Are prison services companies the next frontier for responsible investment in the age of Black Lives Matter?

Back in 2017, in the space of just one month, two black inmates died at the Forsyth County Jail – one reportedly having begged for an asthma inhaler, the other for high blood pressure treatment. The wrongful death lawsuits filed against prison healthcare provider Correct Care Solutions, now called Wellpath, were by no means unique – Wellpath has been sued at least 1,395 times in federal courts over the past decade, including for over at least 70 deaths.

What does this have to do with responsible investment? Among the biggest known investors in the private equity firm backing Wellpath, HIG Capital, are US public pension funds in Ohio, Maine, Massachusetts and Pennsylvania. The risks around listed private prison operators CoreCivic and Geo Group have shot up the investor agenda over the last two years after protests and media frenzy over allegations of human rights abuses including the detention of immigrants. The fallout saw the country’s two biggest pension funds pull their holdings, JPMorgan, Bank of America and Wells Fargo rule out financing for the companies, and several states move to pass laws to phase out private prisons.

But there’s been less focus on the broader ecosystem of correctional service providers, primarily private-equity owned, whose phone, medical, commissary and bail bond services are increasingly plagued by scandal – and whose capital is in many cases coming from the same asset owners. 

In the fall out from the death of George Floyd and the rise of the Black Lives Matter movement, responsible investment organisations have chimed in on the need to address systemic racism. Writing on the topic in June, Principles for Responsible Investment CEO Fiona Reynolds said that “responsible investors have a powerful platform and a critical role to play in creating a better future”. With the imprisonment rate of black people five times higher than that of white people in the US, and twice that of Hispanic people, the US criminal justice system is seen by many as one of the main tools for the oppression of people of colour. In just one example of rising scrutiny for the prison services industry, five private equity companies invested in the sector – BlueMountain Capital Management LLC, H.I.G. Capital LLC, American Securities, Apax Partners, and Platinum Equity LLC – came under fire from US senators and representatives last year for making “millions of dollars off those who are incarcerated, their families, and their communities – often while providing subpar products and services”. As this criticism mounts, there could be risks – and arguably responsibilities – for the industry’s investors, too.

An organisation intent on crystallizing these risks for prison services companies is NGO Worth Rises, which is targeting corporates, private equity firms and asset owners investing in the space, and pushing for policy change. Last year, Worth Rises targeted what Executive Director Bianca Tylek calls “one of the two largest and most predatory prison telecom companies”, Securus Technologies, and its private equity owner Platinum Equity, which is headed up by billionaire owner of the Detroit Pistons basketball team, Tom Gores. 

‘There will be educational institutions and foundations with giant endowments who think they've cleaned up their portfolios by addressing the public equity space, but who really need to understand the private equity space’ – Julie Goodridge, NorthStar Asset Management

Securus and its main competitor, GTL (owned by private equity firm American Securities), have become notorious for charging what lawsuits have called “extortionate” rates for prisoners phone calls. The highest rate Securus currently charges is $14.77 for a 15-minute call in Arenac County, Iron County and Bay County, Michigan; although its rates depend on state laws and whether calls are within or between states. Platinum Equity virulently defends its business, saying, for example, its rates have fallen by 30% since it acquired Securus in 2017 and 14% in the last year, and that it has provided 26.6m free phone calls, 5.2m free video connections and 13.6m free electronic messages since the COVID crisis started in March. Platinum Equity’s full response to this article can be viewed here. 

Tylek, meanwhile, says the falling rates should be put down to changes in law pushed by campaigning and advocacy, not willing moves on the company’s part. Among Worth Rises’ major policy ‘wins’ so far, Tylek counts New York City legislation and a San Francisco county contract making phone calls from jail free, with other statewide and federal bills currently in progress. 

But Worth Rises is also heading straight for the money: when Platinum Equity embarked on a major fundraising round last year, the NGO targeted three significant investors to the firm – New York City Common Investment Trust, Pennsylvania Public School Teachers Retirement System, and Pennsylvania State Employees Retirement System. The latter subsequently held off on a $150m investment in Platinum Equity. 

Tylek predicts that, in all, campaign efforts have lost the firm more than $900m in potential investments and portfolio valuation. 

Next on Worth Rises’ list of targets is HIG Capital, arguably the most preeminent investor in the correctional services space as the private equity owner of not just Wellpath – the lawsuit-ridden medical services provider responsible for the healthcare of around 300,000 people throughout the States – but also caterer TKC Holdings – a correctional food-service contractor made up of Trinity Services Group and commissary provider Keefe Group. US representatives have raised concerns that “in facilities where Trinity and Keefe operate, if Trinity fails to provide quality food for incarcerated individuals, the parent company is still likely to profit via its commissary businesses”.

