Sen. Sherrod Brown (D-Ohio), left, speaks with Sen. Elizabeth Warren (D-Mass.), during a Senate Banking, Housing and Urban Affairs in Washington, DC.
Andrew Harnik | The Washington Post | Getty Images
A handful of the nation’s most powerful Democrats on Wednesday introduced private-equity legislation that, if passed, would represent one of the largest crackdowns on the industry in decades.
The bill, known as the Stop Wall Street Looting Act, would prevent private-equity funds from forcing companies they purchase to take on new loans to extract dividends they could not otherwise afford.
The legislation would also bar takeover companies from paying dividends or making buybacks for 24 months after a private-equity fund closes a leveraged buyout to acquire the firm. It would tax carried interest at the higher earned income rates and levy a 100% tax on fees received from portfolio companies.
Sen. Elizabeth Warren of Massachusetts, a former bankruptcy lawyer and the bill’s chief author, castigated private-equity funds for stripping companies bare, saddling them with steep loans and leaving workers “in the dust.”
This bill “ends these abusive practices by putting private investment fund managers on the hook for the companies they control,” she said in a press release. Sens. Sherrod Brown, D-Ohio, and Tammy Baldwin, D-Wisc., joined Warren in debuting the latest version of the private-equity bill on Wednesday.
By quashing private equity’s ability to burden target companies with debt, Warren and her peers hope to reduce the odds that such companies file for bankruptcy. But the bill faces long odds in a Senate split 50-50.
There are about 18,000 private equity firms across the U.S. that carry about $5 trillion in gross assets, according to a Securities and Exchange report published in May. Part of those assets is what’s known on Wall Street as “dry powder,” or the cash investors have committed to funds that hasn’t been spent yet.
Proponents of the bill say that private-equity investors, often known as limited partners, will often specify that they want their cash spent on new investments that promise rapid growth and not, say, to sustain older investments with more limited upside potential.
By specifying that their investments can only be spent on new acquisitions, investors hope to reap the immediate benefits of a company’s reorganization, improved management or reduced costs. But that can leave older funds unable to sustain companies acquired more than three years prior.
Private-equity critics say that process frequently includes burdening the company with debt to ensure private-equity investors are compensated in the form of dividends, share buybacks or other capital repurchases while the targeted company slips closer to insolvency.
An academic study cited by the Warren office found that, when private-equity firms buy out public companies, employment shrinks 13% in the two years after the acquisition.
Her office also cited a separate study from Americans for Financial Reform, a nonprofit that seeks tougher financial regulations, which showed that between 2015 and 2019 about two-thirds of retail companies that went into bankruptcy were owned by private equity.
“Out of state private equity firms have shut down Wisconsin manufacturing plants and stores and laid off our workers in Janesville, Waukesha and Green Bay,” Baldwin said in prepared remarks. “Our legislation takes on private equity abuse and closes loopholes that these firms are using to make a quick buck while they shut down businesses and lay off workers.”
The American Investment Council, the largest trade group and lobbying shop for the private-equity industry, criticized the latest draft of Warren’s plan and warned that its passage could lead to a sharp pullback in investment at small businesses.
“As families and local economies across the country continue to struggle, Senator Warren’s irresponsible bill would discourage small business investment, destroy jobs, hurt retirements, and threaten investments in important fields including sustainability and life sciences,” he said in a press release.
“In her home state of Massachusetts, the private equity industry directly supports over 307,000 jobs, invests in over 545 companies, and recently delivered FY 2021 returns of over 72% to strengthen public servants’ pensions,” he added.
The AIC said in accompanying materials that of all businesses receiving private equity investments, 86% employ 500 or fewer workers and about one-third have 10 or fewer workers on payroll.
Private equity remains the highest-returning asset class in the broader private markets, which includes hedge funds and venture capital, since 2006.
Median performance through early 2021 of private equity funds raised between 2007 and 2017 is 13.3%, according to report published in April by global consulting giant McKinsey & Co. The top return quartile for funds raised in that range of years was 21.3%.
In 2020, “dry powder reached another new high, while debt grew cheaper and leverage increased—factors providing upward support for PE deal activity,” the McKinsey team wrote. “Few transactions were completed in the depths of the (brief) slide in the public markets, reminding many in the industry that ‘waiting for a buying opportunity’ may entail a lot more waiting than buying.”