Senator Warren and other Democrats revive legislation to crack down on private equity buyouts

On Wednesday, a handful of the country’s most powerful Democrats introduced private equity legislation that, if passed, would represent one of the biggest crackdowns on the industry in decades.

The bill, known as Stop the Wall Street Looting Act, would prevent private equity funds from forcing the companies they buy to take out new loans to extract dividends they might not otherwise be able to afford.

The legislation would also prohibit the takeover companies to pay dividends or make redemptions for 24 months after a private equity fund has entered into a leveraged buyout to acquire the business. It would charge deferred interest at the highest rates of earned income and levy a 100% tax on commissions received from portfolio companies.

Former bankruptcy lawyer and chief author of the bill, Senator Elizabeth Warren of Massachusetts, lambasted private equity funds for exposing companies, subjecting them to high lending and leaving workers “in the limelight”. dust”.

This bill “puts an end to these abusive practices by putting private investment fund managers at the mercy of the companies they control,” she said in a statement. Senators Sherrod Brown, D-Ohio, and Tammy Baldwin, D-Wisc., Joined Warren in launching the latest version of the private equity bill on Wednesday.

By canceling private equity’s ability to leverage target companies, Warren and his peers hope to reduce the risk of those companies going bankrupt. But the bill faces long chances in a 50-50 split Senate.

There are approximately 18,000 private equity firms in the United States that hold approximately $ 5,000 billion in gross assets, according to a Securities and Stock Exchange Report published in May. Some of these assets are what is known on Wall Street as “dry powder,” where cash investors have committed funds that have yet to be spent.

Supporters of the bill say private equity investors, often referred to as limited partners, will often specify that they want their money to be spent on new investments that promise rapid growth and not, for example, to support larger investments. older ones with more limited upside potential.

By making it clear that their investments can only be spent on new acquisitions, investors hope to reap the immediate benefits of a business reorganization, better management or reduced costs. But that can leave older funds unable to support businesses acquired more than three years ago.

Critics of private equity argue that this process frequently includes indebtedness to the company to ensure that private equity investors are compensated in the form of dividends, share buybacks, or other capital buybacks while the target company is getting closer to insolvency.

a University study quoted by Warren’s office revealed that when private equity firms buy out public companies, employment declines by 13% in the two years following the acquisition.

His office also cited a separate study from Americans for Financial Reform, a nonprofit that seeks to strengthen financial regulations, which showed that between 2015 and 2019, around two-thirds of retail businesses that went bankrupt were privately owned.

“Out-of-state private equity firms have closed Wisconsin manufacturing plants and stores and laid off our workers in Janesville, Waukesha and Green Bay,” Baldwin said in prepared remarks. “Our legislation tackles the abuse of private equity and fills the loopholes these companies use to make quick money while closing businesses and laying off workers.”

The American Investment Council, the largest trading group and lobbying firm for the private equity industry, has criticized Warren’s latest draft of the plan and warned that its passage could lead to a sharp decline in investment in 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 pensions, and threaten investments in important areas, including sustainability and life sciences, ”he said in a press release.

“In its home state of Massachusetts, the private equity industry directly supports more than 307,000 jobs, invests in more than 545 companies and recently generated returns of over 72% for fiscal 2021 to strengthen the pensions of civil servants, “he added.

The AIC said in the accompanying documents that of all companies receiving private equity investments, 86% employ 500 workers or less and about a third have 10 or fewer workers on the payroll.

Private equity has remained the most profitable asset class in the broader private markets, which includes hedge funds and venture capital, since 2006.

The median performance at the start of 2021 of private equity funds raised between 2007 and 2017 is 13.3%, according to a report released in April by global consulting giant McKinsey & Co. The top return quartile for funds raised over this range of years was 21.3%.

In 2020, “dry powder hit a new high as debt became cheaper and leverage increased – factors supporting higher PE transaction activity,” the McKinsey team wrote. . “Few deals have been made in the depths of the (brief) downturn in public markets, reminding many in the industry that ‘waiting for a buying opportunity’ can mean much more waiting than buying. “