Portside

Private equity firms are quietly buying up a literal toxic asset: companies’ liabilities for decades of asbestos poisoning. Some Wall Street firms are scoring huge payouts to take on the hassle and financial risks of people getting sick and dying from asbestos exposure — and they can use threadbare oversight and cutthroat legal maneuvers to delay and deny these victims’ claims. 

While assuming asbestos liabilities might seem like a losing proposition — lawsuits from people with asbestos-related diseases have cost companies billions — private equity firms can demand huge payments for the service and are not required to abide by traditional insurance regulations regarding how they manage and invest this cash. 

“I don’t think there’s any oversight to this,” said Michael Shepard, a Boston-based attorney who represents victims seeking damages for asbestos exposure. Investors have “hit upon this ability to have access to a deep well of cash and handle it the way they want to handle it without any oversight whatsoever.”

To get rid of their asbestos liabilities, industrial manufacturers create a subsidiary company onto which they offload their asbestos-related assets. The manufacturer will also add a large pool of cash to their subsidiary, ranging from hundreds of millions to even billions of dollars. A private equity company will then acquire the subsidiary company and its asbestos liabilities, making them responsible for any asbestos claims.

After taking over a manufacturer’s asbestos liability, private equity investors aim to gradually resolve each claim through “litigation, settlement or by successfully resisting it,” according to the law firm Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates, which specializes in company mergers and takeovers — all the while working to spend less than the pool of money received from the manufacturer. That and high investment returns allow private equity firms to turn a hefty profit. The longer companies can hold onto the cash, the more interest it can accumulate in the market. 

Investors view these transactions “as financial instruments, as they may provide a stable cash flow and reliable yield with potentially less market risk than equities or real estate,” according to a February report by the Seattle-based consulting firm Milliman that analyzes these types of acquisitions. According to the report, researchers have noticed an uptick in these types of deals in recent years.

“I definitely see it as a worrisome trend,” said Shepard, the Boston-based attorney.  

Down the road, private equity firms may also try to use legal maneuvers like the “Texas two-step” to avoid paying claims — leaving future asbestos victims without any immediate recourse for their medical expenses.    

“The companies that exposed people to asbestos are finding ways to evade having to pay for the harms that they have caused down the road,” said Shepard. “Victims moving forward may not have any recourse to pursue for their injuries because of what is taking place now.”

A Deadly Mineral

For generations, asbestos was a common component of construction materials like insulation thanks to its resistance to heat, corrosion, and electricity. The mineral is made up of microscopic, needlelike fibers that are excellent for building insulation, vinyl floor tiles, and roofing shingles — but can also be inadvertently inhaled or ingested, leading to scarring, lung cancer, and mesothelioma, a rare and aggressive form of cancer.

Though scientists knew about the material’s harmful qualities as early as the 1920s, asbestos litigation didn’t gain traction until the 1960s. In 1970, Congress classified asbestos as a hazardous air pollutant, and soon after, most industries began tapering off the use of the substance.

Still, it wasn’t until this year that the United States’ Environmental Protection Agency followed in the footsteps of more than 50 other countries and prohibited the ongoing use of asbestos. Meanwhile, asbestos exposure is now linked to more than 40,000 deaths nationwide every year, and even more people bear the cost of serious asbestos exposure annually. 

Consequently, individuals have filed hundreds of thousands of lawsuits over the years to help pay for treatments and other expenses brought about by asbestos exposure.  

While the number of asbestos-related lawsuit filings has diminished in recent years, likely due to decreased asbestos use, the average payout per claim is on the rise, increasing 30 percent from 2021 to 2022, according to a report by the National Economic Research Associates, an economic consulting firm. The average mesothelioma settlement now ranges between $1 and $1.4 million. Over the years, more than 150 companies have filed for bankruptcy after paying out claims to people with asbestos-related diseases. 

It makes sense that manufacturers would be eager to get rid of their asbestos assets and related risk — which is why Berkshire Hathaway stepped in. 

Starting in the 2000s, subsidiaries owned by Berkshire Hathaway — a multinational conglomerate led by billionaire investor Warren Buffet — began buying up billions of dollars worth of asbestos liabilities.

“The entire operation was driven by the target numbers,” a former claims executive from a Berkshire subsidiary said under oath as part of a lawsuit over the company’s activities. He said he was told by higher-ups to “find a way to avoid paying [asbestos claims].”

