Private equity leaders are pushing back sharply against a new plan from Sen. Elizabeth Warren (D-Mass.) to rewrite the basic rules of the road for firms she likened to "vampires."
“Private equity is an engine for American growth and innovation — especially in Senator Warren’s home state of Massachusetts,” said Drew Maloney, who heads the American Investment Council, the industry’s lobbying group. “Extreme political plans only hurt workers, investment and our economy."
Warren, who honed her brand as a Wall Street scourge, insists drastic change is needed: Unveiling the "Stop Wall Street Looting Act" yesterday, she said that the private equity industry is “the poster child for financial firms that suck value out of the economy."
“Private equity firms raise money from investors, kick in a little of their own, and then borrow tons more to buy other companies,” she wrote in a Medium post. “Sometimes the companies do well. But far too often, the private equity firms are like vampires — bleeding the company dry and walking away enriched even as the company succumbs.”
The plan's most disruptive change would make firms responsible for both the employee pensions and debt obligations of the companies they buy while tying their profits to the companies’ performances. As The Washington Post’s Peter Whoriskey notes, private equity firms frequently load up their takeover targets with debt, which become a burden the companies have to carry, sometimes precipitating bankruptcies.
This was perhaps most famously the case with Toys R Us, which crumpled under the $5 billion debt burden that Bain Capital, Kohlberg Kravis Roberts, and Vornado Realty Trust saddled it with after acquiring the toy retailer in 2005.
Industry defenders say that tells only part of the story. Steve Biggar, an equities analyst at Argus Research who covers the sector, said the Warren plan would create “asymmetrical risk” for the industry, with too much downside and not enough upside to warrant investments that could save otherwise struggling companies.
“Her premise is that all private equity does is buy companies, leverage them up, can the employees, take the pensions and come out with millions and billions. That’s not usually the case,” Biggar said. “These are broken business models off the bat. The firms are lending capital, expertise and deep industry knowledge, and getting them back on the right path to make them profitable again.”
Axios’s Dan Primack, a veteran of the private capital beat, said Warren’s bill would shake the industry to its studs:
Warren's main proposal on private equity would kill the industry as currently constructed. My best guess is firms would form JVs with Wall Street banks, although loan syndication would still be tricky.— Dan Primack (@danprimack) July 18, 2019
I also think the definition of "private equity" would become very contentious
Investors appear to be taking the threat seriously. Publicly traded private equity giants saw their stock prices tumble on the news of the proposal. Apollo Global Management dipped nearly 2 percent; the Carlyle Group was off by 1.73 percent midmorning before paring losses to close down .76 percent.
The industry has been in Washington’s crosshairs for years. After a 2007 story appeared on the front page of the Wall Street Journal documenting Blackstone Group CEO Steve Schwarzman’s lavish lifestyle, the Senate’s lead tax-writers at the time — Max Baucus (D-Mont.) and Chuck Grassley (R-Iowa) — proposed ending the capital gains treatment of private equity earnings. The industry, which had maintained a relatively modest presence in Washington, responded by massively ramping up its lobbying machine:
From the Center for Responsive Politics:
Private equity spent the 2012 election on the defensive as President Obama’s reelection campaign weaponized Republican nominee Mitt Romney’s history as an executive at Bain Capital, portraying him as a heartless corporate looter. And it has remained on guard against attempts to close the so-called carried interest loophole Baucus and Grassley first targeted more than a decade ago. President Trump promised to do so on the campaign trail, but the tax cut he signed into law at the end of 2017 left it mostly intact.
Warren's bill — which is cosponsored by fellow 2020 contender Sen. Kirsten Gillibrand (D-N.Y.) and a handful of other Democrats in both chambers — would tax private equity gains as ordinary income. The measure would also scotch the ability of private equity executives to pay themselves monitoring fees; change bankruptcy rules to limit benefits to executives and protect them for workers; and force executives to make their fees and returns public.
The Massachusetts Democrat, who has climbed into the 2020 field’s top tier over the last two months, has won grudging respect in some corners of Wall Street for her policy-heavy focus while benefiting from comparisons to avowed democratic socialist Sen. Bernie Sanders (I-Vt.). In her Thursday post on Medium, however, Warren made clear she will not be content just to tighten the reins on private equity. She also wants to reinstate the Glass-Steagall Act’s firewall between commercial and investment banking; limit bankers’ compensation; and impose tough new standards for capital, liquidity, leverage and living wills on the big banks.
"The truth is that Washington has it backwards," Warren wrote. "For a long time now, Wall Street’s success hasn’t helped the broader economy — it’s come at the expense of the rest of the economy. Wall Street is looting the economy and Washington is helping them do it."
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From the New York Times's Jeanna Smialek:
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