[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
AMERICA FOR SALE? AN EXAMINATION
OF THE PRACTICES OF PRIVATE FUNDS
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HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
NOVEMBER 19, 2019
__________
Printed for the use of the Committee on Financial Services
Serial No. 116-66
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
42-474 PDF WASHINGTON : 2021
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California ANN WAGNER, Missouri
GREGORY W. MEEKS, New York PETER T. KING, New York
WM. LACY CLAY, Missouri FRANK D. LUCAS, Oklahoma
DAVID SCOTT, Georgia BILL POSEY, Florida
AL GREEN, Texas BLAINE LUETKEMEYER, Missouri
EMANUEL CLEAVER, Missouri BILL HUIZENGA, Michigan
ED PERLMUTTER, Colorado STEVE STIVERS, Ohio
JIM A. HIMES, Connecticut ANDY BARR, Kentucky
BILL FOSTER, Illinois SCOTT TIPTON, Colorado
JOYCE BEATTY, Ohio ROGER WILLIAMS, Texas
DENNY HECK, Washington FRENCH HILL, Arkansas
JUAN VARGAS, California TOM EMMER, Minnesota
JOSH GOTTHEIMER, New Jersey LEE M. ZELDIN, New York
VICENTE GONZALEZ, Texas BARRY LOUDERMILK, Georgia
AL LAWSON, Florida ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam WARREN DAVIDSON, Ohio
RASHIDA TLAIB, Michigan TED BUDD, North Carolina
KATIE PORTER, California DAVID KUSTOFF, Tennessee
CINDY AXNE, Iowa TREY HOLLINGSWORTH, Indiana
SEAN CASTEN, Illinois ANTHONY GONZALEZ, Ohio
AYANNA PRESSLEY, Massachusetts JOHN ROSE, Tennessee
BEN McADAMS, Utah BRYAN STEIL, Wisconsin
ALEXANDRIA OCASIO-CORTEZ, New York LANCE GOODEN, Texas
JENNIFER WEXTON, Virginia DENVER RIGGLEMAN, Virginia
STEPHEN F. LYNCH, Massachusetts WILLIAM TIMMONS, South Carolina
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota
Charla Ouertatani, Staff Director
C O N T E N T S
----------
Page
Hearing held on:
November 19, 2019............................................ 1
Appendix:
November 19, 2019............................................ 65
WITNESSES
Tuesday, November 19, 2019
Appelbaum, Eileen, Co-Director, Center for Economic and Policy
Research....................................................... 5
De La Rosa, Giovanna, United for Respect Leader, and former Toys
R Us employee.................................................. 8
Maloney, Drew, President and CEO, American Investment Council.... 9
Moore, Wayne, Trustee, Los Angeles County Employees Retirement
Association (LACERA)........................................... 6
Palmer, Brett, President, Small Business Investor Alliance....... 11
APPENDIX
Prepared statements:
Appelbaum, Eileen............................................ 66
De La Rosa, Giovanna......................................... 83
Maloney, Drew................................................ 94
Moore, Wayne................................................. 99
Palmer, Brett................................................ 102
Additional Material Submitted for the Record
Waters, Hon. Maxine:
Written statement of the AFL-CIO............................. 115
Written statement of Americans for Financial Reform.......... 124
Written statement of the California State Teachers'
Retirement System.......................................... 175
Written statement of the Center for Popular Democracy........ 177
Written statement of the Communications Workers of America... 190
Written statement of the Economic Policy Institute........... 192
Written statement of the Fire and Police Pension Association
of Colorado................................................ 200
Article submitted by David Halperin entitled, ``Warren Probes
Private Equity Owners of For-Profit Colleges,'' dated
September 17, 2019......................................... 201
Written statement of Leo Hindery, Jr......................... 207
Written statement of the Institutional Limited Partners
Association................................................ 210
Written statement of Manufactured Housing Action............. 216
Written statement of NewsGuild-CWA........................... 219
Written statement and Report of the Private Equity
Stakeholder Project........................................ 228
Written responses to questions for the record submitted to
Eileen Appelbaum........................................... 255
Written responses to questions for the record submitted to
Wayne Moore................................................ 271
Written responses to questions for the record submitted to
Brett Palmer............................................... 282
Written statement of the State Board of Administration of
Florida.................................................... 286
Article from the Times Herald-Record entitled, ``New Windsor
mobile home park residents protest upcoming rent hike''.... 288
Written statement of the Transportation Trades Department,
AFL-CIO.................................................... 292
Op-Ed from Truthout entitled, ``Let's Stop Wall Street
Predators From Banking on Displacement''................... 298
Article from The Washington Post entitled, ``A billion-dollar
empire made of mobile homes''.............................. 309
Written statement of Worth Rises............................. 319
Gottheimer, Hon. Josh:
TRU Financial Assistance Fund Final Protocol................. 331
McHenry, Hon. Patrick:
Written statement of the International Franchise Association. 343
Riggleman, Hon. Denver:
Center for Capital Markets Competitiveness report entitled,
``Economic Impact Analysis of the Stop Wall Street Looting
Act (S.2155/H.R. 3848)..................................... 345
AMERICA FOR SALE? AN EXAMINATION
OF THE PRACTICES OF PRIVATE FUNDS
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Tuesday, November 19, 2019
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:08 a.m., in
room 2128, Rayburn House Office Building, Hon. Maxine Waters
[chairwoman of the committee] presiding.
