When private equity owns Main Street

A "Buy Local" sign on Main Street in Livingston, Montana in 2020. (William Campbell/Corbis via Getty Images) Private equity firms are buying up more local small businesses, from dentists to pest control companies to veterinarians. What does this mean for consumers?

Steven Kaplan , professor of Entrepreneurship and Finance at the University of Chicago’s Booth School of Business. Faculty director at the Polsky Center for Entrepreneurship and Innovation, also at UChicago.

Brendan Ballou , former federal prosecutor. Served as special counsel for private equity in the Justice Department's Antitrust Division from 2020 to 2025. Author of the book “Plunder: Private Equity’s Plan to Pillage America.”

Also Featured David Bisaillon , entrepreneur who sold his pest control business to private equity in 2025.

Transcript of Full Broadcast The version of our broadcast available at the top of this page and via podcast apps is a condensed version of the full show. You can listen to the full, unedited broadcast here:

Part I

MEGHNA CHAKRABARTI: David Bisaillon knows a lot about what he calls the big four.

DAVID BISAILLON: Ants, bees, rodents, and rats. Anybody in the pest control industry could build a business around those four pests. For us in Connecticut, because it's very rural, we spent a lot of time doing carpenter ant control and mouse control.

CHAKRABARTI: David started his pest control business in 1999 in Watertown, Connecticut.

BISAILLON: Had no customers, an old truck, a spray can, and a lot more ambition than I had brains to realize that this was crazy because I was already married. We already had a child. Took as many credit cards out as I had at the time. I had $2,000 in the bank.

My wife was a daycare teacher, not making all that much money, but we made it work.

CHAKRABARTI: He named his business EnviroCare, and at first, it was just David and his truck, but it grew from there.

BISAILLON: I added about an employee a year because I ended up with 22 routes and 25 employees. So 22 separate routes that had 250 to 350 customers on it.

CHAKRABARTI: David charged his customers between $175 and $225 an hour for pest control services. His employees made between $45,000 and $65,000 a year. And after the business grew and became more successful, David himself wound up making somewhere in the middle six figures, though he didn't want to give us the exact numbers.

Then, David says, the calls from the private equity firms started. I get calls every year.

BISAILLON: I would get calls and postcards every year. Simply because when you become one of the larger players on the block, fact of the matter is they want me gone. It can be the private equity company itself or one of the national companies that sends postcards, one of the manager of one of the branches, "Hey, when are you going to get ready to sell?"

When you become one of the larger players on the block, fact of the matter is [private equity firms] want me gone.

David Bisaillon

But a lot of it's the brokers. There's a lot of brokers in the pest control industry.

CHAKRABARTI: David says he was reluctant to sell at first, but then after running the company for 26 years, he eventually changed his mind.

BISAILLON: Some of it had to do with private equity. They've been very active in the pest control industry because it's a very desirable industry built around relationships and recurring revenue.

And I kinda just did a rough math and said, "Okay, I'm 58 years old. If I stay another however many years, what am I actually going to accomplish? I'm pretty healthy guy, but who knows?" I figured it wouldn't hurt to see what the business would bring.

CHAKRABARTI: David got three offers to buy EnviroCare Pest Control.

BISAILLON: The first offer, they were going to be using me as a platform company, where the name survives, and they continue to do acquisitions underneath that company. With the company that we ultimately chose, the company was separated into its pieces.

CHAKRABARTI: David didn't wanna tell us exactly how much he sold the business for, but he did confirm it was multiple millions of dollars.

The final sale went through on October 6th, 2025. So EnviroCare Pest Control doesn't exist anymore. It's now called Modern Pest Services, which is owned by Anticimex, one of the largest pest control companies in the world, which in turn is owned by EQT, a global private equity firm that has more than $400 billion in assets under management.

BISAILLON: It takes you by surprise when your lifelong dream just goes away in the stroke of a pen. Listen, this is what happens with private equity, unfortunately, is the company gets broken up into its parts . I made sure that all my employees had jobs. Whether they kept those jobs and stayed is entirely up to them.

What happens with private equity, unfortunately, is the company gets broken up into its parts.

David Bisaillon

But your customers, the name EnviroCare disappears. It is a little disconcerting at first, believing, your whole life as an entrepreneur is tied to this thing that I created, and all of a sudden it's gone, and you got your payout, and you're happy about it. But it was difficult to see that because the name no longer exists.

