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House Financial Services Committee Hearing on Private Funds Practices

House Financial Services Committee

“America for Sale? An Examination of the Practices of Private Funds.”

Tuesday, November 19, 2019

 

Key Topics & Takeaways

  • Benefits of Private Equity: Moore, Los Angeles County Employee Retirement Association, repeatedly expressed that pension funds see the best net return from private equity funds in comparison to public equities, fixed income and real estate funds. Brett Palmer, Small Business Investor Alliance, said that private equity firms provide capital for many businesses, especially during downturns due to firms’ ability to be patient rather than pullout investments. Palmer and Drew Maloney, American Investment Council added that private equity funds help companies grow or restructure their practices by encouraging investment in and retainment of their employees. They both added that private equity firms do not aim to bankrupt companies, as it is not beneficial for GP’s or LP’s.
  • Negative Impacts of Private Equity: Eileen Applebaum, Center for Economic and Policy Research stated that private equity firms buyout companies, hospitals and housing specifically to extract resources such as real estate, to increase prices in markets with no bargaining power in order to turn a profit, leaving each sector saddled with debt. Maloney and Palmer echoed that market forces like changing technologies or natural disasters can lead to rare occurrences of bankruptcy. Maloney highlighted that private equity bankruptcy occurs at a low rate of six percent.
  • Impacts of the Stop Wall Street Looting Act and Other New Laws: Palmer said that private equity funds regulate who can invest in them, block out bad actors as well as require good practices and transparency. He said that the Stop Wall Street Looting Act would restrict private equity capital in the market, as well as cost the economy millions of jobs and tax revenue. Maloney said that research shows that anywhere from 6.2 to 26.3 million jobs and $109-475 billion in tax revenue could be lost. Moore stated that the legislation would be beneficial as there are provisions requiring disclosures and more transparent private equity practices. He stated that this would help pension funds determine how best to make investment decisions. Appelbaum suggested that private equity be regulated the same as other financial institutions.

Witnesses

Opening Statements

Chairwoman Maxine Waters (D-Calif.)

In her opening statement, Waters expressed her concern about the impact of private funds on businesses and American workers. She stated that some private equity firms play a beneficial role in the economy, but that there are far too many examples of private equity firms causing harm to companies and individuals. Waters opinioned that she would like to examine how Congress should provide oversight of private equity as well as collect more information about private equity actions.

Ranking Member Patrick McHenry (R-N.C.)

In his opening statement, McHenry stated that H.R. 3848, the Stop Wall Street Looting Act, introduced by Rep. Mark Pocan (D-Wis.) and it’s Senate companion, S. 2155, introduced by Sen. Elizabeth Warren (D-Mass.), strikes at the foundation of American capitalism. He added that analysis shows the legislation would reduce the workforce by at least 6 million jobs and tax revenue by $109 billion per year. McHenry emphasized the need for the Committee to consider legislation that promotes more competitive and free markets, rather than those that hurt the economy and vilify an industry. He noted that the private equity industry helps inject capital into the economy and provides small business lending opportunities. McHenry continued that private equity firms do not aim to bankrupt companies and “are not just about Wall Street.” He noted the successes of private equity firms in terms of job creation as well as their successes in pension fund investments, with mention of CalPERS CIO, Ben Meng, encouraging the expansion of private equity.

Rep. Carolyn Maloney (D-N.Y.)

In her opening statement, Maloney added that private equity firms need to be examined specifically on the excessive amounts of debt they pile on to companies.

Rep. Bill Huizenga (R-Mich.)

In his opening statement, Huizenga expressed the important role of private equity in supplying the capital to companies who typically cannot receive it from banks. He said that private equity supports roughly $470 billion in tax revenues, and 91 percent of pension funds invest in private equity funds.

Testimony

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

In her testimony, Appelbaum discussed how private equity deals can have positive impacts with higher returns as they maintain a significant role in the economy. However, she said that private equity funds largely are used to acquire companies for financial engineering and erode debt buffers for companies, citing the example of Toys “R” Us. Appelbaum said the Stop Wall Street Looting Act would prevent private-equity firms from “recklessly” loading companies with debt and would hold private equity firms accountable. She also encouraged the committee to make the practice of stock buybacks illegal.

Wayne Moore, Trustee, Los Angeles County Employee Retirement Association

In his testimony, Moore stated that public pension funds often utilize private equity investments, but are often overlooked when it comes to oversight of assets. He expressed the need for cost-effective investment practices, fair outcomes, openness and transparency throughout the process. Moore stated that the Stop Wall Street Looting Act includes provisions requiring transparent data collection and disclosures requirements that would benefit pension funds when making private equity investments. He emphasized that every dollar earned from an investment should be a good dollar made by good decisions.

Giovanna De La Rosa, United for Respect, former Toys “R” Us Employee

In her testimony, De La Rosa spoke on behalf of the Toys “R” Us employees who lost their jobs and pensions following the 2005 leveraged buyout of the company by private equity firms. She said that the buyout led to unnecessary cuts and changes in the company, which in turn led to the company going bankrupt. De La Rosa said there is a need for change in order to better regulate private equity firms. She concluded by noting her support for the Stop Wall Street Looting Act.