Members present: Representatives Waters, Maloney,
Velazquez, Sherman, Meeks, Clay, Green, Perlmutter, Foster,
Beatty, Vargas, Gottheimer, Gonzalez of Texas, Lawson, Tlaib,
Porter, Axne, Casten, McAdams, Ocasio-Cortez, Wexton, Adams,
Dean, Garcia of Illinois, Garcia of Texas, Phillips; McHenry,
Wagner, Lucas, Posey, Luetkemeyer, Huizenga, Stivers, Barr,
Tipton, Williams, Hill, Emmer, Loudermilk, Mooney, Davidson,
Budd, Kustoff, Hollingsworth, Gonzalez of Ohio, Rose, Steil,
Gooden, and Riggleman.
Chairwoman Waters. The Committee on Financial Services will
come to order. Without objection, the Chair is authorized to
declare a recess of the committee at any time.
Today's hearing is entitled, ``America for Sale? An
Examination of the Practices of Private Funds.'' I now
recognize myself for 4 minutes to give an opening statement.
Today, this committee convenes for a hearing to examine the
impact of private funds on businesses and workers. While there
are some examples of private equity firms playing a beneficial
role in the U.S. economy, there are far too many examples of
private equity firms destroying companies, and preying on
hardworking Americans to maximize their profits. Today, we are
going to take a hard look at those practices and examine
whether Congress should take action to prevent the drastic
increase from the $250 million it spent in 2009 on those
industries.
After the devastation of the foreclosure crisis in which
millions of people lost their homes through no fault of their
own, private equity firms swooped in and purchased hundreds of
thousands of foreclosed homes at discounted prices. In many
cases, they converted these homes to rentals, charged
excessively high rents, and became absentee landlords without
community ties. Private equity firms increasingly hold
ownership of hospitals, nursing homes, and emergency services.
In 2018 alone, private equity firms spent a total of $10.4
billion buying up hospitals and medical clinics, a drastic
increase from the $250 million it spent in 2009 on those
industries.
A New York Times investigation found that an ambulance
company owned by private equity Rural/Metro Corporation had
slower response times under private equity ownership and
undertook, ``more aggressive billing practices.'' According to
the report, ``Rural/Metro once sent 761 collection notices to
an infant girl born in an ambulance.''
In the retail industry, 10 of the last 14 companies that
have declared bankruptcy are owned by private equity firms. For
example, Toys R Us was acquired by private equity firms in a
real estate investment trust in 2005. By 2018, Toys R Us had
declared bankruptcy, laid off all 30,000 of its employees, and
closed all of its stores. Meanwhile, the company's private
equity owners had pocketed $470 million in fees and interest
payments from the company.
Today, we will hear testimony from Ms. Giovanna De La Rosa,
a former Toys R Us employee and advocate.
These are just a few examples of the harm that private
equity firms have caused. Unfortunately, the private equity
firms the committee invited to testify at this hearing today
declined to send representatives to engage and answer questions
about their activities. So I would like to thank Drew Maloney,
president and CEO of the American Investment Council, which is
a trade group that represents private equity firms, for joining
us today and testifying on behalf of the industry. But while he
will testify on private equity as an industry, Mr. Maloney will
not be able to adequately speak to the practices or activities
of specific firms.
And so, while we will get started with this today, we are
going to have to determine what other actions we may have to
take in order to get the information that we think we need in
order to make some determinations about what exactly is going
on in our society with private equity firms.
I now recognize the ranking member of the committee, the
gentleman from North Carolina, Mr. McHenry, for 4 minutes for
an opening statement.
Mr. McHenry. I thank the chairwoman for holding this
hearing today. And while my Democratic colleagues are not only
down the hall attempting to undo the 2016 election, it appears
today that committee Democrats are working to predetermine the
2020 Democratic nomination for their party.
Today's hearing is devoted to H.R. 3848, the House
companion to Senator Elizabeth Warren's bill, and a key tenet
of her Presidential platform. Hooray. We are here today to
debate Presidential politics. Moreover, one of our witnesses
testifying here today is cited in Senator Warren's press
release from her Presidential campaign as providing ``the
economic analysis'' of the bill and its impact.
This bad bill strikes at the foundation of American
capitalism. I know there is a socialist lane in the Democrat
primary for President. This clearly is that fight for that
socialist lane. It has harmful effects as well. A recent, more
detailed analysis of the bill found that in a modest-case
scenario, the low range, this bad bill would reduce the
American workforce by 6 million jobs and lead to $109 billion
per year in lower tax revenue. That is the tax revenue piece
only. To repeat, that is a conservative estimate. In fact, the
worst-case scenario says that over 26 million jobs could be
lost. To sum up the Warren bill, this bad bill, if enacted,
would be a disaster for American workers.