CHAKRABARTI: That doesn't mean, though, that David regrets the sale, and we will hear more from him a little later on. His situation, though, is far from unusual. Private equity companies have been buying up small local businesses, from pest control companies like David's to dentists, coffee shops, veterinarians, and more.

So why is this? Why does it seem like a lot more of this is happening, and what impact does it have on the consumers who rely on those small local businesses? Let's start with Steven Kaplan. He's a professor of entrepreneurship and finance at the University of Chicago's Booth School of Business, where he's also the faculty director at the Polsky Center for Entrepreneurship and Innovation, and he joins us from Chicago.

Professor Kaplan, welcome to On Point.

STEVEN KAPLAN: Thank you. Hi there. It's all well and good for us to be, for our attention to be turned to an issue because we're anecdotally hearing that something's going on. There may be a trend afoot. But I'm wondering if there's actual data out there. We had a hard time pinpointing it, so help me out, Professor Kaplan.

Do we know how much or how many small businesses in America have been purchased by private equity firms?

KAPLAN: So the explicit data are very hard to find because they're small and there are a lot of them. I think it is fair to say it has increased. I'll give you a good example of this, which is a program that we have and many business schools now have, which is called Entrepreneurship Through Acquisition.

And our students graduate, and then they go look for businesses like David's to buy, and those businesses, when they buy them, they are usually backed by some form of private equity. It might be formal, it might be informal. And it has been a real trend over the last, I'd say, 10 years. It's increased, with us, and I think at a lot of other schools.

And then in addition to that, you have there's definitely money in private equity, and it's called lower middle market. It's smaller deals, although the pesticide was a bigger one, where they will look for companies to buy, like David's. They will usually put them together with others to make them bigger, and there are pluses and minuses to that.

And so it is, I would say it is a trend.

CHAKRABARTI: Okay, it's a trend. Can we say, I don't know, 5%, 10% of small, of businesses or is there a chunk of the overall economy we can put on this?

KAPLAN: I can tell you, the overall economy I can tell you. So this is not just small business, it's not big business. I would say it's probably on the order of 10%.

... It's a real chunk of the U.S. economy is owned by private equity, and you've got the very large, you've got some very large companies, you've got middle market companies, and we've got smaller companies.

A real chunk of the U.S. economy is owned by private equity.

Steven Kaplan

CHAKRABARTI: Okay, great. So that's not an insignificant number.

KAPLAN: It is not.

CHAKRABARTI: I promise not to get too distracted by small things that you say, Professor. But this is really interesting to me. And in full disclosure I got an MBA from Boston University here. It's actually turned out to be one of the most useful degrees I have. And simultaneously, it left me a little bit skeptical about some of the things that business schools teach.

So forgive me for asking this, but you mentioned about entrepreneurship through acquisition being a very popular path at Chicago and other schools. Where is the entrepreneurship in just going out and acquiring companies?

KAPLAN: So that's a great question. I'm glad you enjoyed your MBA or found it useful.

So here's what they do. There are a lot of people like David who are late 50s, early 60s. Their kids aren't gonna run the business, and they wanna sell, but they don't really wanna sell to private equity directly. They wanna keep the company going, and they wanna work with it. So I'm not sure if David considered this, but the students will go out, and they're, like, say, 30-ish, and they will say, "Look, I'm gonna run the company, but I want you to help me run it with me."

And so you get the continuity that David regretted, and it's entrepreneurial in that the student is going in and he or she has to run a business, right? And running a business, a small business, that's entrepreneurship. And what they hope to do and I've seen them have some success doing this, is they bring some of the things they've learned in the MBA program where they can do some things better than the Davids of this world have been doing and try to improve the company.

And if they can, that's a win-win-win, because they do well. Usually, the Davids of this world keep some ownership in the company, and so they do well when it grows afterward. And so that's how it is entrepreneurship, and it's actually a good thing, and we've encouraged our students to do it.

So I've always thought that private equity, my experience in the news of private equity harkens back to the days of the big PE firms buying up major U.S. corporations, right? Distressed ones. I'm thinking of Toys "R" Us, right? Or Sears and Payless, where in retail, the advantage or the attractiveness of a place like Sears was the brand but also the real estate that they had.

What is the attractiveness of small local businesses? Because those aren't easy, they're not easy to run, and so many small business owners will tell you that their margins are razor thin. So for a group of investors to come in and say, "Aha, we see the potential for higher returns here," at first, Professor Kaplan, it actually seems counterintuitive to me.

