S. history — a $1.6 billion gift from a reclusive electronics mogul named Barre Seid — Leo’s network is now fueling political attacks on issues including abortion access, voting rights and critical race theory. Since 2022, the Concord Fund has received at least $55 million from the nonprofit that houses Seid’s gift, the Marble Trust. Do No Harm’s goals dovetail neatly with Leo’s expanded mission. The group has helped pay for activists and expert witnesses to travel the country, testifying in favor of bans on gender-affirming care for minors. On top of fighting to restrict transgender care, Do No Harm is suing Louisiana and Montana over modest efforts to diversify their state medical boards and trying to dismantle a Pfizer fellowship designed to put more Black, Latino and Native American medical professionals in leadership positions.

Concord Fund, the funding arm of right-wing megadonor Leonard Leo, is funding anti-trans and anti-DEI extremist group Do No Harm to push bans on gender-affirming healthcare for trans youths (and adults in some cases) and diversity initiatives in the medical profession.

#Leonard Leo #Federalist Society #Gender Affirming Healthcare #Anti Trans Extremism #Transgender Rights #Transgender #Do No Harm #Do No Harm Action #Edward Blum #Suzy Edelman #Joseph Edelman #Concord Fund #Barre Seid #Marble Trust #Diversity Equity and Inclusion #DEI

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projectfundingservices · 7 months

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In the past 45 days, Global Star Capital founder Rich Cocovich has met with clients in multiple sectors, executives and established entertainment brass on multiple projects in Los Angeles, Pittsburgh, Phoenix, San Diego, Washington DC and Miami. He is a gearing up for international clients in Spain, Italy, The UAE and South Africa also. If you are a solvent and prepared project principal who understands that high end professional services are not free, not “wrapped into a closing” and not contingent then you are welcome to apply at our website www.globalstarcapital.com beginning in the Our Process section. Projects $1 Million and up are welcome. We are the top experts in private funding with clients in 126 countries and all 50 states since 1991. Our mandatory protocol is etched in stone with fre structure that includes meeting face to face. Over $30 Billion USD awaits our clients from private investors worldwide who cannot be reached without Global Star Capital and our founder.

#richcocovichreviews #richcocovich #globalstarcapital #globalstarcapitalreviews #projectfunding #projectfinance #capitalraising #equityinvesting #equityfunding #topconsultant #privateequity #privatemoney #privatefunding #funding #fundingnews

#rich cocovich #global star capital #richard cocovich #private funding #richard cocovich and global star capital #private equity #equity funding #equity financing #project funding professionals #equity #project funding services #private funding project funding #rich cocovich top consultant in private funding #cocovich #global star capital review #rich cocovich review

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sanskriti-2751 · 1 year

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What is Mutual Fund?

A mutual fund is a type of investment vehicle that pools money from multiple investors to invest in a diversified portfolio of securities such as stocks, bonds, and other assets. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced.

It is managed by a professional fund manager or an asset management company (AMC) who makes investment decisions on behalf of the investors.

Mutual funds offer good investment opportunities to the investors. Like all investments, they also carry certain risks

SEBI formulates policies and regulates the mutual funds to protect the interest of the investors.

OVERVIEW OF MUTUAL FUNDS INDUSTRY IN INDIA

The mutual fund industry in India was set up through a combination of regulatory changes, legislative reforms and the entry of various market players.

Unit Trust of India- UTI was founded in 1964, which is when the mutual fund sector in India first started to take off. To mobilize public funds and invest them in the capital markets, UTI was established as a statutory body under the UTI Act, 1963. The idea of mutual funds was greatly popularized in India because to UTI.

Regulatory Framework-In India, the mutual fund industry's regulatory structure began to take shape in the 1990s. The Securities and Exchange Board of India (SEBI) Act, which established SEBI as the governing body for the Indian securities markets, was passed in 1993. Among other market intermediaries, SEBI was responsible with regulating and supervising mutual funds.

The SEBI (Mutual Funds) Regulations,1996- This regulation established the legal foundation for the establishment, administration, and operation of mutual funds in India. These regulations outlined the standards for investor protection, investment restrictions, disclosure requirements, and eligibility requirements for asset management companies (AMCs).

Introduction of Private Sector Mutual Funds: UTI was the only active mutual fund provider in India prior to 1993. Private sector mutual funds were nevertheless permitted to enter the market as a result of the liberalization of the financial sector and the opening up of the Indian economy. Many domestic and foreign financial organizations launched their own AMCs and entered the mutual fund industry.