“We're starting to show up at their investor meetings and talking to pension investors about HIG,” Tylek says. The investor targets are yet to be made public, and HIG Capital did not respond to requests for comment.

There are some publicly-listed players in the limelight, too. BlackRock, Morgan Stanley and Sarasin & Partners are among the top 20 shareholders in prison caterer Aramark, which has seen controversies including reports of maggots and rats in its food and kitchens. Sarasin & Partners told RI it was aware of the “historic press reports relating to Aramark’s corrections business” but is “encouraged by its new management team, which is making improvements to all aspects of the business”. “We have engaged with Aramark’s board to facilitate and support change and will continue to do so,” a spokesperson said. BlackRock said it did not have discretion to exclude investments from indices chosen by its clients, and said it had engaged with Aramark. Its Q2 engagement report showed it engaged with Aramark once during the quarter, raising issues including corporate strategy, climate risk management and operational sustainability – but not raising social risks. Morgan Stanley declined to comment. 

But, there are issues that are relevant to private equity in particular. Jim Baker from US NGO the Private Equity Stakeholder Project says private ownership itself has made services worse, as consolidation in the market has led to a host of monopolies and duopolies. There used to be numerous companies in the prison telecommunications space, for example, while now just two – both PE-owned – occupy nearly 90% of the market, as visualised in the Prison Policy Initiative’s work. Securus abandoned its attempt to acquire the third, ICS, in 2019, after the Federal Communications Commission and the Department of Justice’s Antitrust Division signalled that they would likely block the deal because of concerns about market competition.

“There's been dramatic consolidation driven by private equity acquisitions and kind of add-ons to companies that they own in the space. We've seen the same thing in healthcare for incarcerated people, and in food and commissary services as well,” Baker says. “It's really striking just the degree to which this consolidation has happened. In a lot of cases, it means worse services at higher prices.” 

Platinum Equity maintains that its investment in Securus “is driving meaningful reform of the company and the industry, while reducing prices and expanding services.”

Baker says it doesn’t stand to reason that these investments have actually made money for investors. “It’s not clear that the benefits outweigh the risks. Even before the pandemic, the phone companies and some others saw the value of the debt backing them decline dramatically.”

Indeed, according to the Bloomberg Valuation Service, Securus’ second lien debt was consistently trading at less than 50% between November 2019 and March 2020, though the value had rallied to 62.5% by June. “Clearly there are investors that think the potential for default in these companies exists,” observes Baker. “Aside from the regulatory and headline risks, there’s real concern about companies’ ability to make their debt payments going forward.”

It’s not clear, however, that this trend extends across the sector. GTL second lien has fared better – averaging at 90% since February 2019, though dipping to 77% in June 2020. TKC Holdings averaged 95.2%, but between February and June, its value has been below 90%. Wellpath’s second lien debt traded robustly until March’s chaotic markets, when it fell towards 90%.

Baker says Private Equity Stakeholder Project’s first recommendation to asset owners is to engage, and that some are starting to – although often behind the scenes. According to Baker, Endeavour Capital, a PE firm that has historically raised capital from the likes of the Washington State Investment Board, Danish pension fund ATP, the Oregon Investment Council and the University of Washington Endowment, exited its investment in bail bond giant Aladdin Bail Bonds and its surety provider Seaview Insurance when it was fundraising for a new fund. The move came after institutional investors raised concerns, having themselves come under pressure from groups including the American Civil Liberties Union (ACLU) over “the predatory, for-profit bail industry”. Aladdin offers loans to cover bail costs for individuals unable to pay for their release from custody, charging a percentage of the bail as a fee for the service (usually 10%), irrespective of the outcome of the case – a service the ACLU says “preys on…those who are too poor to buy their way out of jail [and] disproportionately affects black and brown communities”. Endeavour did not respond to a request for comment. 

Baker says there should be a limit to engagement, though. “If the private equity firm is unwilling to take action to mitigate the risky practices of the firms it owns, then it would seem to be an investor’s fiduciary responsibility not to reinvest with that manager.”

Julie Goodridge, CEO of Boston-based NorthStar Asset Management, warns there is likely a lack of awareness around risks in private equity among asset owners. “There will be educational institutions and foundations with giant endowments who think they've cleaned up their portfolios by addressing the public equity space, but who really need to understand the private equity space,” she says. 

“Most foundations, endowments and pension funds have inside CIOs or hire consulting firms to put together the perfect portfolio for the organisation. Board members or inside CIOs won’t necessarily have the time or knowledge to dig down into these investments and find out what’s truly going on.”

She says boards need to raise their awareness of potential issues. “Boards have to require that their consultants, or whoever's presenting them with these investment options, bring forward possible misalignment with mission and really delve into the underlying investments."

For a full list of responses to this article, see here.