KAPLAN: A few things. I'm gonna start with, first of all, the private equity firms, unlike I think what they did 20, 30 years ago, are much more focused on value creation, which means improving the business. And almost all of them now have some ... they don't just have the deal partners, the financial engineers, they also have operating people with operating experience usually in the industry that they're buying, who they have levers that they use to improve the business.

Private equity firms ... are much more focused on value creation, which means improving the business.

Steven Kaplan

So that's one. They're looking, they're not looking to gut the businesses. This is a misconception.

CHAKRABARTI: No asset stripping here, right?

KAPLAN: If you gut your businesses and you make customers unhappy, you can't sell it. That is the challenge here, and it's a tricky thing, 'cause, I think you have the example they raised prices.

You can raise prices a little, but if you raise them too much, you're gonna lose your customers. You've gotta keep your customers happy. You've gotta figure out ways to run the business better. And I think with these small businesses ... like David's, there are some opportunities to put in one set of systems.

So you put in one IT system. It may be better than he has, and then you use that across your portfolio of small businesses, and you make the business more productive. You let the owner focus a little bit more on sales, rather than having to deal with the back office. So those would be good examples, and it's not perfect, right?

You have wins and losses. And there you go.

Part II

CHAKRABARTI: Today we're talking about the growing number of small businesses, local small businesses, that are now being owned by private equity firms, and the impact that's having on the businesses, on the customers, on sort of the shape of Main Street, let's call it that.

Steven Kaplan joins us today. He's professor of entrepreneurship and finance at the University of Chicago's Booth School of Business. And last week, I let you all know, On Point listeners, that we were gonna be talking about this, and I asked you if private equity has bought any small businesses where you live, and what, if any, changes you've noticed as a result, and many of you have. Maybe it's your local HVAC company, like listener Anne in Troy, Michigan.

ANNE: Worked with the same heating and cooling company for years and years, reliable, knew them personally, and then they sold. Tony sold to a private equity firm. We did not know it was private equity at the time. Went ahead and bought a furnace from them, had it installed. Within 13 months, the furnace broke.

The guy claimed that he replaced the part or fixed the part. Two months later, in single-digit cold, the furnace broke again, and when I went to go get an emergency response appointment, they did not have them. They did not offer them. It was an automated system where I was just plugged into a calendar, and I was 72 hours out from getting my furnace fixed.

CHAKRABARTI: Or your local veterinarian, like Sarah in Cape Elizabeth, Maine.

SARAH: I recently got an estimate for my dog to go to our local veterinary clinic. It was $475 for an annual exam with vaccines and heartworm testing. I was so shocked by that. I just feel like the clinic has this new pricing that now reflects these financial objectives of the private equity. I really don't think most people in my area realize how much they're overpaying.

The clinic has this new pricing that now reflects these financial objectives of the private equity.

Sarah, On Point listener

CHAKRABARTI: Chet in Fairfield, Iowa, says his dentist's office was bought by private equity.

CHET: The effect on the quality of care has just been incredible. It's so systematized so that there's incredible efficiency. You can just see that working out, and zero care, almost resentment at the individuality of their patients.

CHAKRABARTI: Even pickleball isn't immune, according to listener David in Los Angeles, who runs a social sports and events company.

DAVID: All of a sudden, all of the pickleball courts in Los Angeles were already reserved. We could not find a single court that was available to run our pickleball league. And we found that it was a private equity-backed company called Volo that came in and bought up all of our competitors, threw a tremendous amount of money into their marketing, and just started booking all the courts.

And meanwhile, they couldn't even fill their leagues, and so now there's all these unused courts.

CHAKRABARTI: And here's one more. This is Patrick, who owns a restaurant in Seattle, Washington, and he says the Seattle food scene used to be a big, quote, "support local business" kind of place, but he feels that's changing.

PATRICK: There seems to be this warm hug that corporate and private equity food giants receive that locals don't. The hours people have spent in line waiting for a mediocre chicken tender is beyond me. But I think where private equity and corporations win is sameness. They've erased individuality and somehow got us to participate in a sci-fi hive mind experiment.

Where private equity and corporations win is sameness. They've erased individuality and somehow got us to participate in a sci-fi hive mind experiment.

Patrick, On Point listener

CHAKRABARTI: Those are some On Point listeners sharing their observations about private equity and small businesses in their communities. Professor Kaplan, I will acknowledge that when we solicit thoughts from listeners, it is a completely unscientific process, so I'm not saying this is representative. But on the other hand, the specificity with which listeners told us about their businesses that they've known for decades, the people who worked in them, the quality of the service.

