Private Equity and the Pandemic: Brace for Impact…Investing (Part II)

Yves here. Yesterday, Sebastien Canderle described the social-welfare-destroying actions of private equity in their operation of health care industry acquisitions. Even though readers may recall some of the details from the original news stories, having so many aggregated in one article shows how much damage they have done to patients and communities.

Today’s offering focuses on two major private equity targets that haven’t gotten the same level of press attention: prisons and education. It’s not hard to concur with Canderle’s conclusion, that private equity’s newfound enthusiasm for “social, environmental, and governance” investing is a not-credible marketing ploy.

By Sebastien Canderle, a private equity consultant, a lecturer at Imperial College London, and the author of The Good, the Bad and the Ugly of Private Equity


We saw in Part I that the fragmented, low-margin health-care sector is an ideal target for buy-and-build platforms.

Two other socially-vital sectors are attractive consolidation plays. The incarceration and education systems cater to an ill-informed user base with weak bargaining power. Private equity ownership frees service providers from political considerations that constrain local authorities and elected officials when prisons, schools and universities are publicly governed.

Prisoners’ Dilemma

America has the highest incarceration rate in the world, with over 2 million of its citizens behind bars.[1]When campaigning to promote the Stop Wall Street Looting Act last year, Senator (and then presidential candidate) Elizabeth Warren singled out the deterioration of service quality in the American prison system since private equity firms started investing in the space.

As one Forbes reporter put it: “Private equity firms profit enormously not only from incarcerated people, but also from […] taxpayers, whose taxes go to fund prisons and detention centers.” Private equity-backed businesses reportedly receive more than $40 billion from the US government, overcharging for medical and phone services and skimping on food. Jail Inc has become big business.

Senator Warren personally contacted several firms, all active consolidators of the prison services industry. Some of their transactions emphasize the importance of her campaign:[2]

  • For over fifteen years, through a variety of separate roll-ups, H.I.G. Capital (already encountered in Part I) turned correctional phone, food, commissary, and health-care companies into market leaders, enabling them allegedly to drive prices up while lowering quality.[3]

One such platform is health-care provider Wellpath. As a private company, it does not (and has repeatedly refused to) disclose information on its financial and operational performance, including key metrics such as the number of untimely deaths of inmates, litigation history, clinical indicators, training protocols, client lists, understaffing issues… Yet, in many bidding processes run by prisons and county jails to allocate contracts, Wellpath is increasingly the only contender. Its dominant position raises concerns.

  • Corizon Health, which vies with Wellpath for the title of the largest correctional health-care group in America, is owned by BlueMountain (also covered in Part I regarding the bankruptcy of New LifeCare Hospitals). It was the defendant in more than 600 malpractice lawsuits between 2011 and 2018, according to research by the American Federation of Teachers (AFT), an organization representing a variety of public employees, including correction and probation officers.[4]
  • Securus, a telecom group, and JPay, a money transfer specialist, are both owned by Platinum Equity. Both have been accused of overcharging for phone calls and cash withdrawals. Examples included charging monthly maintenance fees, ATM decline fees, and extras for video calls.[5]These rent-extracting practices are reminiscent of the way private equity firms levy advisory and deal fees on portfolio companies.

No Free Out-of-Jail Card

It is important not to blame private equity for the fact that the prison population includes a high proportion of individuals with a history of drug abuse and mental illness. This is the case whether prisons are government- or privately-run. America spends about $8 billion a year on prisoners’ health care and, in an attempt to save costs, states and counties have outsourced a big chunk of incarceration services.[6] What human-rights activists object to is the exploitation of inmates faced with no alternative service provider.

DC Capital’s investments in the sector provide further evidence. According to Forbes, in 2018, as part of the Trump administration’s “zero tolerance” immigration and children separation policies, the federal government paid Comprehensive Health Services (CHS), a DC Capital portfolio company which runs Homestead, the only for-profit detention center and the biggest shelter for unaccompanied minors in the US, more than $210 million for its services.[7]

It is likely that DC Capital was able to get such generous contracts because it also owns an investment in military and youth detention center conglomerate Caliburn International Corporation, whose board includes former White House Chief of Staff John Kelly. What could also help is that, prior to joining the Trump administration, Kelly had been on the board of DC Capital.[8]

Regardless of possible political interference and conflicts of interest, frequently prisons have the choice between hiring contractors in a monopolistic position or opening contracts to bidding. Invariably, the process tends to focus on price rather than quality, generally awarding the contract to “the lowest bidder, so that company has to keep the costs down”, as reported in The Atlantic.[9]

Any fragmented industry (like America’s prison system) is at a disadvantage when negotiating with oligopolies (correctional health-care and food service providers). The National Commission on Correctional Health Care reported that about 70% of the jails it inspects contract out for medical care. The risk for market abuse is real. There is no national agency to overseethe quality of health care. Many contracts are allocated without performance requirements or penalties for failing to meet them. That gives disgruntled jail administrators, prisoners and their families little recourse when they are unhappy with the level of service.[10]

Prison Break

Activists can apply significant pressure on institutional investors to sell off their holdings in politically-charged sectors. According to website The Nation, investors who allocated money to H.I.G. Capital’s funds with portfolio companies in the correctional and incarceration sectors (such as Wellpath, and Keefe Group, in charge of commissaries) include institutions with social missions – the Ford Foundation and the Police & Fire Pension Association of Colorado among them. The list also includes more conflicted parties.