Product Line Evolution: The mutual fund sector in India has grown and increased its product selection throughout the years. Mutual funds initially mainly offered income and growth opportunities. To address various investor needs and risk profiles, the industry did, however, offer a wider range of products, such as equity funds, debt funds, balanced funds, and specialist sector funds.

Investor Education and Awareness: Serious efforts have been made to educate and raise investor awareness in order to encourage investor involvement in mutual funds. Industry groups, AMCs, and SEBI have run investor awareness campaigns, distributed instructional materials, and supported systems for resolving investor complaints. Systematic Investment Plans (SIPs) were introduced, and this was a significant factor in luring individual investors

Technological Advancements-The mutual fund sector in India has embraced technological development, making it possible for investors to access and invest in mutual funds through online platforms and mobile applications. Investors can now transact, track their investments, and get mutual fund information more easily thanks to digital platforms.

The mutual fund industry in India has developed into a strong and regulated sector through regulatory changes, market competition, and investor-centric initiatives. The sector keeps expanding, drawing in more investors and providing them with a wide variety of investment possibilities around the nation.

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privatefunding · 7 months

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#rich cocovich #global star capital #richard cocovich #private funding #richard cocovich and global star capital #private equity #equity funding #equity financing #project funding professionals #equity #project funding #equity capital #cocovich #rich cocovich top consultant in private funding #capital raising #global star capital review #rich cocovich baseball #rich cocovich review

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faspconsultingllc · 5 months

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Unlocking Growth: Your Ultimate Guide to Equity Funding with FASP Consulting LLC

Today, we delve into the realm of equity funding, exploring its benefits, the role of equity funding investors, and the top-notch services provided by FASP Consulting LLC, a renowned name in the industry.

#equity funding stands #equity funding #equity funding investors #equity financing #equity funding services

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ivygorgon · 6 months

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AN OPEN LETTER to THE U.S. CONGRESS

Fund the Affordable Connectivity Program NOW!

130 so far! Help us get to 250 signers!

I’m a concerned constituent writing to urge you to fund the Affordable Connectivity Program or ACP. Digital connectivity is a basic necessity in our modern world and the internet must be treated as a public utility. We use the internet to apply for jobs, perform our jobs, receive telehealth medical treatment, and pay bills, and students use it to complete homework assignments. But for millions of people in rural and urban areas, and Tribal communities, the internet is a luxury they cannot afford. Failure by Congress to fund this program will force millions of households already on tight budgets to choose between being able to stay online or potentially losing access to this essential service. If Congress doesn’t act fast, funding for the Affordable Connectivity Program will run out and more than 22 million Americans -- 1 in 6 households -- will lose this vital service. The implications of this will be devastating. In 2019, 18% of Native people living on Tribal land had no internet access; 33% relied on cell phone service for the internet; and 39% had spotty or no connection to the internet at home on their smart phone. The ACP has enrolled 320,000 households on Tribal lands -- important progress. The largest percentage gains in broadband access are in rural areas. Nearly half of military families are enrolled in ACP, as are one in four African American and Latino households. Losing access and training on using computers and the internet will have devastating impacts on all these communities as technology becomes increasingly integral to work, education, health, and our everyday lives. Without moves to address tech inequality, low-income communities and communities of color are heading towards an “unemployment abyss.” The Affordable Connectivity Program has broad bipartisan support because it is working. As your constituent, I am urging you to push for renewed funding for the ACP before it runs out in the coming weeks.

▶ Created on April 11 by Jess Craven

📱 Text SIGN PJXULY to 50409

🤯 Liked it? Text FOLLOW JESSCRAVEN101 to 50409

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mostlysignssomeportents · 2 years

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The antitrust Twilight Zone

Funeral homes were once dominated by local, family owned businesses. Today, odds are, your neighborhood funeral home is owned by Service Corporation International, which has bought hundreds of funeral homes (keeping the proprietor’s name over the door), jacking up prices and reaping vast profits.