Congress should be focused on policies that make the
economy more free, open up opportunities, and make the capital
markets more attractive and more competitive against our
competitors around the globe, rather than bills that add
regulatory cost and harm our markets and hurt jobs. Good
policies such as the bipartisan bills we passed in the last
Congress could lead to greater opportunity and choices for
everyday investors to grow their savings. Instead, this
committee wants to use Full Committee hearing time to go after
and vilify one industry.
There will likely be several misconceptions presented today
by my Democrat friends, so I want to use some of my time here
to address those. First, private equity is not just about large
investors buying out large companies. Generally speaking,
private equity is a variety of private investment from venture
capital, to capital injections for small businesses, to lending
so that small businesses could buy mismanaged other businesses
that have potential, huge potential, if just managed correctly.
Second, the private equities business model does not
involve intentionally bankrupting companies. Bankruptcy is
failure. Failure is not a part of the business model; success
is. That is where you see the job growth. That is where you see
the returns. And so the idea that an industry could benefit by
failing doesn't make sense.
Third, a misconception that some will present is that
private equity is just about Wall Street. It is not. Private
equity creates investment opportunities that lead to jobs.
According to a recent Ernst & Young study of the impact of
private equity in the U.S. last year, private equity supports
at least 100,000 jobs in 27 States and over 10,000 jobs in each
State.
Additionally, Americans directly benefit through pensions.
U.S. pension funds invest about 9 percent of their portfolios
in private equity, and that same study found that private
equities outperformed investment in public equity, fixed
income, and real estate over the last decade. That means that
everyday investors, including teachers and firefighters and
police officers, all benefit. But don't take my word for it.
The chief investment officer of CalPERS recently said the
following, ``We need private equity to be successful, we need
more of it, and we need it sooner rather than later.''
With that said, I do want to note that private equity has
become more important in the American economy due in no small
part to increased regulatory barriers on public companies. We
should remedy that public company piece, not have a
Presidential rally for Senator Warren.
Chairwoman Waters. I now recognize the gentlewoman from New
York, Mrs. Maloney, who is also the Chair of our Subcommittee
on Investor Protection, Entrepreneurship, and Capital Markets,
for 1 minute.
Mrs. Maloney of New York. Thank you, Madam Chairwoman.
Many private equity funds have caused needless suffering
for ordinary workers, especially in the retail sector. All too
often when a private equity fund buys a company, they pile an
excessive amount of debt onto the company and then use the
bankruptcy system to slash pensions and benefits for ordinary
workers. While not all private equity funds are created equal,
it is clear that our committee needs to closely examine these
practices.
I am also pleased that this hearing will examine the Stop
Wall Street Looting Act, which has been introduced in the House
by Mr. Pocan and Ms. Jayapal. This bill would require private
equity funds to share the liability for the debt that they pile
onto their portfolio companies. I believe that there is a good
case to be made for increased risk sharing between private
equity funds and portfolio companies in order to deter the
``heads I win, tails you lose'' mentality.
Thank you, and I yield back. And thank you for having this
important hearing.
Chairwoman Waters. I now recognize the ranking member of
the subcommittee, the gentleman from Michigan, Mr. Huizenga,
for 1 minute for an opening statement.
Mr. Huizenga. Private equity (PE) is an important aspect of
the U.S. capital markets that helps create jobs and bolster
pension returns for Main Street Americans. Most PE firms make
long-term investments in companies poised for growth as well as
undervalued or underperforming businesses by providing critical
working capital that would otherwise be unavailable through
traditional banks. It is important to note that the U.S.
private equity sector drives a significant amount of economic
growth in the United States and supports more than 26 million
American jobs, which contributes $475 billion in annual
Federal, State, and local tax revenues.
Additionally, the profits from private equity are funding
the retirement security of millions of pensioners. According to
the American Investment Council, 91 percent of U.S. public
pension funds have invested a portion of their portfolios in
private equity. In Michigan, for the State of Michigan's
pension fund, that means $71.2 billion. Needless to say,
investments made by the private equity industry in our local
communities all across the nation are playing a vital role in
job creation, wage growth, and retirement savings.
In my district alone, private equity firms have helped
create or sustain over 5,700 jobs, and private equity
investment was $4 billion, helping companies such as JR
Automation in Holland, Brillcast in Grand Rapids, Challenge
Manufacturing in Walker, and I could go on. Private equity is a
fundamental part of our economy and plays a direct role in our
districts by working to make businesses more successful.
I look forward to hearing from our witnesses today, and I
yield back the balance of my time.
Chairwoman Waters. I want to welcome today's distinguished
panel: Eileen Appelbaum, co-director, Center for Economic and
Policy Research; Wayne Moore, trustee, Los Angeles County
Employee Retirement Association; Giovanna De La Rosa, United
for Respect, and a Toys R Us employee for 20 years; Drew
Maloney, president and CEO, American Investment Council; and
Brett Palmer, president, Small Business Investor Alliance.
Each of you will have 5 minutes to summarize your
testimony. When you have 1 minute remaining, a yellow light
will appear. At that time, I would ask you to wrap up your
testimony so we can be respectful of both the witnesses' and
the committee members' time.