The Michigan Department of Corrections contracts its commissaries and care-package service to Keefe, and previously contracted its food to Trinity (another H.I.G. investee), while the city of Adelanto, California used to subcontract parts of services for Immigration and Customs Enforcement detention facilities to Keefe and Wellpath. Thus, two of H.I.G.’s investors – Michigan Retirement Systems and the University of California – partly earned capital gains from prisoners’ unsatisfactory treatment.[11]

Perhaps the dilemma lies in what purpose one gives to imprisonment. At one end of the spectrum, incarceration exists to protect society from dangerous citizens. At the other end, a period in jail is needed for criminals to redeem themselves. A prison operator whose main goal is to maximize profit – as is standard practice under private equity ownership – could be tempted to see re-education measures as a cost item rather than part of its corporate raison d’être. In private equity, cost centers must be tackled relentlessly. They must also be replaced with new profit streams.

In 2016, while on the campaign trail, Hillary Clinton promised to “end private prisons and private detention centers”. “They are wrong”, she maintained. Donald Trump favored further outsourcing.[12]Trump’s policies were in line with past US Government initiatives implemented across multiple departments.

Let us turn to the education system.

Dark Sarcasm In The Classroom

A few years ago, I was asked to give lectures on private equity to a bunch of MSc Finance students. Their business school was part of a larger education group owned by a private equity firm. During the second academic year, the institution reduced the number of teaching hours for my course by 15%, kept my hourly rate unchanged, and increased student tuition by 8%. I decided to stop teaching there, considering that charging more for less would damage the quality of the course and my reputation as a lecturer.

Although this sort of anecdotal evidence should not lead to lazy generalization, an interesting academic paper prepared by professors from New York University, Chicago Booth and the University of California, Merced, corroborates this mean-and-lean private equity approach in the education sector. It makes for alarming reading.

From a sample of 88 deals involving almost one thousand higher education institutions, their research found that after the leveraged buyout, profits of the college triple on average. The private equity-owned institutions achieve this by increasing tuition, capturing more federal financial aid, taking in more students, and reducing staffing. These practices led to lower education inputs, graduation rates, loan repayment rates, and earnings among graduates.

The researchers explain that, “in sectors with intensive government [taxpayers] subsidy and opaque product quality, value for equity holders may come at the expense of consumers [students].” In the education system, “in exchange for federal grant and loan inputs,” the tacit commitment is that “the school would increase the human capital of its students.” The study finds that, under private equity ownership, the opposite occurs.[13]

A buyout of an education group that did not end well is that of Education Management Corporation (EDMC). In June 2006, at the peak of the credit bubble, Goldman Sachs, Leeds Equity and Providence Equity (refer to Part I to learn about the ill-fated LBO of Dutch childcare provider Estro) took EDMC private in a $3.4 billion transaction. The target served 70,000 students across 70 institutions, including Argosy University, Brown Mackie College, South University, and Western State University College of Law. Eighty percent of the group’s funds came from the US government and other federal departments, including the Veterans Administration.

Fresh capital was used to grow online enrollment aggressively, bringing in tens of thousands of new students. EDMC was relisted in September 2009, raising $330 million. Due to the Great Recession and federal restrictions on loan programs, EDMC’s enrollment declined between 2011 and the end of 2012.[14]The decrease in enrollment was partly due to a combination of increased tuition and questions surrounding the quality of the degrees delivered.

The tuition freeze in 2013 did not halt the attrition. Management spent the following three years divesting and closing dozens of campuses as its stock collapsed 99.9%. Unable to turn its fortune around, in June 2018, the group filed for bankruptcy, subsequently liquidating its assets.

It took nine years for EDMC to go bust after its buyout experience. As is customary, the private equity owners would argue that its ultimate demise had nothing to do with the $2 billion in LBO loans EDMC was carrying on its books when it relisted in 2009.[15]

One potential consequence of such value-intensifying approach in education is that top-tier professors refuse to teach at penny-pinching institutions, therefore reinforcing the gap in quality between elite institutions (that do not need private equity backing thanks to huge endowment funds, incidentally supported by many alumni working in private equity) and other universities.

In the US college system, the social contract has long been broken. Research has shown that, even when the likes of TPG’s Bill McGlashan do not try to rig the recruitment process, prestigious universities give preference to the offspring of alumni. But by reducing the content and quality of teaching to the masses, private equity fund managers are institutionalizing social inequity.

