Thanks to the press of Brexit, I’m late to comment on a series on private equity that the New York Times ran last week. One of the reasons for the delay is that I needed to ponder a bit so as to not fall into the problem that was allegedly described by Julius Caesar: “Because I did not have time to write you a short letter, I wrote you a long one.”

Another factor impeding dealing with these articles crisply isn’t that they are wrongheaded, but that they are flabby and inconclusive. They are reminiscent of a McKinsey progress review where the team got a ton of data but didn’t figure out the “so what’s” so they instead dumped a ton of slides in a semi-organized manner on the client to show they had done a lot of digging and initial analysis. You might call this the “Here is a lot of shit, I am sure you can find a pony” school of journalism.

The worst of this is that the fact that the Times appears to regard these pieces as impressive (among other things, they created custom graphics for each, as well as giving them lots of real estate) when the basic issues are all old news. Yes, private equity regularly crapifies their offerings through via overly-aggressive cost-cutting and installing know-nothing managers. Yes, alternative investors have been providing public services via infrastructure deals and other types of outsourcing, and their business model virtually requires that they provide a lower level of service at a higher cost to citizens. And yes, they regularly bankrupt companies.

One of the stories, When You Dial 911 and Wall Street Answers, follows two companies that went bankrupt. One, TransCare, was purchased out of bankruptcy but later failed. And it didn’t go into Chapter 11, but a Chapter 7 liquidation, which left its customers stranded, with no emergency service provider. The authors fail to explain how unusual a Chapter 7 failure for a business of reasonable size is. The most likely explanation is that the business was so mired in suits over patient injuries and deaths that no one would touch it.

The second, Rural/Metro, had a disastrous run under its first private equity owner, Warburg Pincus. Although the Times tried getting metrics across five customers, their methods differed, but four showed serious declines in performance to patient-endangering substandard levels. Bondholders sued for fraud because Warburg Pincus overstated its likely revenues. Investors who bought the falling safe of the company’s falling bonds didn’t expect the bankruptcy filing. OakTree Capital Management decided to take over the company but it did not halt the decay. Because the Rural/Metro also had ran outsourced fire fighting, the article has a long section on that that comes off as not integrated (and the story was already disjointed).

Despite all the spade work (and the authors mention the use of FOIAs and the analysis of lawsuits). this blog post provided more insight. From Managing Healthcare Costs:

Ambulance companies should inherently be profitable. Patients sick enough to come to a hospital by ambulance generally can’t “shop around,” and so these companies generally don’t find themselves forced to accept steeply discounted contracts. (An exception is Medicare which has low allowances for ambulance rides, and Medicaid, which generally has low allowable fees for all service providers.) Here are the ways an ambulance company can fail economically: 1) Fees are too low (but the barrier to increasing fees is low for most payers- ambulance companies should be profitable)

2) Collection efforts are inadequate (but the private equity owners put in place processes to improve collection rates, including punitive processes)

3) High service provider wages (but the private equity owners generally slashed personnel costs and pensions –and workers were not protected by unions as are many municipal workers.

4) High executive and management salaries (the article is mum on this issue –and as these companies are privately held that information might be hard to obtain)

5) Operational incompetence

6) Too much debt. Too much debt is likely the problem here. The private equity companies loaded a lot of debt on to these companies as they purchased them. Debt is good for investors who believe in their company – who can borrow money without giving up ownership interest as they would with a sale of stock. But a company that should be profitable often won’t be when it’s saddled with a half billion of debt – as Rural/Metro was after the Warburg Pincus investment. High debt loads can help concentrate the minds of executives; with high debt payments they cannot afford to waste any money – and can squeeze additional efficiencies from the business.. In this instance, though, the ambulance company employees had instructions to steal supplies from hospitals, and often ran short of supplies and equipment. Ambulance services are better delivered by fire departments and municipalities. Many private companies perform productive “pruning” when faced with substantial debt – but outsourcing ambulance services to private equity companies has led to inappropriate debt levels which have left these companies unable to discharge their responsibilities to the public.

And this is where the Times story failed abjectly. Despite presenting a litany of horror stories, it never made a case for the fundamental unsuitability of private equity for this type of activity. The best it could do was hope that local officials would learn about these bad results and steer clear of private equity owned vendors. Instead, the authors bend over backwards not to reach any firm conclusions:

In many of the fields where private equity now operates, it has not necessarily performed better or worse than the banks and governments it replaced. In some cases it financed projects that others wouldn’t fund and provided crucial public services, including emergency care.

And the excuse offered for the private equity misfire was that they misjudged the market:

Private equity investors swept into the ambulance business with high hopes. “Tremendous growth potential,” Warburg Pincus said in a statement in 2011 when it bought Rural/Metro with plans to acquire rival ambulance services and improve bill collection. Other firms bet that fragile towns would outsource emergency care. And, the thinking went, President Obama’s health care overhaul would insure millions more people, providing new paying customers. But many newly insured Americans turned out to be on Medicaid, according to the Kaiser Family Foundation. Medicaid restricts some of the most aggressive billing tactics. “It didn’t quite play out like they had hoped,” said Mike Ward, executive director of the National EMS Management Association. So some private equity firms fell back on a time-tested moneymaking strategy: slashing costs.

But again, this framing lets the private equity firms off the hook. Private equity general partners rely on high levels of borrowing not just to lever their returns but also to minimize taxes. As tax expert Lee Sheppard wrote, “Private equity often resembles a tax reduction plan with an acquisition attached.” The traditional private equity formula was to buy businesses with stable cash flows. Levering up with the expectation of growth would make the borrowing manageable is playing Russian roulette with way too many chambers loaded.

Gretchen Morgenson regularly delivers more bang with far less investigative flailing about. Too bad she wasn’t given access to all this raw material.