Funeral homes are now one of America’s most predatory, vicious industries, and SCI uses the profits it gouges out of bereaved, reeling families to fuel more acquisitions — 121 more in 2021. SCI gets some economies of scale out of this consolidation, but that’s passed onto shareholders, not consumers. SCI charges 42% more than independent funeral homes.

https://pluralistic.net/2022/09/09/high-cost-of-dying/#memento-mori

SCI boasts about its pricing power to its investors, how it exploits people’s unwillingness to venture far from home to buy funeral services. If you buy all the funeral homes in a neighborhood, you have near-total control over the market. Despite these obvious problems, none of SCI’s acquisitions face any merger scrutiny, thanks to loopholes in antitrust law.

These loopholes have allowed the entire US productive economy to undergo mass consolidation, flying under regulatory radar. This affects industries as diverse as “hospital beds, magic mushrooms, youth addiction treatment centers, mobile home parks, nursing homes, physicians’ practices, local newspapers, or e-commerce sellers,” but it’s at its worst when it comes to services associated with trauma, where you don’t shop around.

Think of how Envision, a healthcare rollup, used the capital reserves of KKR, its private equity owner, to buy emergency rooms and ambulance services, elevating surprise billing to a grotesque art form. Their depravity knows no bounds: an unconscious, intubated woman with covid was needlessly flown 20 miles to another hospital, generating a $52k bill.

https://pluralistic.net/2022/03/14/unhealthy-finances/#steins-law

This is “the health equivalent of a carjacking,” and rollups spread surprise billing beyond emergency rooms to anesthesiologists, radiologists, family practice, dermatology and others. In the late 80s, 70% of MDs owned their practices. Today, 70% of docs work for a hospital or corporation.

How the actual fuck did this happen? Rollups take place in “antitrust’s Twilight Zone,” where a perfect storm of regulatory blindspots, demographic factors, macroeconomics, and remorseless cheating by the ultra-wealthy has laid waste to the American economy, torching much of the US’s productive capacity in an orgy of predatory, extractive, enshittifying mergers.

The processes that underpin this transformation aren’t actually very complicated, but they are closely interwoven and can be hard to wrap your head around. “The Roll-Up Economy: The Business of Consolidating Industries with Serial Acquisitions,” a new paper from The American Economic Liberties Project by Denise Hearn, Krista Brown, Taylor Sekhon and Erik Peinert does a superb job of breaking it down:

http://www.economicliberties.us/wp-content/uploads/2022/12/Serial-Acquisitions-Working-Paper-R4-2.pdf

The most obvious problem here is with the MergerScrutiny process, which is when competition regulators must be notified of proposed mergers and must give their approval before they can proceed. Under the Hart-Scott-Rodino Act (HSR) merger scrutiny kicks in for mergers when the purchase price is $101m or more. A company that builds up a monopoly by acquiring hundreds of small businesses need never face merger scrutiny.

The high merger scrutiny threshold means that only a very few mergers are regulated: in 2021, out of 21,994 mergers, only 4,130 (<20%) were reported to the FTC. 2020 saw 16,723 mergers, with only 1.637 (>10%) being reported to the FTC.

Serial acquirers claim that the massive profits they extract by buying up and merging hundreds of businesses are the result of “efficiency” but a closer look at their marketplace conduct shows that most of those profits come from market power. Where efficiences are realized, they benefit shareholders, and are not shared with customers, who face higher prices as competition dwindles.

The serial acquisition bonanza is bad news for supply chains, wages, the small business ecosystem, inequality, and competition itself. Wherever we find concentrated industires, we find these under-the-radar rollups: out of 616 Big Tech acquisitions from 2010 to 2019, 94 (15%) of them came in for merger scrutiny.

The report’s authors quote FTC Commissioner Rebecca Slaughter: “I think of serial acquisitions as a Pac-Man strategy. Each individual merger viewed independently may not seem to have significant impact. But the collective impact of hundreds of smaller acquisitions, can lead to a monopolistic behavior.”

It’s not just the FTC that recognizes the risks from rollups. Jonathan Kanter, the DoJ’s top antitrust enforcer has raised alarms about private equity strategies that are “designed to hollow out or roll-up an industry and essentially cash out. That business model is often very much at odds with the law and very much at odds with the competition we’re trying to protect.”

The DoJ’s interest is important. As with so many antitrust failures, the problem isn’t in the law, but in its enforcement. Section 7 of the Clayton Act prohibits serial acquisitions under its “incipient monopolization” standard. Acquisitions are banned “where the effect of such acquisition may be to substantially lessen competition between the corporation whose stock is so acquired and the corporation making the acquisition.” This incipiency standard was strengthened by the 1950 Celler-Kefauver Amendment.

