Democrats on Tuesday made the case for a crackdown on private equity firms during a hearing of the House Financial Services Committee.
The hearing came as both Democratic lawmakers and many of the party’s presidential contenders take aim at the controversial investment firms.
A proposal from Sen. Elizabeth Warren (D-Mass.), a 2020 candidate, to curb debt-laden corporate buyouts dominated the hearing, with Chairwoman Maxine Waters (D-Calif.) touting provisions of the Stop Wall Street Looting Act she said would stop private equity firms from “destroying companies and preying on hardworking Americans to maximize their profits.”
“People’s lives and health are at stake,” Waters said, citing the 2018 bankruptcy of HCR ManorCare, a nursing home chain where health-code violations soared 26 percent after it was purchased by The Carlyle Group, a powerful investment firm.
Private equity firms are investors who use their private capital, often buying control of public companies with the aim of making those businesses more profitable or valuable to shareholders.
In recent weeks, a number of Democrats have taken aim at the industry and its practices, accusing private equity firms of shuttering business and cutting jobs while investors walk away with massive profits.
Progressive Rep. Alexandria Ocasio-Cortez (D-N.Y.) last week offered her support for musician Taylor Swift, who says two music executives own some of her older songs and have prohibited her from performing them.
“Private equity groups’ predatory practices actively hurt millions of Americans,” Ocasio-Cortez tweeted about the backing of a private equity firm in purchasing Swift’s songs.
Warren has made reining in private equity a centerpiece of her plans for Wall Street, and her rise in the Democratic primary has posed a serious challenge for the industry.
Warren and other industry skeptics in particular have seized on the bankruptcy of Toys R Us after a leveraged buyout by private equity firms.
The iconic toy retailer crumbled under financial pressure after private equity firms loaded its books with $5 billion in debt obtained to purchase the chain. While the investment firms walked away with millions of dollars in fees, 30,000 Toys R Us workers were laid off, initially without severance pay.
“From day one, they started making all kinds of cuts that weren’t needed,” said Giovanna De La Rosa, a former Toys R Us manager who helped organize efforts to secure a $20 million severance fund and who testified at Tuesday’s hearing.
“Other retail workers are also going through the nightmare of having private equity firms or hedge funds putting their stores out of business,” De La Rosa added, citing the struggles of Sears, Payless and Kmart.
Warren’s bill would seek to end that practice by preventing private equity firms from taking money from a business they loaded with debt until the business becomes profitable. The bill would also hold investment firms legally liable for bankruptcy and severance if the acquired business goes under.
“Private equity investing in Toys ‘R Us really meant squeezing the company of every opportunity,” said Rep. Jesús García (D-Ill.), the lead sponsor of the House version of Warren’s proposal. “When it collapsed it left workers to pick up the pieces.”
For many Democrats on Capitol Hill and on the presidential campaign trail, private equity is increasingly becoming their new Wall Street punching bag. But the hearing also highlighted divides among Democrats over how to regulate powerful nonbank investment firms, with some lawmakers questioning the Warren bill’s tough rules.
“We’ve seen private equity attacked for doing things that are done elsewhere in our economy,” said Rep. Brad Sherman (D-Calif.), who described himself as “not hostile” to the industry.
“We’ve seen stores closed for a lot of reasons. I’m not sure it’s the private equity model,” he added.
Some moderate Democrats pitched smaller fixes, such as boosting investments in minority- and women-owned companies and increasing transparency into private equity firm’s business models.
Lawmakers in both parties also peppered witnesses on which class of investments provide the highest returns for pensions plans.
“I’ve said this four or five times: It’s private equity,” said Wayne Moore, trustee for the Los Angeles County Employee Retirement Association, adding that their pension yielded a 13.1 percent return through investments in private capital funds.
Rep. Gregory Meeks (D-N.Y.) said that while lawmakers have the responsibility to ensure workers laid off by private equity firms face “a softer blow,” Congress must also protect those “dependent upon a return on investment from private equity.
“We want to make sure that they get that return on investment,” Meeks said, noting that he’s trying to help a business in his district score private equity money to stay afloat.
Ocasio-Cortez, though, fired back that lawmakers who focus on pension returns “almost betray the priorities” of their most vulnerable constituents.
“The first question that I hear from so many members are, ‘How are the returns? But the returns are great, aren’t they?’” said Ocasio-Cortez. “I wasn’t sent here to safeguard and protect profit. I was sent here to safeguard and protect people.”
Several GOP lawmakers bashed Democrats for “vilifying” an industry responsible for thousands of jobs, suggesting they were doing Warren’s bidding instead of fostering a competitive economy.
“Hooray, we’re here today to debate presidential politics,” said Rep. Patrick McHenry (R-N.C.), the panel’s ranking member. He called the hearing “a presidential rally for Sen. Warren.”
Private equity firms are no strangers to left-wing political pressure and have invested millions of dollars in trying to shed a reputation driven by the infamous 1980s culture of predatory firms taking over failing businesses.
In the 2012 presidential campaign, then-President Obama targeted his GOP challenger, Mitt Romney, over Romney’s tenure at Bain Capital.
One 2020 Democratic contender, former Massachusetts Gov. Deval Patrick, also worked at Bain.
American Investment Council President Drew Maloney, chief of the main lobbying group for private equity firms, stressed that the industry does far more than strip companies for parts and drive them into bankruptcy.
“Private equity provides patient, long-term capital that allows management to think beyond quarterly earnings and short-term fluctuations in the stock price,” Maloney told the committee, adding that the industry supported 8.8 million jobs in 2018.