And without objection, all of your written statements will
be made a part of the record.
Ms. Appelbaum, you are now recognized for 5 minutes to
present your oral testimony.
STATEMENT OF EILEEN APPELBAUM, CO-DIRECTOR, CENTER FOR ECONOMIC
AND POLICY RESEARCH
Ms. Appelbaum. Chairwoman Waters, Ranking Member McHenry,
and distinguished members of the committee, I am very pleased
to be here today to discuss private investment funds.
Most private equity deals are used to acquire small and
medium-sized companies, and here my research shows that private
equity can bring know-how that makes a positive difference.
These investments generally have higher returns than
acquisitions of big companies. But in what one finance writer
called the paradox of private equity, most private equity money
goes into acquiring large companies that offer few
opportunities for improving operations and many for financial
engineering.
Activist hedge funds take small stakes in major companies
and then call the shots. Hedge funds make money from short-term
increases in share prices, then sell before the negative
consequences are apparent.
Exemption from regulations that rule out risky behaviors
enables private funds to gamble with the future of acquired
companies while funneling money to wealthy private equity
partners.
Private investment funds play a significant role in the
U.S. economy. Over the past decade, assets managed by hedge
funds and private equity funds have exploded. They doubled for
hedge funds, septupled for private equity funds, and now exceed
$3 trillion for each. There were nearly 10,000 private equity
buyouts between 1980 and 2013, according to a study by Chicago
and Harvard economists. They had data for 6,000 companies
employing 6.9 million workers at the time of the buyout.
Thirteen percent of workers at publicly traded companies lost
their jobs in the next 2 years. Overall, 4.4 percent or 304,000
workers lost jobs.
Big private equity firms buy out large, viable companies
and use their assets as collateral for risky levels of debt
that the company and not its private equity owners must repay.
This erodes the buffer that companies have to make it through
hard times. Toys R Us is the poster child. It was purchased
with $5.5 billion in debt. It went from a capital structure of
87 percent equity and just 13 percent debt before it was
acquired to an upside down 17 percent equity and 83 percent
debt. Yearly interest payments exceeded $400 million, and total
advisory and other payments that went straight to the private
equity firm were another $470 million eating up profits. Toys
failed. Its stores were shuttered, and 33,000 workers lost
their jobs.
It is this reckless loading of debt onto companies that the
Stop Wall Street Looting Act would end by requiring the private
equity firm and the fund's general partner to be jointly liable
with the company for repayment.
Add-ons are another favorite tactic. Private equity firms
buy small competitors to add onto an initial acquisition,
building national powerhouses without any antitrust
supervision. Private equity-owned Envision and TeamHealth own
hundreds of doctors' practices and have more than 90,000
employees in hospitals and other health facilities across the
country. Both have multibillion dollar loans to pay off. They
use surprise medical bills or the threat of such bills to get
much higher payments than other doctors receive, driving up
healthcare costs.
Hedge funds pursue profits through the purchase and sale of
stock in publicly traded companies. Stock buybacks that were
illegal before 1982 because they are a form of market
manipulation are widely used by hedge funds to raise share
prices and then cash out before the effects of draining
resources, like the plant closings at General Motors, become
apparent. As we speak, AT&T management is capitulating to
similar demands from a hedge fund that owns just 1 percent of
its stock. At DuPont, the hedge fund firm used a small stake to
break up the company and shut down a premier research facility
that was a major source of U.S. innovation. It sold its shares
before the reorganization was completed.
The Reward Work Act would make stock buybacks and
manipulation of share prices illegal again. The Stop Wall
Street Looting Act will bring the incentives for private
investment funds in line with their stated aspirations: to
improve operations at companies they invest in. This and other
pending legislation will reduce opportunities for financial
abuse and ensure that capital is deployed in support of
economic growth and rising living standards.
Thank you.
[The prepared statement of Dr. Appelbaum can be found on
page 66 of the appendix.]
Chairwoman Waters. Thank you.
Mr. Moore, you are now recognized for 5 minutes to present
your oral testimony.
STATEMENT OF WAYNE MOORE, TRUSTEE, LOS ANGELES COUNTY EMPLOYEES
RETIREMENT ASSOCIATION (LACERA)
Mr. Moore. Chairwoman Waters, Ranking Member McHenry, and
members of the committee, I am honored to be here this morning
as a public pension fund retiree, trustee, and taxpayer. As a
fiduciary, I am responsible for protecting public pension plan
assets and ensuring promised benefits are delivered. That
begins with openness and transparency between us and the asset
management industry.
Public pension funds will pay up to $45 billion in fees and
expenses to the industry this year, a massive transfer of
wealth from workers to Wall Street. My fiduciary duties include
making sure we get what we paid for.
More than 20 million active and retired public employees
have accumulated over $4.5 trillion in assets to provide for
their secure retirements. They are often overlooked during
discussions about complex legal and financial strategies,
profits, and bonuses. It is past time for workers to exercise
greater oversight over their assets.
