WASHINGTON—The nine-month-old strike at Warrior Met Coal in Brookwood, Alabama happened “because of the conditions that private equity created,” AFLCIO president Liz Shuler said at an online press conference Dec. 14.
The stage was set in 2015, when the mine’s previous owner went bankrupt, and a federal bankruptcy judge ruled that whoever bought it would have it “free and clear,” said United Mine Workers of America president Cecil Roberts. That meant the eventual buyer, a group of private-equity firms that included Apollo Global Management, Blackstone, and KKR, had no obligation to honor the UMWA’s union contract or keep any of the miners on the job.
The result was that the union had to give massive concessions, including a $6-an-hour pay cut, mandatory work on holidays, and the elimination of health care for retirees—among them 80-year-olds with black lung, said Roberts. Retirement benefits for over 2,700 miners and their dependents were dumped on the federal Pension Benefit Guarantee Corporation, says the Private Equity Stakeholder Project.
Meanwhile, said Sen. Elizabeth Warren (D-Mass.), Apollo and the other “giant vulture” firms “loaded Warrior Met up with debt,” using it to pay themselves almost $800 million in “dividend recapitalization.” They raked in more than $300 million when they took Warrior Met public in 2017. The new owners, mostly investment firms, have refused to roll back more than token amounts of the concessions, provoking the strike.
“Apollo takes almost $800 million out of this company and they’re gone,” Roberts said.
Shuler calls it the “buy, strip, and flip business model.” Typically, according to the Private Equity Stakeholder Project, the firms buy a company, try to increase cash flow as much as possible in four to six years so they can take out cash through dividends and fees, and then try to sell it or take it public at a premium. Because “they put so little of their own capital at risk,” it says, “they can at times make a profit even if companies they acquire go bankrupt,” and they generally don’t have to pay back creditors, as the burden falls on the shell of the company.
When private-equity firms buy companies, they often lay off workers and cut pay and benefits, while making minimal investments and putting large amounts of debt on the company’s balance sheet.
For example, Cerberus Capital Management acquired the Albertsons supermarket chain in 2013 in a leveraged buyout, and two years later bought Safeway for $9.2 billion, $7.8 billion of that borrowed, according to a March 2019 report by the Center for Economic and Policy Research. Since the takeover, Phil Contee, a United Food and Commercial Workers Local 400 shop steward at a Safeway Maryland, said during an online press conference in October, all jobs have been reduced to part-time except for department heads and management.
Between 2015 and 2018, seven supermarket chains declared bankruptcy after being taken over by private-equity firms, according to the CEPR report.
Alden Global Capital has acquired more than 200 U.S. newspapers over the past decade, including the New York Daily News, the Chicago Tribune, the Baltimore Sun, and the Denver Post. When it took over the Tribune in May, it immediately axed a quarter of the newsroom staff; the Denver Post’s has been slashed by two-thirds. It often finds selling the papers’ downtown buildings more lucrative than publishing.
Alden “is not a newspaper company,” former Tribune editor Ann Marie Lipinski told The Atlantic magazine. “It’s a hedge that went and bought up some titles that it milks for cash.”
“They suck as much as they can out of these companies,” said Warren. Private-equity takeovers, she said, are responsible for killing more than 1.3 million retail jobs, and in nursing homes, the death rate increases by 10% on average after a private-equity takeover, due to staff cuts and cutting corners on safety.
It’s a fast-growing model. Private-equity firms, said Private Equity Stakeholder Project director Jim Baker, have “taken advantage of the flood of cheap debt” during the COVID-19 pandemic to buy up companies, and now manage $7.5 trillion in assets.
According to the American Investment Council, the industry’s main lobbying group, the number of U.S. employees at private equity-owned companies increased from 8.8 million at the end of 2018 to 11.7 million at the end of 2020. The first half of 2021 saw more private-equity funded mergers and acquisitions than any six months in the past 40 years, with almost 6,300 deals worth $513 billion. Debt-funded dividends are likely to reach a record high of more than $30 billion this year, according to S&P Global Market Intelligence; they had reached $26.8 billion as of Sept. 22.
In October, Warren and Rep. Mark Pocan (D-Wisc.) introduced a bill called the Stop Wall Street Looting Act of 2021. The legislation would hold private investment firms, the firm’s general partners, and their insiders responsible for the liabilities of companies under their control — including debt, legal judgments, and pension-related obligations, and eliminate the “carried interest loophole,” under which fees to private-equity firms are not taxed as regular income, but at the lower capital-gains rate. To end “the extraction of wealth and resources,” it would ban paying dividends to investors and the outsourcing of jobs for two years after a firm is acquired. It would modify the bankruptcy process to give workers’ pay and pensions, as well as consumers’ gift cards, priority as obligations to be paid off.
The American Investment Council and the Chamber of Commerce immediately objected, claiming that the bill would destroy anywhere from 6 million to 27 million jobs and cost public pension funds $329 million to $1.65 billion by forcing them to switch to lower-yielding investments. The Chamber said it would “punitively target” private equity, and that taxing carried interest as regular income “would prevent private equity funds from investing in job creation.”
“The job number cited by the Chamber of Commerce is ridiculous, since private equity firms do not typically create jobs,” the Private Equity Stakeholder Project says. “Instead, they buy companies that already have jobs and workers. Those jobs would still exist if the companies were owned in some other way.”
The group says that while private-equity funds generally produce slightly higher returns than investment in the S&P 500, public pension funds’ investments in them “actually had worse returns than from the S&P 500.”
Warren’s bill has not yet received a committee hearing in either house of Congress. It has five sponsors in the Senate and 14 in the House, all Democrats, including New Yorkers Mondaire Jones and Alexandria Ocasio-Cortez.
One thing that gets lost, said Roberts, is that the money private-equity funds extracted from the Brookwood mines is no longer going into the local economy. “The money they used to spend in Alabama is now in New York in some billionaire’s pocket,” he said.
“Workers should not, under any circumstances, lose their jobs during bankruptcy,” he added. “That’s what gave this company leverage over the workers.”