Drew Maloney, President and CEO, American Investment Council

In his testimony, Maloney stated that the private equity industry helps to create jobs, power the economy and strengthen retirement by providing a level of expertise and capital for the markets. He explained that the three forms of private equity funding are: 1) venture capital in the early cycle of investment; 2) growth capital to help companies expand; and 3) buyouts to help distressed or underperforming companies. Maloney said the ultimate goal of private equity is to help build a better business through capital allocation and management and strategy expertise. He highlighted the fact that private equity is largely invested in pension funds and endowments, and the $685 billion invested in over 4700 businesses in the last year.

Brett Palmer, President, Small Business Investor Alliance

In his testimony, Palmer stated that private equity funds are mutually beneficial partnerships between general partners (GPs) and limited partners (LPs) with the intent to maintain balanced and robust capital markets. He added that private equity funds are a good source for jobs, a force utilized for good and a driver of innovation that helps small and mid-sized companies, endowments, pension funds, and rural communities. Palmer recommended Congress work to promote and empower more private equity investment rather than reject private equity’s ability to provide businesses access to capital.

Question & Answer

Benefits of Private Equity

Reps. Bill Foster (D-Ill.), Josh Gottheimer (D-N.J.), Ben McAdams (D-Utah), Steve Stivers (R-Ohio), Anthony Gonzalez (R-Ohio), Blaine Luetkemeyer (R-Mo.), Andy Barr (R-Ky.), Scott Tipton (R-Colo.), French Hill (R-Ark.), Ted Budd (R-N.C.), Huizenga and McHenry asked various panelists about pension funds’ performance in private equity funds, the role of private equity in rural communities and the benefits of private equity in financial downturns. Moore repeatedly expressed that pension funds see the best net return from private equity funds in comparison to public equities, fixed income and real estate funds. Moore added his desire to reduce fees for pension funds in private equity investments. Palmer said that private equity firms provide capital for many businesses, especially during downturns due to firms’ ability to be patient rather than pullout investments. Palmer and Maloney added that private equity funds help companies grow or restructure their practices by encouraging investment in and retainment of their employees. They both added that private equity firms do not aim to bankrupt companies, as it is not beneficial for GP’s or LP’s.

Negative Impacts of Private Equity

Reps. Cindy Axne (D-Iowa), Katie Porter (D-Calif.), Jesus “Chuy” Garcia (D-Ill.), Sean Casten (D-Ill.), Alma Adams (D-N.C.), Vincente Gonzalez (D-Texas), Alexandria Ocasio Cortez (D-N.Y.), Rashida Tlaib (D-Mich.), and Waters asked about how private equity negatively affects the economy specifically pertaining to healthcare and housing. Applebaum stated that private equity firms buyout companies, hospitals and housing specifically to extract resources such as real estate, to increase prices in markets with no bargaining power in order to turn a profit, leaving each sector saddled with debt. She added that they separate the valuable assets of the buyout into different operational buckets, which are not included in their bankruptcy filings. De La Rosa expressed how in the case of Toys “R” Us, the private equity firms cut jobs and other services, which decreased customer services and worker benefits, eventually bankrupting the company.

Reps. Barr, Luetkemeyer and Tipton asked about forces that drive bankruptcy in private equity investments. Maloney and Palmer echoed that bankruptcy is not a winning strategy for private equity firms, and that market forces like changing technologies or natural disasters can lead to rare occurrences of bankruptcy. Maloney highlighted that private equity bankruptcy occurs at a low rate of six percent.

Impacts of the Stop Wall Street Looting Act and Other New Laws

Reps. Ed Perlmutter (D-Colo.), Brad Sherman (D-Calif.), Roger Williams (R-Texas), Bill Posey (R-Fla.), Ann Wagner (R-Mo.), Denver Riggleman (R-Va.), Gottheimer, Anthony Gonzalez, Tipton and Adams asked what impact the legislation and other regulations would have on the private equity industry. Palmer said that private equity funds regulate who can invest in them, block out bad actors as well as require good practices and transparency. He said that the Stop Wall Street Looting Act would restrict private equity capital in the market, as well as cost the economy millions of jobs and tax revenue. Maloney said that research shows that anywhere from 6.2 to 26.3 million jobs and $109-475 billion in tax revenue could be lost. He said that this would ultimately harm pension funds and the economy as a whole. Moore stated that the legislation would be beneficial as there are provisions requiring disclosures and more transparent private equity practices. He stated that this would help pension funds determine how best to make investment decisions. Appelbaum suggested that private equity be regulated the same as other financial institutions.

Diversity Practices in Private Equity

Rep. Greg Meeks (D-N.Y.) and Nydia Velazquez (D-N.Y.) asked Maloney about private equity diversity practices. Maloney stated that he is supportive of working on projects such as the Harlem or JFK project to continue making diversity in private equity stronger.

Improvements in Private Equity Practices

Reps. Al Lawson (D-Fla.), Foster, Luetkemeyer and Velazquez asked about other methods for Congress to consider in enhancing transparency standards and best practices. Applebaum and Moore emphasized the importance of private equity firms providing LPs as much information as possible. Appelbaum added that she believes LPs should form a union. Palmer and Maloney suggested that private equity firms already provide small and mid-sized firms with any requested information and aim to provide a transparent process.

Rep. Hill asked about ways to bolster rural community enhancement. Palmer said that Arkansas is taking a step in the right direction by bringing together financial leaders, banks, community leaders, universities and others to coordinate efforts. Maloney said that many members are interested and committed to responsible investing and that his firm has adopted a comprehensive guideline for ESG investing.

For more information about this hearing, click here.

For an archive of past SIFMA hearing coverage, please click here.