Congress must act on measure putting tighter regulation on private equity firms

Greg Nash

In the last five years, the grocery sector has endured a wave of bankruptcies. Seven large chains, employing more than 125,000 workers, have fallen victim. All were private equity-owned.

The private equity industry is a major player in the American economy, owning companies that employ nearly 6 million people. In the first half of 2019, the value of leveraged buyouts climbed to a near-record $256 billion.

As elected officials, we have several responsibilities that interact with this massive sector of the economy. We play a role in investing pension funds and other public funds, some of which are managed by private equity firms. We have a responsibility to the long-term fiscal health of our governments, which rely on a vibrant and sustainable economy. And most importantly, we have a duty to tend to the well-being of the communities we represent, including the economic security and dignity of millions of workers.

Unfortunately, some private equity firms engage in practices that harm all of these objectives.

These firms fail to clearly disclose fees they charge investors — even public funds that are investing taxpayer dollars. They don’t even disclose investment returns in a consistent and transparent way, and their promotional materials can be downright misleading about past performance.

Private equity buyout firms have set up a business model that allows many of them to buy companies, load those firms up with debt, and then pay themselves massive and often secret fees with that borrowed money. If the companies go bankrupt, investors like public funds might not get paid. Worse yet, these predatory practices harm the economy and make it harder for the governments we represent to stay solvent over the long term.

Apparently some private equity companies don’t mind looting a community to make a quick buck and then walking away to search for the next opportunity somewhere else. But we don’t get to operate that way, and we have no desire to — our job is to make sure that our communities are prosperous next year, next decade, and the decade after that.

The most pernicious fallout, though, is for workers. When private equity-owned companies go bankrupt, it’s usually to lay off workers and get out of their own obligations. Hundreds of thousands of workers have lost their employment at private equity-owned companies in the retail sector in the last few years alone. These job losses tear families and neighborhoods apart.

None of this is to say that private equity is necessarily all bad. The idea of the industry is simple and reasonable: sometimes a company has room to grow and become more productive, but its current ownership isn’t in a position to capitalize on that opportunity. In this situation, it makes sense for an investment vehicle run by experts to pool private capital, buy the firm, take it to the next level, and then sell it. This generates a profit for private equity firm and its investors, it helps the company that gets purchased, and it creates more economic opportunity for society at large.

The problem is that, because of persistent lobbying on the part of some of the wealthiest people in the country, private equity is dangerously under-regulated. That means that predatory and destructive activity like looting assets, hiding fees, and strategically using bankruptcy without regard for the well-being of workers is perfectly legal.

As long as these practices are allowed, they will happen, and as long as they happen, our communities are at risk. That’s why sensible federal legislation to rein in this harmful behavior is needed.

Fortunately, legislation was introduced recently in Congress to provide essential regulation of the private equity industry. S. 2155, The Stop Wall Street Looting Act, would protect workers, communities, and investors alike by prohibiting some of the worst abuses, eliminating tax breaks for others, and finally mandating real transparency for this industry.

As investors of public funds, we are excited about how much the passage of this legislation would help us better do our jobs. But we are even more excited about the benefits to workers, which would provide urgently needed economic stability and dignity to the communities we are proud to represent. We urge Congress to pass S. 2155 without delay.

Michael Frerichs is Illinois State Treasurer. Joe Torsella is State Treasurer for the Commonwealth of Pennsylvania.

Tags private equity firm regulation

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