WASHINGTON—The private equity industry faces a serious political challenge going into the 2020 election year as progressive Democrats, including the presidential primary’s frontrunners, are taking aim at it.
Private equity (PE) firms attract big investors and use their money to buy companies—anything from retail stores to nursing homes. PE firms try to increase the companies’ profits through changes in their operations, thus creating profit for investors.
But opponents say PE firms are infamous for running these companies into the ground, since they usually sell the companies within several years and thus aren’t interested in their long-term well-being.
“There’s a continuum of private equity folks, from good actors to bad actors,” said Rep. Ed Perlmutter (D-Colo.) on Nov. 19 at a House Financial Services Committee hearing titled “America for Sale?”
While Perlmutter represents a moderate Democratic stance on the issue, Democratic candidates Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) in recent months have stepped up their attacks on PE funds.
Warren, one of the industry’s most vocal critics, accused these funds of “sucking value out of our companies” and “putting people out of work,” in comments on Twitter in October. In an effort to end what she called the “abusive practices” of PE firms, Warren along with several other Democrats introduced a bill in July dubbed “The Stop Wall Street Looting Act.”
The Act would significantly change the way PE does business. For example, it would require PE firms to take on more responsibility for the liabilities of companies under their control, including debt and legal judgments.
But PE firms often invest in struggling or underperforming companies that have some potential, with the hopes of turning them around. The Act would make the risk a lot greater to PE firms if that turnaround fails.
And considering the number of jobs dependent on the PE industry and the amount of money—including a lot of public pension money—invested in it, the effects of the Act could have big consequences.
According to the American Investment Council (AIC), an advocacy organization for the private equity industry, PE firms directly employed 8.8 million people and paid $600 billion in wages and other benefits in the United States last year.
“Businesses of every size and every congressional district depend on private equity capital and expertise to grow,” Drew Maloney, president and CEO of the AIC, said in his testimony during the House hearing. “Ninety-one percent of public pension funds have invested a portion of their capital in private equity, and in 2018, we generated the strongest returns of any asset class over the last 10 years.”
The U.S. Chamber of Commerce, the nation’s largest business organization, released a report on Nov. 12 showing the economic consequences of Warren’s bill. “Proposed legislation would impose significant restrictions, liabilities, and tax increases on the industry,” the report said.
Due to these restrictions and taxes, the report concluded that if enacted, the bill would “result in a loss in the range of 6.2 million to 26.3 million jobs across the United States” and would lead to loss of $109 billion in tax revenue annually in a modest-case scenario.
“This bad bill strikes at the foundation of American capitalism,” Rep. Patrick McHenry (R-N.C.) said on Nov. 19 in his opening remarks at the hearing. “I know there’s a socialist lane in the Democratic primary for president. This clearly is that fight for that socialist lane. It has harmful effects as well,” he said.
PE-backed companies and the PE firms themselves together support more than 26 million American jobs.
Brett Palmer, president of Small Business Investor Alliance, said at the hearing that The Stop Wall Street Looting Act—though well-intentioned—would harm Main Street, particularly smaller businesses that aren’t liquid.
“I think there would be a lot less investing in businesses. There’d be a lot less lending into businesses,” he said.
Warren’s bill aims to reform the PE industry in the wake of several high-profile bankruptcies in the retail industry, including Toys R Us, Sears Holding, Payless Shoes, and Radio Shack—all owned or controlled by PE funds.
A former Toys R Us employee, Giovanna De La Rosa, who also testified at the hearing, claimed that the private equity firms KKR and Bain caused the bankruptcy of the retail company.
Toys R Us was acquired by the PE funds and real estate investment firm Vornado in 2005 through a leveraged buyout, or acquisition using a significant amount of debt. The retail company went bankrupt in 2017.
De La Rosa said that her life changed when “news hit that Toys R Us stores would shut down nationwide and lay off over 30,000 of us without a dime of severance pay.”
When asked whether the private equity funds or Amazon had bankrupted Toys R Us, Maloney said that the bankruptcy could be largely caused by market forces such as the competitive pressures of Amazon, rather than the mismanagement of PE firms.
Moderate Democrats also came to the defense of PE firms, playing down the issues they’ve caused and touting their strong investment returns.
Rep. Al Lawson (D-Fla.) said, “private equity is the best performing asset class for public pensions, and that is true in Florida.”
Rep. Alexandria Ocasio-Cortez (D-N.Y.), however, who joined Warren in seeking to rein in private equity, expressed frustration at the hearing, saying she was “quite upset” by comments about the investment returns of PE funds.
“I wasn’t sent here to safeguard and protect profit. I was sent here to safeguard and protect people,” she said. “And we’re talking about reining in private equity, which is responsible for wiping out tens of thousands of jobs at Toys R Us alone.”
Rep. Rashida Tlaib (D-Mich.), one of the lawmakers who co-sponsored the legislation, said at the hearing that “greed is a disease in our country, and you can see it just alone with the behavior of private equity firms.”