Along with openness and transparency, we must have cost-
efficient investment practices, fair returns, and outcomes that
support a growing economy. My constituents expect no less. Last
year, at the Los Angeles County Employees Retirement
Association, where I am a trustee, 3,800 general members
retired. They received an average annual retirement benefit of
$45,400.
Controlling and minimizing the cost of investing through a
more open and transparent data collection regime as proposed in
H.R. 3848 is not an inconsequential exercise. If we could save
just $1 million in the cost of investing, those savings
invested at 6\1/4\ percent would fund 2 average L.A. County
pensions for 20 years, including a 2\1/2\ percent annual COLA.
While private equity is our pension fund's best performing
asset, it is also our most costly asset. While just 10 percent
of our portfolio, private equity makes up over half of our
investment management costs.
Over the past decade, many initiatives have been launched
to address transparency issues with private equity managers.
While much has been accomplished, for example, California's AB-
2833, more needs to be done. The disclosures proposed in H.R.
3848 are important to investors and the public as more complete
information means sounder and more meaningful asset allocation
decisions.
Public pension funds are eager to participate in the
growing, worldwide private economy. As a matter of fact, in
2019, Preqin reported that 31 U.S. public pension funds
provided 35 percent of worldwide allocations to private equity
firms. We do not, however, want to participate through
financial engineering, destabilizing our communities, and
undermining our future for short-term gains.
Many fund sponsors, participants, and beneficiaries want to
see ourselves in our investments; people who look like us
making investments that will favorably impact our lives. If I
lived in Ohio, I might want to see investments in
manufacturing. In California, investments around agriculture
and logistics are just as important as technology. Every dollar
we earn from investment should be a good dollar.
Being informed by the impact of investment decisions on our
constituents is good information. Being open and transparent
means helping investors in private equity make good decisions.
Private equity is not a sector of our economy. They buy
stakes in sectors of our economy. However, just buying and
owning a company does not automatically make you a job creator
or an engine of economic growth. It is the outcomes of what you
do after the purchases that is important.
As a major stakeholder fueling the private equity industry,
pension funds must have a greater oversight role in our
investments. After all, it is our money.
Thank you.
[The prepared statement of Mr. Moore can be found on page
99 of the appendix.]
Chairwoman Waters. Thank you.
Ms. De La Rosa, you are now recognized for 5 minutes to
present your oral testimony.
STATEMENT OF GIOVANNA DE LA ROSA, UNITED FOR RESPECT LEADER,
AND FORMER TOYS R US EMPLOYEE
Ms. De La Rosa. Thank you, Chairwoman Waters, for inviting
me to speak today. I am honored to be here.
My name is Giovanna De La Rosa, and I am from Chula Vista,
California. I worked at Toys R Us as an assistant manager for
20 years before private equity firms drove it to bankruptcy. I
am here today as a leader with United for Respect to speak on
behalf of the 1.3 million workers who have lost their jobs to
private equity.
I started working at the Toys R Us store in Chula Vista
when I turned 18. I grew up in that store and have deep
emotional ties to it. I got to work there with my sister and
other family members. I met my husband at work, and our son was
a true Toys R Us kid. And, of course, I gained a second family
in my coworkers.
We loved working at Toys R Us, especially around this time
of year. Our job was to bring joy to kids and their families.
We knew our customers, and I was proud to work for a company
that cared about its employees and treated us like family.
Then in 2005, two private equity firms, KKR and Bain, and a
real estate investment trust, Vornado, acquired Toys R Us
through a leveraged buyout. After that, the old culture was
thrown out the window. From day one they started making all
kinds of cuts that weren't needed. They cut staff and benefits,
but we had to keep it together as a team with limited
resources.
I thought these new Wall Street owners were coming in to
make our company and operations work better. I had no idea what
private equity or leveraged buyouts were, but they were making
things worse, and then everything fell apart. My life changed
that spring when news hit that Toys R Us stores were shut down
nationwide, and they laid off over 30,000 of us without a dime
of severance pay, despite our years of dedication to the
company.
I started having breakdowns at home and work and had to
pull it together for my team and for my son who has special
needs. It was hard to imagine how I was going to make rent or
afford healthcare for us. How could I tell my special needs son
that someone on Wall Street made a series of decisions that
turned our lives upside down? I couldn't find anything but
seasonal work for over a year, despite my experience.
My coworkers and I were left with nothing, while the
executives and private equity owners walked away with millions.
I heard later that Toys R Us paid $470 million in fees to
private equity owners. That would be enough to pay over $14,000
in severance to each employee who lost their job versus the
$800 that I received.
That is why I got involved in the fight to hold private
equity accountable. I joined United for Respect, along with
thousands of other Toys R Us workers to demand justice and
severance pay. We told our stories everywhere, from Congress to
pension fund meetings to the press. And because of that, KKR
and Bain finally started talking to us about a hardship fund
for Toys R Us workers. They set up an historic $20 million fund
for us, which helped a little bit, but it wasn't enough, and it
didn't help us get back the financial security we had when we
were working.
Luckily, Toys R Us is making a comeback, and the new owners
reached out. Together, we formed a mirror board made up of
three former Toys R Us employees, including me, to help guide
the new company. I am excited for the chance to bring Toys R Us
back the right way.
