News & Analysis

driven by the PitchBook Platform

4 key takeaways from Congress’ private equity hearing

With the impeachment hearing underway, the US House Intelligence Committee was continuing its role in the spotlight Tuesday. Yet, simultaneously, the Financial Services Committee was gathering for a hearing of its own. We took a look at the key players and takeaways.

It was just another Tuesday on Capitol Hill.

With the impeachment hearing underway, the US House Intelligence Committee was continuing its role in the spotlight. Yet, simultaneously, the Financial Services Committee was gathering for a hearing of its own, ominously dubbed: “America for Sale? An Examination of the Practices of Private Funds.”

While PitchBook doesn’t cover impeachment, we do indeed cover private equity—an arena that has seen a lot of recent political drama. Here’s a look at some of the characters and takeaways that defined Tuesday’s PE showdown, which occurred just a day after Sen. Elizabeth Warren (D-MA), perhaps the industry’s most vocal political critic, slammed Blackstone for reaping “shameless” profits from the 2008 housing crisis.

The witnesses

Eileen Appelbaum
PhD; Co-Director, Center for Economic and Policy Research

Decidedly anti-PE, given this line in her witness testimony: “In ways large and small, Main Street is being pillaged by Wall Street’s largest private investment firms.”

Wayne Moore
Trustee, Los Angeles County Employee Retirement Association

Not clearly for or against PE, he indicated that it’s his best performing asset but also said that he needs more information. From his witness testimony: “I have come to believe the interests of the financial services industry and the interests of our public pension plans are not properly aligned. I am especially apprehensive about the asset-based management fee construct and its lack of correlation with the services provided and the level of performance achieved in asset management.”

Giovanna De La Rosa
Leader, United for Respect; lost her job at Toys R Us after the company went bankrupt following PE’s takeover

A PE opponent, she helped organize efforts for the $20 million Toys R Us severance fund for former employees. At the hearing she said: “From Day One, they started making all kinds of cuts that weren’t needed.”

Drew Maloney
President and CEO, American Investment Council

A clear PE supporter, based on his witness testimony: “Our industry creates jobs, powers the economy and strengthens the retirements of millions of Americans.”

Brett Palmer
President, Small Business Investor Alliance

Also on Team PE, per his witness testimony: “Private equity is a positive force for job creation, innovation and expanding prosperity to the people and places that are not yet fully benefiting from our system of free enterprise.”

The major takeaways

1) The partisan divide remains glaring

Today’s political climate can be summed up in one word: polarized. Thursday’s private equity hearing was no exception. Republicans were squarely in the pro-PE camp, while Democrats mostly opposed private equity to varying degrees.

Rep. Roger Williams (R-TX) shared a quote from the chairman of the Houston Firefighters’ Relief and Retirement Fund, who said “private equity opportunities far exceed those available in stock market investing for the foreseeable future.” (Not surprisingly, he didn’t mention the TXU fiasco.) Rep. Denver Riggleman (R-VA) described how private equity investments helped his own small business grow after he couldn’t get a bank loan. And Rep. Ann Wagner (R-MO) shared that in her congressional district, “there are over 47,000 constituents working at private equity-backed companies.”

In general, the other side of the aisle did not extend such kindness to the PE industry. Rep. Rashida Tlaib (D-MI) referenced instances of surprise medical billing from PE-backed companies as evidence of a “corporate disease,” doubling down to say that “corporate greed is tainting our democracy.” Rep. Alexandria Ocasio-Cortez (D-NY) said “we need to think about our economy not just in terms of returns,” pointing to jobs lost after PE takeovers. However, the more moderate Rep. Al Lawson (D-FL) stated, “private equity is the best performing asset class for public pensions, and that is true here in Florida.”

2) Pension returns may not be as high as they seem

Public pensions are major investors in private equity funds, and thus commanded airtime on Tuesday. Per American Investment Council president and CEO Drew Maloney, 91% of public pension funds have invested some portion of their capital in private equity. The high returns that pensions receive from PE funds is a classic industry defense.

Wayne Moore, a Los Angeles County Employee Retirement Association trustee, explained that “private equity is the best performing class net of fees.”

But Eileen Appelbaum, Center for Economic and Policy Research co-director, pointed out that returns from PE funds, measured in terms of IRR, have not outpaced the S&P Index over time.

3) Toys R Us is an example of the damage PE can cause

A former Toys R Us employee, Giovanna De La Rosa, also joined the hearing. De La Rosa shared examples of job cuts and changes to the company culture, including canceled employee birthday gifts and holiday parties, that occurred after private equity got involved with the toy company. She also described the decline in her mental health following PE’s takeover of her former employer.

The Toys R Us bankruptcy fiasco popped up again and again in the hearing. When Maloney was asked if it was PE-driven debt or Amazon that bankrupted Toys R Us, he responded that it was impossible to know. Overall, the defense of the industry was focused on the benefits of private money when it comes to small and medium-sized companies. It largely ignored mega-deals gone wrong.

4) A lack of transparency in the private markets continues to be a problem

Several players repeatedly called out the lack of transparency in private markets. According to Appelbaum, firms “have an interest in keeping private as much as they want to keep private.”

She also said that IRR is a poor measure of PE performance, claiming a public market equivalent would provide much more information. IRR figures can be inflated, as GPs take out loans against the capital from LPs, then call that capital down at the last minute for an investment. “We really just have snapshots,” she added.

Until next time ...

The hearing ended on a decidedly foreboding note. Appelbaum shared her view that “a lot of companies are going to go under in the next recession” due to debt burdens from leveraged buyouts. There will be “a lot, a lot of pain,” she said.

Private equity is shaping political discourse like never before, with voters and policymakers alike scrambling to understand the notoriously introverted industry that commands billions. And, with the presidential primaries on the horizon, the topic will likely only gain traction.

Featured image via Kent Kawashima/CC by 2.0

Join the more than 1.5 million industry professionals who get our daily newsletter!