I didn't actually, we didn't hear anyone running to us and say, actually, the service has gotten better under private equity ownership, which you implied was one of the goals with these groups or young entrepreneurs coming out trying to buy up these smaller businesses.

Your thoughts?

KAPLAN: My thoughts on this are, in every example you gave, the private equity firm is not gonna do well. If your furnace is bad and that company is not delivering service, she's gonna go somewhere else, and they are not gonna be able to make money because they're gonna lose customers.

The vet's trickier. I, you know, have a dog. I have a vet who's not private equity and they raised prices on me too, because I think there's just huge demand for vets, and so that's a trickier one. But if there are vets who are cheaper, they're going to get the business and the PE's going to lose.

The dentist, if the care is bad, people are going to go elsewhere. And restaurants, the market is speaking. People go to the chains for some business, and the chains are much more efficient. And ... if the food is bad, people are not going to go. So in all the examples you gave the private equity firms or the investments are not going to be good, and we know that on average, the investments are actually reasonably good, and that's also, you see this more generally when people pick out private equity deals, you mentioned Toys "R" Us they pick the losers that are very visible and they ignore the winners.

And I can give you a lot of examples of winners anytime you would like me to stop.

CHAKRABARTI: Winners for whom, though?

KAPLAN: Okay, so there's a very nice paper a couple years ago on in vitro fertilization clinics, and she looked, the authors looked at this, and what they found is when private equity bought IVF clinics the number of patients went up by 27%, and the success rates, meaning pregnancies that were successful, went up 14%.

So I suspect there that there were a lot of happy parents, and there were a lot of children who wouldn't be here otherwise. And that's a very well-documented study. So I can give you other examples like that if you'd like. There's a very nice one, not mom-and-pop, but this has affected everybody.

That in the COVID crisis, two of the very big suppliers, one to Moderna and one to Pfizer, were private equity-funded companies that the private equity firms had basically reconfigured to become suppliers for mRNA.

One is called Aldevron, ironically enough funded by EQT. And one of them was Maravai LifeSciences, and both of those were really changed by the PE firms, and part of the reason you got your COVID vaccine as quickly as you did was because of private equity, but you never read about that.

Part of the reason you got your COVID vaccine as quickly as you did was because of private equity, but you never read about that.

Steven Kaplan

CHAKRABARTI: Yeah. Yeah, fair enough. Okay let me bring Brendan Ballou into the conversation. He's a former federal prosecutor and founder of the Public Integrity Project. That is an anti-corruption law firm. ... He served as special counsel for private equity in the Justice Department's Antitrust Division from 2020 to 2025, and he's author of Plunder: Private Equity's Plan to Pillage America.

Brendan, welcome to On Point.

BRENDAN BALLOU: Thanks so much for having me.

CHAKRABARTI: So you just heard Steven Kaplan describe some winners, as he said, but mutual winners when private equity came in and bought businesses. It wasn't just the increased returns for the PE investors, but also on the customer side. I take it that you have a different view of the effect of private equity on business.

BALLOU: I do. And I should say, I've read Professor Kaplan's work for years and admire it, and I think to the extent that we're approaching this or have slightly different opinions, it's probably just our different backgrounds. He's approaching this from an economics background. I'm approaching it as a lawyer.

I think we just have slightly different lenses here.

CHAKRABARTI: ... We're not trying to set up, like, a PE antitrust cage fight here.

(LAUGHS)

BALLOU: No. We like each other too much. But let me just try to explain my perspective on why I think systematically from a legal perspective, we often have such bad consequences for private equity acquisitions.

The first is that these acquisitions are usually financed with a lot of debt that the acquired company ironically has to pay, not the private equity firm. While the private equity firm gets to extract a lot of fees from the company while it's owning it. At the same time, the private equity firm is insulated from liability for the consequences of its actions.

So if something goes wrong at that IVF clinic, if something goes wrong at a private equity-owned nursing home, it's very easy to hold the clinic responsible or the nursing home responsible. It's very hard to hold the private equity firm responsible, even if they have effective operational control over that business.

It's very hard to hold the private equity firm responsible, even if they have effective operational control over that business.

Brendan Ballou

And I think the last reason that we often see bad consequences is because private equity firms often, not always, but often have a very short-term investment horizon. So they want to turn a profit for a business in five years, four years, two years. And so what that inclines them to are generally cost-cutting strategies, trying to increase profit by cutting costs really quickly.

