TITLE: How Private Equity Is Reshaping Special Education
https://www.businessinsider.com/how-private-equity-is-reshaping-special-education-2024-4
EXCERPT: Sarah didn't know it at the time, but when she enrolled Emily in New Story, she was unwittingly signing on to an experiment in American education, one that worries former staff, US senators, and special-education researchers alike: New Story is the country's first large-scale special-education-school network owned by a private-equity firm.
In 2019, the Boston-based private-equity arm of Audax Group, which manages $36 billion for investors, including the Kentucky Teachers Retirement System and the Pennsylvania State Employees' Retirement System, purchased a mid-Atlantic special-education-school network called New Story Schools for an undisclosed price. Under Audax, New Story has purchased other local school chains, like Pennsylvania's River Rock Academy, as well as various behavioral-services companies, and rolled them up under New Story's corporate umbrella. The deals have created what New Story calls one of the largest special-education companies in the US, serving children with autism, behavioral problems, and other issues.
Now, Audax is reportedly looking to flip the company. More than a quarter of private-equity-owned companies across industries are sold to other private-equity firms, so the new owners may look much like the current one.
To some, private equity's business model appears antithetical to special education. In a basic private-equity deal, a firm pools money from investors like public pensions to buy a business, improve it (or load it up with debt), and sell it. Fast expansion means the firm can sell the business, typically four to seven years after buying it, and make a profit of 15% to 20% or more. Private equity targets companies that can grow fast, often by acquiring similar businesses.
A private-equity firm also makes money well before offloading the business, including by collecting fees from its investors and charging the businesses it owns for management and advisory services.
Special-education schools bring in a reliable income stream, typically from public funds: School districts and states pay New Story anywhere from $27,000 to $95,000 per student, and some schools operate year-round. (The average public school district in Pennsylvania, where New Story operates the most schools, spends about $23,000 per child across all types of public education. Additional services, such as providing an individual aide or specialized therapy, can push those costs much higher.) And a fragmented nationwide market means that a company like New Story — which Audax grew from 15 schools to a network of 75 schools and centers across seven states — has plenty of opportunities for expansion.
This year, New Story expects to bring in $305 million in revenue, the analytics firm Mergermarket said. The company serves a few thousand students, a tiny slice of the 8 million Americans between the ages of 3 and 21 who receive special-education services each year — a 25% increase from 2011, according to government data. (In 2021-22, 2% of these children attended public or private schools dedicated to students with disabilities.)
To understand how New Story changed under private-equity ownership and what private-equity takeovers could mean for the special-education landscape, Business Insider reviewed more than 3,000 pages of public records and spoke to 20 current and former New Story employees and parents. Many of them said that under Audax, New Story pushed to expand at the expense of student safety and academic progress. While parental complaints and even lawsuits alleging mistreatment are not uncommon at special-education schools, records of complaints and interviews with parents and educators show that New Story's focus on profit under private-equity ownership added an alarming layer of stress to special education.
Under Audax, New Story gutted departments focused on quality and education and struggled with turnover. The company's hiring practices grew so lax in some instances — including hiring an administrator who was fired from her previous school for failing to report suspected sexual abuse — that state regulators expressed alarm. Some parents, like Sarah, grew concerned about the inappropriate use of restraints and isolation.
Shanon Taylor, a professor at the University of Nevada, Reno, who studies privately run special-education schools, told BI that private equity's push to make big profits is fundamentally at odds with special education's mission. Since the schools are generally paid flat reimbursement rates by school districts or insurers, she said private-equity firms make money by cutting costs.
"They'll cut the number of employees. They'll pay employees less. They'll hire less-qualified employees so they can pay them less. They're going to defer maintenance on their facilities and not have the equipment necessary in those facilities," Taylor said, speaking about private-equity firms generally. "All of those things then are impacting the services to these vulnerable populations."
TITLE: Private equity’s latest trade: The financial futures of millions of retirees
https://www.semafor.com/article/04/25/2024/private-equitys-latest-trade-corporate-pensions
EXCERPT: A brisk new trade in the financial futures of millions of retirees is unnerving some US workers, regulators, and politicians who worry that private equity firms will invest corporate pensions recklessly.
Recent lawsuits challenging AT&T, Lockheed, and Alcoa’s plans to turn their pensions over to Athene, which is owned by Apollo, casts a broader spotlight on private equity’s push into new corners of finance. Sen. Sherrod Brown has held hearings, cheered on by the Teamsters, and the Labor Department is weighing whether to require companies to at least consider whether an insurance business is owned by private equity before turning over their pensions.
Companies like AT&T and IBM don’t want to be in the retirement business. So they’ve been offloading their pension plans to insurance companies. The 773 deals last year broke 2022’s record of 568, according to Aon.
For years, the business of taking over those pensions was dominated by a handful of century-old insurance mainstays like Prudential and MetLife. But private-equity firms have barrelled in. Apollo, KKR, Brookfield, and Blackstone have all bought insurance companies since 2019, and have been bidding aggressively to acquire pension plans.
Over the past three years, about $135 billion of corporate pension liabilities have moved from America’s biggest companies to insurers. They are converted from corporate promises, vestiges of an era of generous paternalism, into an annuity, a type of insurance contract that has become the hottest product on Wall Street.
In the process, they lose the backing of the Pension Benefit Guaranty Corp., a government entity that guarantees workers’ retirement benefits if their pension plans fail. Instead, any insolvency would be resolved by state insurance funds, which operate similarly to the FDIC’s fund for bank depositors and try to make as many people whole as possible from what’s left.
“Nothing comes free in the investment world. With higher returns come higher risks,” said Jerry Schlichter, who filed the lawsuits contesting the Athene transactions. “You can say insurance companies are stodgy but there’s good reason for that.”
TITLE: Cash-Strapped PE Firms Borrow from Themselves
https://www.barchart.com/story/news/25706181/cash-strapped-pe-firms-borrow-from-themselves
EXCERPT: Private equity firms are increasingly seeking to leverage their funds’ assets through net-asset-value (NAV) loans, a trend that is growing in popularity amid a challenging financial landscape for deal-making. Firms like Stone Point Capital are incorporating provisions in their fund agreements that allow borrowing against the fund's assets at any time. This move, while facilitating greater flexibility in accessing capital, is stirring concerns among investors, particularly limited partners (LPs) who worry about the added risk of layering debt upon already leveraged portfolios. NAV loans, although offering a relatively low loan-to-value ratio, are viewed by some investors as a form of risky financial engineering that could potentially expose the entire fund portfolio to greater financial instability. The use of NAV loans has surged as traditional financing avenues have dried up, with private credit firms stepping in to fill the void left by banks that have pulled back amid regulatory pressures. This shift is part of a broader strategy by private equity firms to maintain liquidity and fund operations without selling portfolio companies or resorting to other conventional funding mechanisms. Law firms like Kirkland & Ellis are actively facilitating this shift by drafting fund documents that permit NAV loans without requiring investor consent or notification, further complicating the dynamics between private equity firms and their investors.