The lawmakers who passed both acts were clear about their legislative intention — to block this kind of stealth monopoly formation. For decades, that’s how the law was enforced. For example, in 1966, the DoJ blocked Von’s from acquiring another grocer because the resulting merger would give Von’s 7.5% of the regional market. While Von’s is cited by pro-monopoly extremists as an example of how the old antitrust system was broken and petty, the DoJ’s logic was impeccable and sorely missed today: they were trying to prevent a rollup of the sort that plagues our modern economy.

As the Supremes wrote in 1963: “A fundamental purpose of [stronger incipiency standards was] to arrest the trend toward concentration, the tendency of monopoly, before the consumer’s alternatives disappeared through merger, and that purpose would be ill-served if the law stayed its hand until 10, or 20, or 30 [more firms were absorbed].”

But even though the incipiency standard remains on the books, its enforcement dwindled away to nothing, starting in the Reagan era, thanks to the Chicago School’s influence. The neoliberal economists of Chicago, led by the Nixonite criminal Robert Bork, counseled that most monopolies were “efficient” and the inefficient ones would self-correct when new businesses challenged them, and demanded a halt to antitrust enforcement.

In 1982, the DoJ’s merger guidelines were gutted, made toothless through the addition of a “safe harbor” rule. So long as a merger stayed below a certain threshold of market concentration, the DoJ promised not to look into it. In 2000, Clinton signed an amendment to the HSR Act that exempted transactions below $50m. In 2010, Obama’s DoJ expanded the safe harbor to exclude “[mergers that] are unlikely to have adverse competitive effects and ordinarily require no further analysis.”

These constitute a “blank check” for serial acquirers. Any investor who found a profitable strategy for serial acquisition could now operate with impunity, free from government interference, no matter how devastating these acquisitions were to the real economy.

Unfortunately for us, serial acquisitions are profitable. As an EY study put it: “the more acquisitive the company… the greater the value created…there is a strong pattern of shareholder value growth, correlating with frequent acquisitions.” Where does this value come from? “Efficiencies” are part of the story, but it’s a sideshow. The real action is in the power that consolidation gives over workers, suppliers and customers, as well as vast, irresistable gains from financial engineering.

In all, the authors identify five ways that rollups enrich investors:

I. low-risk expansion;

II. efficiencies of scale;

III. pricing power;

IV. buyer power;

V. valuation arbitrage.

The efficiency gains that rolled up firms enjoy often come at the expense of workers — these companies shed jobs and depress wages, and the savings aren’t passed on to customers, but rather returned to the business, which reinvests it in gobbling up more companies, firing more workers, and slashing survivors’ wages. Anything left over is passed on to the investors.

Consolidated sectors are hotbeds of fraud: take Heartland, which has rolled up small dental practices across America. Heartland promised dentists that it would free them from the drudgery of billing and administration but instead embarked on a campaign of phony Medicare billing, wage theft, and forcing unnecessary, painful procedures on children.

Heartland is no anomaly: dental rollups have actually killed children by subjecting them to multiple, unnecessary root-canals. These predatory businesses rely on Medicaid paying for these procedures, meaning that it’s only the poorest children who face these abuses:

https://pluralistic.net/2022/11/17/the-doctor-will-fleece-you-now/#pe-in-full-effect

A consolidated sector has lots of ways to rip off the public: they can “directly raise prices, bundle different products or services together, or attach new fees to existing products.” The epidemic of junk fees can be traced to consolidation.

Consolidators aren’t shy about this, either. The pitch-decks they send to investors and board members openly brag about “pricing power, gained through acquisitions and high switching costs, as a key strategy.”

Unsurprisingly, investors love consolidators. Not only can they gouge customers and cheat workers, but they also enjoy an incredible, obscure benefit in the form of “valuation arbitrage.”

When a business goes up for sale, its valuation (price) is calculated by multiplying its annual cashflow. For small businesses, the usual multiplier is 3–5x. For large businesses, it’s 10–20x or more. That means that the mere act of merging a small business with a large business can increase its valuation sevenfold or more!

Let’s break that down. A dental practice that grosses $1m/year is generally sold for $3–5m. But if Heartland buys the practice and merges it with its chain of baby-torturing, Medicaid-defrauding dental practices, the chain’s valuation goes up by $10–20m. That higher valuation means that Heartland can borrow more money at more favorable rates, and it means that when it flips the husks of these dental practices, it expects a 700% return.