And it's very easy to quantify the benefits of short-term cost savings, very hard to quantify the long-term harms. And so the challenges that these cost-cutting tactics create for the business aren't always accounted for in the follow-on sale price of the business. And so that's what I'm get --

CHAKRABARTI: Brendan, can I just jump in here for a second, please? ... Because what you just said about having a shorter investment horizon and trying to achieve the desired returns within the, let's say, five years, as you said involves a lot of cost-cutting. To be clear, that's a tactic that seems familiar from a decade ago when we were talking about PE buying large companies.

Are you saying that the same sort of the same strategy is being put into play with these smaller local businesses that are being purchased?

BALLOU: Obviously, the answer is it depends, but I can say the businesses that I've talked to and worked with, that typically is the strategy that we're seeing.

Generally, what happens with small business acquisitions are what are called roll-ups. So you buy all the veterinary clinics in Washington, D.C. You buy all the OB-GYN clinics, or as many as you can get, in Edison, New Jersey, or whatever it happens to be, and then you try to achieve some efficiencies of scale.

Maybe you can negotiate better rates with your suppliers and so forth. But once you have market power in these communities, you also have the ability to raise prices and to lower pay for workers. Because veterinarians now have fewer places that they can go to if they don't like working in a place.

Same with OB-GYNs and so forth. And so oftentimes what I see is the front line of folks that are affected by cost-cutting are really the employees.

What I see is the front line of folks that are affected by cost-cutting are really the employees.

Brendan Ballou

CHAKRABARTI: Okay. We're gonna come to that in just a second, but Professor Kaplan, I wanted to give you a chance to respond to what Brendan was saying there.

KAPLAN: I'll say two things. I think the roll-ups and if you're getting monopoly power, I think that's a real concern, and I think there's some evidence in some places, anesthesia roll-ups, I think there's some evidence in Texas. Yeah, you clearly want to look at that.

And that's not great. On the other hand, I take issue with the short term and the five to seven years. Their horizons do tend to be five to seven years, and that's a long time. In this day and age, that's an eternity. And when they're private, they really do have time to try to grow the business.

And the empirical evidence on the buyouts of private companies, when you look across all of them, or all of them you can find information on, is that employment goes up 15% relative to other companies. So there's a paper using census data that finds this. There's a more recent paper using LinkedIn data that finds this.

So I think on the large samples, there's actually good things happening in the sense that they're trying to grow these businesses. Because as I said before, if you are cutting costs and making customers unhappy, your revenues are not going up, and the thing that gets buyers most excited is not cost-cutting.

Buyers of these businesses are excited by growing businesses. So you have to have ... the best thing you can do as a private equity investor is have happy customers, and they are really focused on that. This is the thing that has changed in the last 10, 15 years, and a lot of the examples in his book are longer ago than that it's really changed.

And again, there are negatives and positives, because you have more than 10,000 deals out there, so you're always gonna find negatives. But the positives, at least in the large data, outweigh the negatives, and for good reason.

CHAKRABARTI: Let me just say that since we all agreed at the beginning of the show that it was hard to find clear data sets on the the small local business side of PE acquisition, I'm gonna say that our inability to disaggregate small purchases from medium or large sized companies that are being bought by private equity is gonna be a continuous problem in this conversation, right?

Because we're lumping it all together. And Brendan, let me just put this back to you because when we're talking about small local businesses, in many communities and not just rural communities, even just neighborhoods in cities, we're talking about businesses that might be the only business doing that particular thing.

The only sort of reasonably located pest control service or local hardware store, things like that. So it's not that you have to buy up all of them in a city. You only need to buy up maybe a few in a neighborhood, and you have essentially what is a hyperlocal monopoly, don't you?

BALLOU: Exactly.

And let me again give my perspective as a lawyer here. So what you have are with these smaller roll-ups, you can often achieve market power by buying just a few businesses, or in your example, potentially just one business. And as a practicing lawyer, one of the challenges that you have is actually prosecuting those sorts of roll-ups or potential monopolization cases, is they're really expensive to do.

You need to hire a number of expert witnesses to define a product market and a geographic market. So ironically, it can be just as expensive to challenge the roll-up of HVAC businesses in a single county as it would be to challenge the merger of Facebook and Google. As a result, I think federal and state enforcers very rarely go after these businesses.