Over the past year-and-a-half, I have learned that Toys R
Us workers aren't the only ones who went through this buyout
hell. Other retail workers are also going through the nightmare
of having private equity firms or hedge funds putting their
stores out of business. I met workers from Gymboree, Sears,
Payless, Kmart, and Shopko, and they all had the same story as
me, and they knew the names of the Wall Street firms that made
them lose their jobs: ESL, Alden, Sun Capital, and many more.
Because of private equity investments in retail, 1.3
million jobs have been lost. That is 1.3 million people with
kids, parents, and grandparents, who also lose their financial
security.
We need real change like the Stop Wall Street Looting Act.
The last time I was in D.C. was to help introduce the bill with
our amazing partners at Americans for Financial Reform, the
Center for Popular Democracy, and in Congress. I believe that
this bill can protect jobs by regulating private equity so they
can't make money by putting people like me out of work.
And now our fight has caught the public's attention,
because more and more people from retail workers to nurses to
grocery store workers are speaking out. The economy isn't
successful and thriving when so many of us are losing our jobs.
What would you do as a single mom raising a special needs
child, then being left with nothing: no job, no income, no
healthcare? We are counting on you to do the right thing and
pass this bill. We are waiting to see which side you are on,
working people or Wall Street billionaires.
Thank you.
[The prepared statement of Ms. De La Rosa can be found on
page 83 of the appendix.]
Chairwoman Waters. Thank you, Ms. De La Rosa.
Mr. Maloney, you are now recognized for 5 minutes to
present your oral testimony.
STATEMENT OF DREW MALONEY, PRESIDENT AND CEO, AMERICAN
INVESTMENT COUNCIL
Mr. Maloney. Good morning, Chairwoman Waters, Ranking
Member McHenry, and other distinguished members of the House
Financial Services Committee. Thank you for the opportunity to
testify today.
My name is Drew Maloney. I lead the American Investment
Council. We are proud to represent private equity firms of all
sizes. Our industry creates jobs, powers the economy, and
strengthens the retirements of millions of Americans. Our
industry provides businesses with the capital and expertise to
grow.
The term ``private equity'' is very broad, so before I go
any further, I wanted to take a minute to talk about three main
forms of private equity: venture capital; growth capital; and
buyouts. Each describe investments at a different phase of the
business cycle.
Venture capital represents those early investments in
startups that need capital to exist. For example, private
equity made early investments in Uber, Spotify, and Peloton
long before those companies became household names.
Growth capital is when private equity invests to expand an
existing company. Growth capital represents the largest part of
the investment chain. A great example is Tate's Bake Shop
founded in New York by Kathleen King when she was 21-years-old.
She partnered with private equity to grow the business, and now
Tate's cookies are in grocery stores across America.
Finally, buyouts. Buyouts are private equity investments in
well-established companies that may be distressed or
underperforming. Private equity helped Hilton Hotels almost
double in size during its 11-year investment in the company.
Hilton was recently recognized as the best company to work for
in the United States.
The ultimate objective of each of these investments is to
build a better business. Private equity provides patient, long-
term capital that allows management to think beyond quarterly
earnings and short-term fluctuations in stock price. Private
equity also provides more than just capital. Firms bring
operational expertise to each investment and often work closely
with management of each company to define strategy and map out
long-term growth objectives.
The biggest investors in our industry are pension funds and
university endowments. Successful private equity investments
strengthen the retirements of public and private sector
workers, including teachers, firefighters, and police officers.
In total, the private equity sector in the United States
employed 8.8 million people and paid $600 billion in wages and
other benefits in 2018. That included more than 1.1 million
jobs in California. Roughly a third of those private equity
jobs were in manufacturing, construction, transportation, or
warehousing.
Private equity invested $685 billion in more than 4,700
businesses across the U.S. last year. Most of these are small
or midsized companies. Businesses of every size in every
congressional district depend on private equity capital and
expertise to grow.
In 2014, private equity invested in Inland Coatings, a
small industrial coating manufacturer in Adel, Iowa. The
investment helped the company grow to become an industry leader
and provided healthcare and retirement benefits to its
employees.
Ninety-one percent of public pension funds have invested a
portion of their capital in private equity. And in 2018, we
generated the strongest returns of any asset class over the
last 10 years. The Los Angeles County Employees Retirement
Association had one of the highest average annual returns in
the country. Earlier this year, the chief investment officer of
the California Public Employees' Retirement System (CalPERS),
the country's largest pension fund, said, we need private
equity, we need more of it, and we need it now.
These strong returns have become increasingly critical for
pension funds at a time when many do not have enough money to
meet their existing obligations. Private equity is proud to
help close that shortfall.
Thank you again for giving me the privilege of appearing
before the committee today. I am grateful for the opportunity
and look forward to answering your questions.
[The prepared statement of Mr. Maloney can be found on page
94 of the appendix.]
Chairwoman Waters. Thank you very much.
Mr. Palmer, you are now recognized for 5 minutes to present
your oral testimony.
