The real real on buying supplements hailed from private equity firm owned companies

Most people know very little about private equity firms or what they do.

What are private equity firms?

According to Pro Publica:

“Private equity funds are pooled investments that are generally not open to small investors. Private equity firms invest the money they collect on behalf of the fund’s investors, usually by taking controlling stakes in companies. The private equity firm then works with company executives to make the businesses — called portfolio companies — more valuable so they can sell them later at a profit.”

“This is different from, say, an individual investor buying a share of Amazon stock for $135. Purchasing that share gives you an infinitesimal stake in the company and entitles you to any dividend the company may pay out, but your ownership stake isn’t large enough to affect the company’s decision-making and operations. Private equity funds, by contrast, are not publicly traded securities, and the amount they invest usually involves trying to take a controlling stake in companies.”

“Private equity funds are generally backed by investments from large institutional investors: pension funds, sovereign wealth funds, endowments and very wealthy individuals. Private equity firms manage these funds using investors’ contributions and borrowed money.”

Those things don’t seem that bad but do not truly explain what happens when a private equity firm takes a controlling stake in a company.   

When private equity firms buy or take a significant stake in a company, they are not doing it out of the goodness of their heart; they are doing it to make huge profits. It’s not the profit-making that is the problem; how they achieve those massive profit margins is the issue.

From Inetenomics:

“Financier William Simon got the idea for private equity back in the seventies. Simon, a Nixon administration official and right-winger whose heart’s desire was to free finance and corporations from regulation, left Washington to execute the first “leveraged buyout.” He and a partner bought an old greeting card company on mostly borrowed funds, extracted huge fees, and then sold it for enormous profit in a rising market. People like “junk bond king” Michael Milken took notice and started following the model. In the go-go eighties, the Washington Post noted that “greed and debt” had combined to “create the hottest game on Wall Street today.”

Until things went bust, the leveraged buyout industry got a nasty reputation as the “robber barons of the eighties” and retreated.”

“But there was just too much money to be made. The industry went on to rebrand itself as “private equity” and expanded following the 2008 financial crisis into many of the less regulated corners of finance – some previously occupied by the great investment banks. After yet another run of bad press – you might recall when Mitt Romney’s Bain Capital was denounced as a profiteering predator in the 2012 election — the industry started to rebrand itself once again. Today some of the big firms call themselves “global investment businesses” or “alternative asset management businesses.”

Ballou warns that whatever you call them, many have become incentivized to do great harm to consumers, workers, and taxpayers– and they’re doing it with the help of lavishly-funded political allies.”

“But, you might ask, isn’t this just capitalism? Nobody said it was pretty.

According to Ballou, this is something different – an industry that has metastasized into a job-killing, business-destroying, community-crushing machine the likes of which we haven’t seen since the money trusts of the nineteenth century. In other words, it’s predatory capitalism on steroids. Most worrisome of all, in Ballou’s view, is the fact that these firms have almost no accountability to the U.S. legal system.

Some liken private equity firms to vultures picking the bones of dying companies, which you could argue is a necessary activity. But Ballou points out that many private equity firms now target healthy companies, leaving them gutted, unproductive, or even bankrupt. Whether it’s Bain, Apollo, or Sun Capital, each firm has its preferred tactics for extracting money from the businesses they buy up, too often hurting the most vulnerable people, like nursing home residents, who can’t fight back. When they buy up rental properties, watch out for evictions. When they target doctors’ offices, expect to pay more for care. They might even be cutting corners at your hospital’s emergency room (the horror stories will make you research your local ER). And they really, really want to get their hands on your 401 (k).

The founders of these companies have become absurdly rich – we’re talking multi-multi-billionaires — so their power in American politics is tremendous. Not only do they influence the political system — increasingly, they are the political system. Just ask men like Timothy Geithner, Newt Gingrich, Paul Ryan, and David Petraeus, all now working in private equity. It’s more than a revolving door between Washington and Wall Street. As Forbes magazine highlights, it’s a “passionate love affair.”

The New York Times has a great article on private equity; here is just one example of what happens when private equity buys a chain of nursing homes.

“Consider the case of the Carlyle Group and the nursing home chain HCR ManorCare. In 2007, Carlyle — a private equity firm now with $373 billion in assets under management — bought HCR ManorCare for a little over $6 billion, most of which was borrowed money that ManorCare, not Carlyle, would have to pay back. As the new owner, Carlyle sold nearly all of ManorCare’s real estate and quickly recovered its initial investment. This meant, however, that ManorCare was forced to pay nearly half a billion dollars a year in rent to occupy buildings it once owned. Carlyle also extracted over $80 million in transaction and advisory fees from the company it had just bought, draining ManorCare of money.”

“ManorCare soon instituted various cost-cutting programs and laid off hundreds of workers. Health code violations spiked. People suffered. The daughter of one resident told The Washington Post that “my mom would call us every day crying when she was in there” and that “it was dirty — like a run-down motel. Roaches and ants all over the place.”

In 2018, ManorCare filed for bankruptcy, with over $7 billion in debt. But that was, in a sense, immaterial to Carlyle, which had already recovered the money it invested and made millions more in fees. (In statements to The Washington Post, ManorCare denied that the quality of its care had declined, while Carlyle claimed that changes in how Medicare paid nursing homes, not its own actions, caused the chain’s bankruptcy.)

Carlyle managed to avoid any legal liability for its actions. How it did so explains why this industry often has such poor outcomes for the businesses it buys.