Steve made a great point, which is there was this great case from the FTC under the Biden administration for anesthesiologists in Texas and Colorado. There was a consent decree for veterinarians as well. But these cases are incredibly hard to pursue, even though the everyday effects on them are probably greater than some of those big mega mergers for most people.

CHAKRABARTI: So before we take our next break here, which will be in about a minute, Steven Kaplan, there's something else that you've said a couple times which is really important, that we have a generation of entrepreneurial baby boomers who started their businesses when they were in their 20s.

They've maybe been working that small business for now, what, 40 years or so, and they're ready to hand it over, and there may be no one to hand it over to. I'm seeing some reports that say that a quarter of American small businesses are owned by people now who are 65 or older, and they're looking to retirement, which means more than a million small businesses might be up for sale by 2035, and if there's no one to inherit those businesses, maybe it's just a totally natural thing for outside investors like PE companies to come in and say we'll do it."

KAPLAN: Absolutely, and this is where private equity has come in and where, why you've seen the boom in entrepreneurship through acquisition interest at business schools because there are a lot of these people, and there are going to be more in the next few years.

Part III

CHAKRABARTI: I promised we would hear more from David Bisaillon. He is the former owner of EnviroCare Pest Control in Connecticut. He sold to private equity, and he says that when he ran EnviroCare, his company’s culture really mattered.

BISAILLON: I think that family environment gets thrown around, but if you go look us up, we’re still on the internet. That dog that you see, my dog Tasha, she came to the office every day since she was eight weeks old. My wife would cook for meetings. There is something to that. My wife managed my office, had a couch in her office. They would come in for what seemed like psychotherapy lessons, some of these kids.

CHAKRABARTI: And when he sold to the private equity company EQT, David said it was very important to him to make sure there would still be jobs for his 25 employees. But since last year’s sale, 19 of those employees have left the company. Only six have stayed on with the new ownership.

BISAILLON: The six that are there are thriving. I had a 20-year employee that is now a manager, and he’s absolutely thriving. The ones that didn’t make it, there’s a difference between working for EnviroCare Pest Control, total staff of 28, versus a large national company.

There are certain things that I would tolerate that a large company is just not going to tolerate it. They had to assimilate into a larger entity. As much as you hate to say this, it’s about money. You have to produce.

CHAKRABARTI: David acknowledges the kind of “family environment” that EnviroCare had is gone now. But overall, he does not regret selling his company, and he doesn’t think private equity deserves a blanket bad reputation.

BISAILLON: They’re rewarding somebody, meaning the owner of the company, for their hard work. Bad actors aside, I don’t think private equity is the boogeyman.

But many of the people that complain about private equity, alls they know, they see stock prices, and, “Oh, it’s all about money.” And, okay, so let’s cut your salary if it’s not all about money. It’s not solely for the love of the game. If it’s a job, that’s part of it, but it’s not all of it.

CHAKRABARTI: So Brendan, I have to say that looking at a small business as a balance sheet, you can absolutely see both negative and positive outcomes from private equity ownership. I’m quite convinced by the examples that Professor Kaplan brought along.

But the thing about small local businesses is that to the community, they’re not just balance sheets, right? When you have long-term founder ownership, you have a company that, as David described, is actually really invested in the well-being and goodwill of the community that it serves.

I cannot tell you how many small business owners I know who are actively, they’re raising funds for charities, or they’re sponsoring Little League teams, or they are picking up the phone. A human being is picking up the phone 24 hours a day so that when someone’s HVAC system dies on a two-degree Minnesota day, there will be someone out there to help fix it immediately. Whereas now we’re hearing people say, “All I get is the endless, automated phone answering machine system, and I can’t actually get a human on the line.” There is something about what the business was worth to the community that does seem to be getting lost.

BALLOU: Yeah. So I think there are two issues here.

One is, one of the great things about small business owners is that the wealth of the business typically stays in the community. When private equity firms buy up these businesses, suddenly the wealth of that business, the profits that it’s making, are getting distributed to the private equity firm and the pension funds and the sovereign wealth funds that tend to be its co-investors. So money that might have been staying in Waltham is now going to New York or Stockholm or Dubai or whatever it happens to be.

But I think there’s also a second issue here, which is, every business wants to make money, and I think sometimes private equity is criticized as being more greedy than other businesses. I don’t think that’s accurate, or I don’t think that’s the right critique. I think the problem is really a legal one in how we structure these deals, in particular by financing them with debt that the acquired business has to pay, and the fact that private equity firms are able to extract so many fees from the businesses while they own it, or what are called dividend recapitalizations, so borrowing money to pay a profit to the private equity firm.