Fund Managers Turned Medicine Men

The global financial crisis hurt traditional banking and led to a surge in demand for newcomers like fintech platforms. Similarly, the Covid-19 pandemic is expected to feed the recent craze for impact investing. Fund managers are good at identifying new founts of fees by grabbing the latest thematic trend.

But anyone with a basic understanding of the private equity model can see why businesses with a social purpose are not appropriate buyout targets. Private equity practitioners aim to turbocharge cash flows in a tight time frame to meet debt requirements, make dividend payouts and boost investors’ internal rate of return (IRR).

Contrast this with the tacit objective of a medical, incarceration or education institution: to provide sustained and personalized support over several years, sometimes even a lifetime for chronic illnesses or some jail sentences.

Naturally, from the point of view of private equity owners, the benefits that can be derived from exploiting such a ‘captive audience’ – quite literally in the case of prisoners – are obvious. When people require hospitalization, are inside for a long period, or prepare a university degree, they can be taken exploited.

Impact investing still accounts for a tiny portion – tens of billions of dollars at most – of private markets’ $6 trillion assets under management. Due to the unprecedented level of dry powder, regulated and fragmented public sectors are expected to represent an increasing deal flow. Yet, there is a risk that private equity groups – with a lacklustre history in corporate governance matters, including gender and racial diversity – will only pay lip service to this mega trend as an image-making ploy to attract investors.

Most of them fail to appreciate that, as owners and board members of social institutions, they hold a custodial responsibility for the well-being of vulnerable citizens. This is a role few fund managers are trained or suited for.

Their overriding credo is to protect the interest of institutional investors. In August 2019, Blackstone’s Stephen Schwarzman, a member of America’s Business Roundtable, refused to sign a charter calling for an end to the shareholder-led model of capitalism.[16]PE firms follow a transactional philosophy for which nothing is permanent. It is a wholly inappropriate ethos in the context of responsible investing, where economic fairness must prevail.

The Need For Adult Supervision

Laissez-faireism has prevailed for the last 40 years. Stakeholder capitalism and impact investing are meant to reset our economic model by combining financial returns with a social and ethical purpose.

One way for governments to prevent tearaway practices from turning America into a downwardly mobile society is to monitor social institutions the way they do public utilities. In many countries, utility bills are capped or curbed to make sure people can heat and light their homes at affordable rates. Medical bills and tuition fees ought to be likewise regulated. Otherwise the middle class will continue to run down its savings or get in hock to help PE-backed hospitals and colleges repay expensive loans.

The second vital ingredient to a reliable and honest investment strategy is the introduction of rigorous, independently verifiable reporting standards, something that private equity, due to its obsession for secrecy and cavalier code of governance, has repeatedly refused to apply. Fund managers have a strong preference for devising their own bespoke performance indicators. This loose approach clearly does not work in the context of social services.

Perhaps for that reason, KKR and TPG recently agreed to report on the environmental, social and governance (ESG) impacts of their investments and to have their analysis reviewed by independent assessors.[17]Still, according to Global Impact Investing Network, two-thirds of impact investors only measure the positive effects of their management policies, thereby ignoring the negative outcomes.[18]There is room for improvement.

Again, one way to nudge the behavior of fund managers is to persuade their capital providers to act. In 2018, campaigners demanded that pension funds withhold commitments from KKR, one of the firms behind the failed buyout of Toys “R” Us. KKR, alongside its deal associate Bain Capital, eventually offered $20 million in compensation for former Toys “R” Us employees. Last year, similar pressure was exercised on institutions with stakes in private prisons in the wake of president Trump’s decision to split up migrant families.[19]

What part will impact investing play in the overall strategy of private equity groups? When energy giants announce their intention to shift towards renewables, their ultimate intention is to replace fossil fuel. What is the point of allocating a tiny proportion of assets towards responsible investing if the majority of a portfolio applies mercenary and predatory practices like sale-leasebacks, dividend recaps and cost-cutting irrespective of externalities? Is impact investing simply self-serving tokenism to give private equity a respectable image?

When TPG raises $2 billion for its Rise Fund II without adopting similarly laudable values to the rest of its $110 billion under management, is it green washing? If fund managers primarily seek market-rate returns rather than positive and measurable social impact, their preferred acronym will remain IRR, not ESG.


[2]The Atlantic, 12 September 2019;; Forbes, 1 October 2019;; Financial Times, 14 October 2019

[3]The Nation, 30 April 2019;




[7]Forbes, 27 July 2019;

[8]Forbes, 27 July 2019



[11]The Nation, 30 April 2019;


[13]When Investor Incentives and Consumer Interests Diverge:Private Equity in Higher Education, by Charlie Eaton, Sabrina Howell, Constantine Yannelis, April 4, 2019




[17]Financial Times, 3 January 2020

[18]Global Impact Investing Network, The State of Impact Measurement and Management Practice, 2017 Survey

[19], PE firms pushed to offload prison company investments, Financial Times, 10 February 2019


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