This is why your local veterinarian has been enshittified. “A typical vet practice sells for 5–8x cashflow…American Veterinary Group [is] valued at as much as 21x cashflow…When a large consolidator buys a $1M cashflow clinic, it may cost them as little as $5M, while increasing the value of the consolidator by $21M. This has created a goldrush for veterinary consolidators.”

This free money for large consolidators means that even when there are better buyers — investors who want to maintain the quality and service the business offers — they can’t outbid the consolidators. The consolidators, expecting a 700% profit triggered by the mere act of changing the business’s ownership papers, can always afford to pay more than someone who merely wants to provide a good business at a fair price to their community.

To make this worse, an unprecedented number of small businesses are all up for sale at once. Half of US businesses are owned by Boomers who are ready to retire and exhausted by two major financial crises within a decade. 60% of Boomer-owned businesses — 2.9m businesses of 11 or so employees each, employing 32m people in all — are expected to sell in the coming decade.

If nothing changes, these businesses are likely to end up in the hands of consolidators. Since the Great Financial Crisis of 2008, private equity firms and other looters have been awash in free money, courtesy of the Federal Reserve and Congress, who chose to bail out irresponsible and deceptive lenders, not the borrowers they preyed upon.

A decade of zero interest rate policy (ZIRP) helped PE grow to “staggering” size. Over that period, America’s 2,000 private equity firms raised buyout warchests totaling $2t. Today, private equity owned companies outnumber publicly traded firms by more than two to one.

Private equity is patient zero in the serial acquisition epidemic. The list of private equity rollup plays includes “comedy clubs, ad agencies, water bottles, local newspapers, and healthcare providers like hospitals, ERs, and nursing homes.”

Meanwhile, ZIRP left the nation’s pension funds desperate for returns on their investments, and these funds handed $480b to the private equity sector. If you have a pension, your retirement is being funded by investments that are destroying your industry, raising your rent, and turning the nursing home you’re doomed to into a charnel house.

The good news is that enforcers like Kanter have called time on the longstanding, bipartisan failure to use antitrust laws to block consolidation. Kanter told the NY Bar Association: “We have an obligation to enforce the antitrust laws as written by Congress, and we will challenge any merger where the effect ‘may be substantially to lessen competition, or to tend to create a monopoly.’”

The FTC and the DOJ already have many tools they can use to end this epidemic.

They can revive the incipiency standard from Sec 7 of the Clayton Act, which bans mergers where “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.”

This allows regulators to “consider a broad range of price and non-price effects relevant to serial acquisitions, including the long-term business strategy of the acquirer, the current trend or prevalence of concentration or acquisitions in the industry, and the investment structure of the transactions”;

The FTC and DOJ can strengthen this by revising their merger guidelines to “incorporate a new section for industries or markets where there is a trend towards concentration.” They can get rid of Reagan’s 1982 safe harbor, and tear up the blank check for merger approval;

The FTC could institute a policy of immediately publishing merger filings, “the moment they are filed.”

Beyond this, the authors identify some key areas for legislative reform:

Exempt the FTC from the Paperwork Reduction Act (PRA) of 1995, which currently blocks the FTC from requesting documents from “10 or more people” when it investigates a merger;

Subject any company “making more than 6 acquisitions per year valued at $70 million total or more” to “extra scrutiny under revised merger guidelines, regardless of the total size of the firm or the individual acquisitions”;

Treat all the companies owned by a PE fund as having the same owner, rather than allowing the fiction that a holding company is the owner of a business;

Force businesses seeking merger approval to provide “any investment materials, such as Private Placement Memorandums, Management or Lender Presentations, or any documents prepared for the purposes of soliciting investment. Such documents often plainly describe the anticompetitive roll-up or consolidation strategy of the acquiring firm”;

Also force them to provide “loan documentation to understand the acquisition plans of a company and its financing strategy;”

When companies are found to have violated antitrust, ban them from acquiring any other company for 3–5 years, and/or force them to get FTC pre-approval for all future acquisitions;

Reinvigorate enforcement of rules requiring that some categories of business (especially healthcare) be owned by licensed professionals;

Lower the threshold for notification of mergers;

Add a new notification requirement based on the number of transactions;

Fed agencies should automatically share merger documents with state attorneys general;

Extend civil and criminal antitrust penalties to “investment bankers, attorneys, consultants who usher through anticompetitive mergers.”

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