The family of one ManorCare resident, Annie Salley, sued Carlyle after she died in a facility that the family said was understaffed. According to the lawsuit, despite needing assistance walking to the bathroom, Ms. Salley was forced to do so alone, and hit her head on a bathroom fixture. Afterward, nursing home staff reportedly failed to order a head scan or refer her to a doctor, even though she exhibited confusion, vomited and thrashed around. Ms. Salley eventually died from bleeding around her brain.

Yet when Ms. Salley’s family sued for wrongful death, Carlyle managed to get the case against it dismissed. As a private equity firm, Carlyle claimed, it did not technically own ManorCare. Rather, Carlyle merely advised a series of investment funds with obscure names that did. In essence, Carlyle performed a legal disappearing act.”

So not only do these companies cause untold pain, but they face no consequences.

The Atlantic detailed more of the horrors and deaths caused by private equity:

Private-equity investment in nursing homes, to take just one example, has grown from about $5 billion at the turn of the century to more than $100 billion today. The results have not been pretty. The industry seems to have recognized that it could improve profit margins by cutting back on staffing while relying more on psychoactive medication. Stories abound of patients being rushed to the hospital after being overprescribed opioids, of bedside call buttons so poorly attended that residents suffer in silence while waiting for help, of nurses being pressured to work while sick with COVID. A 2021 study concluded that private-equity ownership was associated with about 22,500 premature nursing-home deaths from 2005 to 2017—before the wave of death and misery wrought by the pandemic.

Mother Jones goes into more detail on just how destructive these companies are to our society.

“In the last decade, private equity has taken control of more than 80 retailers, leading to the loss of 1.3 million jobs.”

“Private equity incursions into real estate have left no form of housing unscathed, driving up the costs of both owning and renting any type of house or apartment or mobile home. They’ve bought up for-profit colleges, driving down graduation rates while increasing student debt. They’ve sought gains in the obscure crevices of our mutual existence, from contact lenses to port-a-potties to ketchup. And they’ve enveloped the health care sector, including hospitals, dermatologists, ophthalmologists, veterinarians, hospice care, and nursing homes, often leading to increased medical costs for patients and a drop in the quality of care. A 2021 study from a group of business school professors found that private equity ownership of nursing homes increased their Medicare billing and upped the mortality of patients by 10 percent—about 20,000 lives across the 12-year period they studied.”

“Multiple studies have also found that private equity buyouts drive down wages at acquired companies, even when productivity increases.”

“This aversion to stricter regulation of private equity means its dominance will only grow, says Appelbaum, and so will cutting costs and corners and jobs to extract financial gain. The evidence can be seen in small inconveniences: the decision by a PE-owned hospital, for instance, to buy the cheapest, roughest paper towels for nurses who wash their hands dozens of times a day. Or in broader indignities: a PE-owned ­hospice care company that provides fewer visits to dying patients by medical assistants who are cheaper to employ, but for whom the company can bill Medicare the same amount as for a visit by a nurse. And then there is life-altering damage: medical bills that gut family finances all because private equity firms have bought up so much of the health care sector that they can charge virtually anything.

“Right now, they can do whatever they want,” Appelbaum says. “And that means quality of life deteriorates for everybody.” 

These companies make nearly every part of our lives worse and more expensive.

Private equity companies also own and have controlling stakes in a large number of supplement companies. So what happens, in most cases, when a private equity company buys a supplement company or takes a considerable stake in one?

The first thing that happens is staff are cut, wages are slashed, and benefits are reduced. A lot of institutional knowledge and workings are lost, as the most knowledgeable employees are often the first to go as they have often been there the longest and are usually paid the most, or they quit because they do not like the company's new direction. Consultants like McKinsey & Company are often hired to “justify” these cuts.

The second thing is cheaper raw materials are substituted. This lets the labels and formulas look the same while dramatically reducing costs. Check out our blog, A Tale Of Two Bottles, to learn how two labels can look the same but be very different products.

The third thing that happens is outsourcing. Many companies go from their own manufacturing and quality control departments to outsourcing them to questionable third parties, who promise to do the work for significantly less.

Next, the marketing budget goes up. Fancy new packaging, advertising, and social media strategies come on board.

This all leads to products that cost fifty to seventy percent less to produce while the company increases the prices that people pay for them.

So not only are there a ton of ethical issues with private equity, but the consumer gets products that are not nearly as good and pays far more for them.

If you want a deep and in-depth look at how damaging private equity is to the very fabric of our society, check out this book.

Does a private equity-owned company sound like a good place to get your vitamins from?

Here are some (definitely not all) well-known supplement companies that are owned by or that private equity has a significant stake in:

Check out this page to see more companies affected by private equity firms.

While the issues caused by private equity firms may not make the news often, they are one of the biggest drivers of problems in our society, from healthcare to housing costs, food quality, and education. 

We work very hard to avoid selling products from supplement companies owned by or primarily controlled by private equity companies (and those owned by horrible corporations like Nestle) because people and the environment should come before profits. Partnering with small family-owned companies makes it easier to verify sources of raw materials and ensure that the environment is protected and that farmers and laborers are paid a fair price for their products and labor. It also helps to keep more money in the local communities, which benefits all of us. 

It can be hard to know who owns which companies, but whenever possible, choose companies you know are independently owned and work hard to improve their communities and make the world a better place. It would make a huge difference if everyone changed even a few monthly purchases!