Helping to peel off some of the layers of mystery surrounding the practices of private equity firms, Matthew Goldstein of The New York Times examined dividend recaps, “a kind of borrowing long condemned for loading up companies with debt for the benefit of their private equity owners.”
In this examination, Goldstein helps to explain the fallouts that some companies endure “after their private equity owners heaped debt on them while pulling out cash.”
The article features the findings of a report released by the Private Equity Stakeholder Project on how private equity raids critical health care infrastructure for short term profit, reporting how Trident USA, a provider of mobile diagnostic equipment to nursing homes and elder care facilities, filed for bankruptcy in 2019 “after piling on debt to pay out $380 million in dividends to several private equity firms.”
Also shared from the PESP report were the financial problems of Prospect Medical Holdings, “a chain of hospitals in five states, which paid out a $457 million dividend in 2018 to the private equity firm Leonard Green & Partners and other owners, despite the chain shuttering five facilities and laying off more than 1,000 workers” at the same time.
The NYT article observes how “the borrowing boom is being closely watched by lawmakers,” quoting Senator Elizabeth Warren as saying that the dividend paid by Apria was indicative of how Wall Street firms are “padding their own pockets.”
Jim Baker, executive director of the Private Equity Stakeholder Project, tells the NYT that the main concern with using borrowed money to pay for a dividend is that it could hamstring a company’s ability to borrow new money for purposes that could help it grow.
“Debt-funded dividends do nothing to help private equity-owned companies and only put those companies at greater risk.”