STATEMENT OF BRETT PALMER, PRESIDENT, SMALL BUSINESS INVESTOR
ALLIANCE
Mr. Palmer. Thank you very much.
My name is Brett Palmer, and I am the president of the
Small Business Investor Alliance (SBIA). SBIA was formed in
1958 to represent small business investment companies, the
original American venture capital and private equity funds.
As the small business investing market grew more complex,
so did SBIA. And SBIA now includes small business investment
companies, rural business investment companies, business
development companies, as well as conventional private equity
and debt funds. These private equity funds pursue a wide range
of investing strategies because this is a continuum that spans
from the early stage venture investors to the latest stage
buyout and everything in between.
While we segment these investing styles for the sake of
simplifying and explaining them, the reality is they are all
inextricably interconnected. Our members also include
institutional investors such as university endowments that
invest in private equity, where they get their best returns.
Private equity is a real and mutually beneficial
partnership. As such, our public policy goals are balanced and
focused on maintaining a robust, healthy, and competitive
market for investing in American businesses. Good public policy
should increase the capital options available for a company's
success, whether that company is a start-up business, proving
its products in a competitive market; a small family-owned
manufacturing business, managing through generational
succession; or a larger company, including retail companies
that are trying to adapt to a new competitive threat in the
form of technology and e-commerce, as well as take advantage of
those opportunities of e-commerce.
Our members grow businesses and are rightfully proud of
what they do, of how they do it, and of the benefits their
actions have on people and on communities, because private
equity is a force for good, a source of job creation, and a
driver of innovation.
Private equity supports the retirement security of millions
of pensioners and provides endowments the money they need to
provide scholarships and educational access to a new generation
of college students. And private equity is also invested all
over the country, including to areas of the country that are
otherwise passed over or passed by. Most of our member funds
are in places like Little Rock, Indianapolis, Buffalo, Kansas
City, or other places that are far from Wall Street or Silicon
Valley, but we do have investors there too.
But regardless of the investing style, private equity
investors in small and medium-sized businesses make money by
helping the businesses grow and succeed. The idea that private
equity funds succeed by having businesses fail just isn't true.
The only way to be a successful private equity fund in the
lower middle market is to find smaller businesses, and help
them grow to be bigger, better, stronger businesses. And
private equity provides patient capital that conventional banks
cannot provide themselves. They help businesses make big leaps
forward that they otherwise would not have been able to achieve
on their own.
And not having the resources to embrace change that happens
in the economy on a constant basis creates more risk. The more
capital options a company has, the better chance it has to
survive and succeed in the long term. If a business cannot
survive and adapt to change, it cannot maintain its employees,
much less add new employees.
If Congress can agree on one thing, we would hope that
Congress should agree that regulatory and tax policy should
promote and empower private equity to invest into more growing
American businesses. Congress should reject policies that make
it harder for private equity to provide access to capital,
particularly the smaller and medium-sized businesses that
already face disproportionate challenges to capital access. We
need more investment, not less.
While providing growth capital is the core of what private
equity does, it is not just money. Successful private equity
managers invest in people. That is why SBIA partnered with the
Ohio State University's business school to train business
executives on how to grow their business. Just this month, over
45 small business executives took part in a 3\1/2\-day intense
training seminar on how to maintain their employees, how to
attract new employees, how to manage growth, how to
successfully operate in a leveraged environment, and how to
create successful strategies. In other words, our private
equity funds are training their businesses how to grow their
businesses by investing in their employees and by investing in
their customers.
Again, private equity can only succeed when the businesses
grow, and growing businesses need to retain their employees and
they need new employees to help that growth.
I would like to close with a real-world example of what
private equity does. The Florida Autism Center provides center-
based autism therapy services to children throughout Florida.
In 2016, Resolute Capital Partners out of Nashville invested
both debt and equity capital in a small platform that had only
5 centers and served 50 children with 70 employees. The company
will end this year with 51 centers serving over 1,000 children
with over 900 employees and has expanded into Georgia. The
company was founded by a woman who started her career as a
behavioral therapist. It has been led by a female CEO
throughout this stage of growth. This is a growing business.
This is the kind of business that changes people's lives, and
this is what private equity does.
With that, I yield back, and I am pleased to answer any
questions you may have.
[The prepared statement of Mr. Palmer can be found on page
102 of the appendix.]
Chairwoman Waters. Thank you very much.
Let me thank all of our witnesses for being here today.
Allow me to take a moment to say to Ms. De La Rosa that
your testimony to us today was extremely revealing, and you
have described to us the impact that this basically undermining
of Toys R Us by private equity firms and managers such as Bain
and KKR has had on you, your families, and other employees of
Toys R Us. As a matter of fact, Toys R Us is our case study
about private equity firms, and so your being here today is not
lost on us at all. Thank you.
Dr. Appelbaum, because people's lives and health are at
stake, as well as concerns about equitable treatment for all
communities, emergency medical services and other industries
related to help and public safety do not operate like for-
profit firms. Studies have shown that when private equity firms
move into health-related industries, costs go up, standards and
quality of medical care decrease, and emergency public health
response times lag.