Private equity firms only get a portion of the profit of the business that they buy, but they get all of the fees. And so ironically, private equity firms are often incentivized to extract money from businesses even if it hurts the long-term profitability of that business. That’s not an economic problem. That’s just a legal problem on how we structure these deals right now.

CHAKRABARTI: Professor Kaplan, I’m gonna come to you in a second, but Brendan, I’d like to push back on what you just said for a moment. From, and I’m speaking from here completely from the POV of a customer, right? I take your point about maybe it’s not just an economic problem, it’s a legal one, but I’m also talking about a cultural problem here, right?

Because when a small business stays locally owned, it’s not just that the money stays local, it’s that the accountability for how that business is run is also stays local. You can go to the person’s house maybe, if they’ve been around for a long time, that owns the business and say, “Hey, why’d you jack up the cost of this hammer by 25%?” And at least that person can explain it to you.

But I think that sense of local investment and local connection, that really is one of the things that keeps people coming back to a business over and over again, gets lost immediately because there’s no longer an accountability mechanism. So it, again, it’s, I think it’s more than just about something that’s purely a legal problem.

BALLOU: You’re exactly right that you have both an accountability issue and you have an expertise issue. One of the challenges that we have, and again, legally we’re returning to the structures that we had in the 1890s and the 1900s, where the finance industry had an increasing role in the operational part of our economy. And finance people know a lot of things. What they typically don’t know a lot about is pest control and HVAC work.

And so oftentimes what we’re seeing is when businesses fail under private equity ownership, sometimes it’s because of the misaligned incentives that I was just talking about. Sometimes it’s a simple matter of expertise about is this an industry that you actually know about? Is it an industry that you plan to stay in for 10 years, for 20 years, for your entire career? I think David Bisaillon, that was his career. That was his expertise. I don’t know if that’s EQT’s expertise.

CHAKRABARTI: Steven Kaplan, go ahead.

KAPLAN: Okay, there were a lot of things said there that I will disagree with or recap. First of all, on what David said, if you listen, six of his employees are thriving, and these, if you read between the lines, are the employees who were the most competent And so they’re still there, so they’re not gone. And the 19 who left, he said they had some issues. My guess is they hired people to replace them.

So as I said, employment usually goes up in these private-to-private deals, and my guess is the people they hired are doing a better job. If his employees are thriving, he didn’t say there was a failure. He implied the business is doing well, and there is expertise still there. So I’ll push back on Brendan. The six employees are still there who are thriving. They have the expertise they learned under David.

So that’s one. Two, again, if you have — I keep saying if you have unhappy customers in pest control, there are other providers. They’re gonna lose business, so they’ve got to have happy customers. And then the last thing I want to say on the fees that they take out of the companies just going to the PE firms that’s not true any longer. It was true 10, 20 years ago. Now those fees, if they take those fees out, there’s something called a fee offset. It goes to the limited partners, to the investors, not to the private equity firms.

So their incentive to do this is much less than it used to be. And then finally, on the debt side most of these deals now are funded with 50% debt and 50% equity, so it’s not the days of the, the 1980s. They were, like, 90 or 95% debt. Now they’re 50/50. And, your house is more leveraged than that, right? Your house is 80% when you buy it. These are 50/50. So it’s not this high leverage thing that it used to be. There’s leverage and so some of these companies, it does cause financial distress at some point, but it’s a small number these days. And it’s just not starting out at these, these hugely highly leveraged that they used to be.

Brendan, I'm gonna let you respond here in a second. But Professor Kaplan, when you say that customers can just go elsewhere, again, I only have anecdotal evidence, but it seems to be growing that you can't just go elsewhere. And in fact, I'll give you my N equals one.

KAPLAN: ... Very reasonable.

CHAKRABARTI: Here's my N equals one, being me. Okay? In my neighborhood, there are within, easy travel distance, there are three veterinarians. They are all owned by private equity firms now. This just happened in five years, okay? All of them. All of them. I think they're owned by two different PE firms. But the prices went up on all of them. If I wanted to go somewhere else, it would now be, like, I'd have to get in the car and drive for 25 minutes, half an hour, if not more, and I'm still not sure I'd find a business that's not owned by private equity.

