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Paper Cuts: When private equity firms control local newspapers

Chapter 3

With private equity companies, profit is king

The role of private equity investing began growing after the 2008 financial crisis in the US. Two experts explain what it is – and how it affects different industries in different ways.

Private equity investing has been around since the mid-20th century, but the reach of private equity grew into nearly every sector of life in the U.S. after the 2008 financial crisis. If you look closely, depending on where you live, you can find private equity at work in not only the newspaper industry but also in utilities, transportation, restaurants, education, and health care.

Photo of Niklas Huether

Niklas Huether

We turned to two financial experts for help with understanding the ins and outs of private equity:

Niklas Huether is an assistant professor of finance at Indiana University’s Kelly School of Business, who at one time worked in private equity for Deutsche Bank.

Jeffrey Hooke is a finance professor at Johns Hopkins University's Carey Business School, a former private equity executive and the author of "The Myth of Private Equity."

What are private equity firms and how do they operate?

Private equity firms acquire struggling businesses with the goal of improving them and reselling them. They raise money for their private equity funds mainly from institutional investors and, sometimes, extremely wealthy individuals.

Huether and Hooke are quick to point out a unique feature of private equity funds: they have a shorter life cycle than other investment funds such as mutual or index funds — typically 10 to 12 years. In the first seven years, private equity fund managers look to improve their investments, typically through operating efficiencies and the sale of real estate. In the newspaper industry, those efficiencies have meant cutting staff and publication days, and selling presses and buildings.

In the remaining three to five years, fund managers are looking for buyers. Hooke compares the model to real estate investors flipping houses.

Photo of Jeffrey Hooke

Jeffrey Hooke

"They might try to fix it up, put a new batch of paint on it, install a new bathroom and kitchen, and then try to sell it a year or two later at a profit,” he said. “That's the private equity business in a nutshell, except the numbers are a lot bigger.”

About 60-65 percent of private equity transactions are leveraged buyouts. In this scenario, a company’s assets are used as collateral for a loan to cover the cost of buying it.

The company is then under pressure to generate enough profit to cover not only its new debt, but also to give the private equity firm a return on investment.

“These companies are highly leveraged,” Huether emphasized. “They have 70 to 80 percent debt on their balance sheet. A typical public company — any debt on their balance sheet is way below that number.”

Meanwhile, private equity fund managers can collect fees from both their investors and the acquired companies. Those fees create a buffer if a company doesn’t live up to performance expectations, according to Hooke.

Where are private equity firms investing?

Huether estimates 80 percent of the private equity market is investments in other private companies and private equity funds, and those transactions are kept private.

Where does the money come from?

Private equity firms invest other people’s money instead of their own to limit risk.

“If you gamble and you can use someone else's money,” Huether said, “why not use that instead of your own when you could lose everything?”

State pension funds are a primary institutional investor in private equity, along with university endowments, sovereign wealth funds and nonprofit foundations.

The Indiana State Employee Pension Plan, for example, had investments with more than 130 private equity firms in fiscal year 2022, according to its comprehensive financial report. It only invested with six fund managers in the public market. The list includes the well-known Bain Capital Partners and Fortress Investment Group, which was instrumental in helping GateHouse Media (now Gannett) out of bankruptcy.

PDF Read the Indiana State Employee Pension Plan's investment activity report »

The list of investment managers the State of Indiana used in 2022 begins on page 32.

As Huether explained it, pension fund managers find private equity funds attractive because the net asset valuations are “smoother” than those of public entities, which can fluctuate more with market ups and downs, making employees checking their accounts quite nervous.

“And it’s good not to get your police officers, firefighters and teachers nervous about their pensions,” he said.

Pension fund managers are also attracted to private equity because they think the returns will beat the stock market.

“But they don’t,” said Hooke, who references a number of studies highlighting private equity’s comparative underperformance in his book “The Myth of Private Equity.”

Huether said the main reason investors gravitate to private equity is because there is less fluctuation in the valuations.

“And that’s something you want in your portfolio even if you don’t believe in the outperformance of the public market,” he said.

Huether added it’s important to note that investment decisions are made solely by the private equity firm. Investors, he said, “are basically giving up their fiduciary rights – they are not involved in the investment process.”

By the very nature of private equity being private, it can be hard for investors to get a full picture of how their funds are being invested. Huether said private firms face fewer regulations and reporting requirements than public ones, which means less information is available about private equity funds’ investments and performance. In fact, data services such as Pitchbook and Thomsen Reuters are only able to collect data on about 60 percent of buyout funds, Hooke points out in his book, because “participation by buyout fund managers is voluntary and many choose not to disclose their results.”

Hooke also writes that 68 percent of deals bought by private equity funds since 2009 “have not been sold to follow on buyers” leaving those funds still owning companies they hoped to profitably offload after a decade.

“Yes, these terrific deals that have supposedly spawned great returns either do not have buyers or have no takers at reasonable prices,” writes Hooke. “The returns displayed by investors, therefore, are in large part derived from the guestimates of what the fund managers think they can sell the deals for.”

Why get into the newspaper industry?

According to Hooke, there was more than one reason private equity was attracted to the newspaper industry as it began to decline.

“One, they were low-tech businesses,” he said. “So private equity tends to like low-tech because they can put more debt on low-tech businesses than a high-tech business. Secondly, most of the larger dailies are monopolies so that provided some protection from competition. The third reason,” he said, “would be that the profit margins are quite high in a monopoly, and often the monopoly would have real estate that was quite valuable dating back to when the newspaper was founded.”

Is private equity good or bad?

“Private equity maximizes profits. It's not about being bad or being good,” Huether said.

Some industries fare better than others after private equity involvement – he points to the restaurant industry or certain aspects of health care as examples. But critics of private equity in the news industry point to a number of negative outcomes, including news deserts, ghost papers and declining content quality and coverage in those papers that survive.

Huether thinks it’s ultimately a question of regulation and quotes a colleague.

“Think of private equity as the lion and think of the government and regulation as the zookeeper,” he said. “So what are you going to do? Are you going to tell the lion not to eat the kid? The lion is a lion and of course it's going to eat the kid. It's the job of the zookeeper to make sure the gate is closed — that's the problem.”

Chapter 4: Private equity firms cutting costs in a distressed industry »


Officials at Gannett would not talk to WFIU/WTIU for these stories. They sent a statement attributed to Jill Bond, news director of The Herald-Times.

Paper Cuts The reporting is supported by a grant from the Poynter Institute, a non-profit journalism school and research organization in St. Petersburg, Fla., and the Omidyar Network.

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