As the firm bought up subsidiary companies, they also bought up some of the insurers covering the liabilities, in a complicated scheme that let them squeeze out even more profit from the unfolding catastrophe

Berkshire Hathaway has since faced dozens of lawsuits alleging it wrongfully delayed or denied compensation to asbestos victims, according to a 2013 investigation by Scripps News.  

“Asbestos defendants often drag out court proceedings,” Scripps News reporter Mark Greenblatt wrote in his investigation. The strategy, one attorney told Greenblatt, is “delay, deny until [victims] die.”

A Slice Of The Asbestos Pie

While Berkshire Hathaway has reportedly scaled back its aggressive practices, private equity firms have entered into the asbestos liability game. 

“Because for all practical purposes Berkshire Hathaway was first into the sector and with scale, it was able to charge [manufacturers] what today might be considered a fortune,”  said Stephen Hoke, a Chicago-based attorney and expert in liability sales. Now, Hoke said sales of asbestos liabilities have become a competitive market, with many private equity firms aiming to take a slice of the pie.  

“Competition for these deals from acquirers is fierce,” attorneys at Skadden law firm wrote in a 2023 post. “We expect this market to continue to flourish.” 

In 2021, Delticus Group, part of the global private equity firm Warburg Pincus, was paid $398 million to acquire InTelCo Management LLC, a subsidiary of the manufacturing firm ITT Inc. that managed the companies’ liabilities for exposing people to asbestos through its aerospace, transportation, and energy products.  

The transaction represented “the culmination of our multi-year strategy to reduce ITT’s legacy liability profile,” the company’s CEO boasted in a press release. “ITT will operate with a simplified and well-capitalized balance sheet… without the risks and management time required to manage long-term asbestos liabilities.”

Last month, Deliticus was paid another $189 million to acquire subsidiary companies holding the asbestos liabilities of the industrial manufacturer Ingersoll Rand. 

Delticus is just one of several Wall Street firms buying up asbestos liabilities. In 2022, SPX Technologies, a manufacturer of cooling towers and other products that historically contained asbestos, offloaded its asbestos liabilities to three separate subsidiaries. The private equity firm Global Risk Capital LLC then partnered with Premia Holdings, a reinsurance company, to acquire the new companies in exchange for a $139 million payout. 

Because private equity companies are not technically insurers, they do not abide by traditional insurance regulations. There are no requirements around how they invest the cash they receive from manufacturer payouts. Firms are also not subject to “bad faith” insurance laws, which prevent insurers from using tactics to delay or avoid paying claims. 

According to an article by the legal news service Law360, New York state insurance regulators have confirmed that “non-insurance transactions,” including private equity firms acquiring asbestos liability, “do not fall within their jurisdiction.” 

Regulators from New York, Texas, and California reported they have yet to receive “any complaints regarding private equity acquisitions” of manufacturers’ liabilities. 

Private equity firms are also well positioned to take advantage of the controversial Texas two-step scheme, an increasingly popular legal maneuver in which the subsidiaries created to offload asbestos-related or other industrial liabilities subsequently file for bankruptcy, trapping victims’ legal claims in bankruptcy court. 

Beyond Asbestos

Private equity firms are no longer limiting their toxic asset investments to just asbestos liability. 

“Investors are considering liabilities that range from asbestos to workers’ compensation and can even include federal black lung and per- and polyfluoroalkyl substances (PFAS),” actuaries from Milliman wrote in their report.  

Black lung refers to a benefit program through the U.S. Department of Labor that compensates coal miners and their families who have been impacted by lung disease caused by their work. Since 1970, the program has paid out more than $47 billion in Social Security supplementation and medical payments. 

PFAS, or so-called “forever chemicals,” are toxic materials found in a wide range of products like nonstick cooking pans and cleaning products that have been linked to serious health risks like cancer, heart damage, and other illnesses. By 2020, insurers had paid out approximately $92 billion in claims from people suffering from PFAS-related diseases, leading companies to call these chemicals the “new asbestos.” 

As Wall Street buys up corporate liability for these toxic chemicals and environmental hazards, it will likely apply the same playbook it’s used for asbestos: Demand big payouts upfront from industrial manufacturers and then delay or deny payments to victims. 

Along the way, the people caught in the middle are being harmed twice, Shepard said: first by the toxins themselves, and then by private equity firms. 

These investors have “found a way to make money off of victims,” he said, “and that’s just wrong.”