So I don't think it, we can just say that the magic of the market is going to be, is gonna guarantee that the service received by customers and the prices customers paying, are paying will be both good and fair. I just don't think we can say that with total confidence.

KAPLAN: No, that's fair enough. And again, you should get entry.

You could go, I go 40 minutes to my vet I love my dog.

CHAKRABARTI: Hey, man, I love my dog too. I keep telling everyone he's my favorite child.

KAPLAN: (LAUGHS) Me too. But no, I think, and again I acknowledge that, with what Brendan said about the anesthesia, and that's a concern.

And my view on this is that there's a lot of positives, there are some negatives. On balance it's been positive, but that's the way the world works.

CHAKRABARTI: Brendan, go ahead, jump in here.

BALLOU: I think the challenge that we've got is the basic incentives of private equity firms have not changed.

The basic structure that we have that encourages short-term thinking, that encourages reliance on debt, that encourages extraction of fees haven't changed. We can debate with anecdotes. I was just in a case a couple weeks ago, in fact, where the fees that Professor Kaplan was saying have gone away were the issue and still are going on.

I would say, but I think abstracting for a little bit, as long as private equity has existed, it has been rebranding itself precisely because of the bad consequences that it has in small and medium-sized businesses. It didn't used to be called private equity. It used to be called leverage buyouts.

As long as private equity has existed, it has been rebranding itself.

Brendan Ballou

Now, leverage buyouts became unpopular, so they rebranded as private equity. Now private equity's unpopular, and so they're rebranding themselves as alternative asset managers. But the basic structure remains the same because the laws around them have remained the same. And so until we either beef up enforcement around antitrust laws, change how we interpret ERISA, our retirement statute, change our state corporate liability laws, we are going to keep inventing private equity under a new name.

CHAKRABARTI: So clarify something. Beefing up antitrust regulation or laws, that makes sense, but the second one about retirement, how does that factor in here?

BALLOU: Yeah, so the entire private equity industry, at least in its modern form, can be dated back to the 1970s when ERISA, which is the federal retirement statute, was reinterpreted to allow pension funds to invest in riskier assets.

And so that's what pushed all of those pension funds to start funding private equity, which is really what created the modern version of the industry.

CHAKRABARTI: Okay. And then the third one that you mentioned was, oh, liability. Explain that to me more, because my understanding was, okay, a small local business owner is probably not a direct owner anymore.

It's got at least LLC as the business entity, so the liability question, clarify.

BALLOU: So let me give you a real-world example. Private equity firms have been enormously invested in nursing homes for the past couple of years. Carlyle bought up one of the larger nursing home chains, slashed staffing, extracted a lot of fees, sold the underlying real estate and leased it back to the company.

A lot of the sort of similar playbook that we've been talking about and that I've been critiquing. Ultimately, at least one resident died there, allegedly because of that understaffing. She slipped and fell, hit her head on a bathroom fixture, died of subdural hematoma. Unfortunately, the family sued for wrongful death.

They were able to sue the nursing home, but the case against Carlyle, against the private equity firm, was dismissed because Carlyle, the court said, was not the technical owner of the nursing home chain. And so this is just an area where the law hasn't caught up to the reality of where business is.

Private equity firms have operational control over the businesses they buy, but because of how they are structured legally, it's very hard to hold them responsible for the consequences of their actions. And so I think that's what creates a lot of the irresponsible behavior that you see at PE firms.

CHAKRABARTI: Got it.

So again, you're talking about the law and incentives here. Professor Kaplan, you're gonna get the last word today, and I just wanted to note that there it doesn't seem like this trend is gonna reverse for the sort of boomer aspect of, that we talked about earlier. And also I'm seeing here that buyouts in medium to small sized businesses, so we're talking $100 million or less, were $89 billion last year.

That's a 56% increase over 2015. So like it or not, this isn't, the tide isn't gonna turn. So you get the last 30 seconds here.

KAPLAN: No, it's not going away, and again, the, the overall evidence is positive. Brendan wanting to change ERISA. You change ERISA, you lose all the benefits that I talked about earlier, that productivity goes up in these transactions, and in the private to privates you get big increases in employment.

And some of the things that he mentioned are terrible, the ManorCare one, but that was 20 years ago. And again I keep saying that the PE firms have changed.

The first draft of this transcript was created by Descript, an AI transcription tool. An On Point producer then thoroughly reviewed, corrected, and reformatted the transcript before publication. The use of this AI tool creates the capacity to provide these transcripts.

When private equity owns Main Street

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