Just last year alone, ManorCare, the second-largest nursing
home chain in the United States, realized an astonishing 26
percent increase in its total annual health code violations
after it was acquired by the private equity firm The Carlyle
Group. And according to The New York Times, Trans-Care EMS,
which was taken over by the private equity firm Patriarch
Partners, was forced to close its doors up and down the East
Coast, including in Mount Vernon and Brooklyn, New York. Many
have argued that there are certain sectors, especially
industries related to public health and public safety, that are
too sensitive for private equity firms to be operating in.
Now, you have heard and you know all about Toys R Us. I
don't know what you know or understand about what I just
described in relationship to health and public safety. Can you
tell us, Ms. Appelbaum, why you think private equity firms
should acquire public services such as health clinics and
hospitals and fire departments, et cetera, given the
information that has been, basically, understood now about what
they do when they take over these kind of public safety
entities?
Ms. Appelbaum. I think the place to begin is that we are
not talking about normal marketplaces when we talk about
healthcare, especially when we talk about emergency care,
whether it is ambulances, air ambulances, emergency rooms.
These are situations in which you do not say, how much are you
going to charge me for this? I would rather have a cheaper
ambulance. It doesn't work like that. These are services that
you are going to use because you urgently need them and you
have no opportunity to bargain over price, which means that the
services are able, if they so desire, to charge whatever prices
they want, as high as they want, without losing any business.
Chairwoman Waters. Do you think private equity firms should
be allowed to take over these kinds of services?
Ms. Appelbaum. I do not think so, because--
Chairwoman Waters. What about you, Mr. Moore, do you think
they should be allowed to take over these kinds of services?
Mr. Moore. It depends on the strategies that they are going
to employ in taking over the companies.
Chairwoman Waters. I can't hear you.
Mr. Moore. It depends on the strategies that they are going
to employ--
Chairwoman Waters. We have information now that they have
slowed down response times, et cetera, et cetera. So given the
information that we already know about them, do you think they
should be able to continue to take over public health?
Mr. Moore. Given that information, I would say no.
Chairwoman Waters. What about you, Ms. De La Rosa?
Ms. De La Rosa. No, ma'am. The way we were--
Chairwoman Waters. Mr. Maloney?
Mr. Maloney. Yes. I believe we can be responsible investors
in the healthcare investment community.
Chairwoman Waters. I beg your pardon?
Mr. Maloney. Yes. I believe that we can be responsible
investors across all sectors, including healthcare.
Chairwoman Waters. What about the evidence that we already
have? Should we just forget about that?
Mr. Maloney. I think there are some isolated cases that are
unfortunate, but overall, there are very positive cases that--
Chairwoman Waters. Our research shows that it is not
isolated.
Mr. Maloney. Madam Chairwoman, there are great examples of
investments that we have out there in healthcare. For example,
GrapeTree Medical Staffing in Iowa is a great example of
private equity partnering with a business to increase the
demand of nurses and healthcare professionals in Iowa. And
after 2 years, that partnership has expanded into--
Chairwoman Waters. Thank you very much.
Mr. Palmer, what do you think?
Mr. Palmer. I don't know anything about owning hospitals.
That is not what our guys do. They are too big. But I will tell
you that there are parts of the country that have healthcare
now that did not have it until private equity bought small
businesses that were healthcare providers and expanded them
into communities that didn't have any. We gave an award to one
of those companies, I think last year or the year before,
because they provided the first primary care and emergency care
services in Appalachia.
Chairwoman Waters. Thank you. My time has expired,
unfortunately. Thank you.
The gentleman from North Carolina, Ranking Member McHenry,
is recognized for 5 minutes.
Mr. McHenry. Thank you.
According to Moody's, private equity-backed firms have no
greater bankruptcy rate than nonprivate equity firms in this
country. There is a big misunderstanding of what private equity
is, though. So let's start with the business model, Mr.
Maloney. If you are here on behalf of the industry, let's
describe what a buyout fund does, since that is the largest
piece of what private equity does, although not all of what
private equity does. But how does a buyout fund work?
Mr. Maloney. A buyout fund will pull resources from pension
funds, and college endowments, and it will go invest with
companies that are either in need of growth or large companies
that are underperforming and work side by side with those
companies.
And I would say that, as you suggested, the overwhelming
majority of our investments are successful. That is the only
way that we make a return for our pension holders. And if you
look at what you said, the 6 percent bankruptcy rate, that
means 94 percent of our deals are successful, so that the
transactions like Hilton Hotels, Dunkin' Donuts--
Mr. McHenry. So the idea is you take capital and you bring
some expertise with the capital to improve a firm. Is that how
you would explain it, Mr. Palmer?
Mr. Palmer. That is right. And for a buyout, you are
changing ownership. And when you are changing ownership,
oftentimes it is a founder, someone who is retiring. There are
a lot of baby boomers who started businesses, or post-baby
boomers who are retiring, and you are taking the next
generation. Oftentimes, of the people who work at that business
management, you are buying out the owner. They go away. They
stay on for a little bit. They retain some of the ownership of
that business, but you apply new technologies. You buy new
equipment. You grow it.
And that is how buyouts work in the lower and middle
market, and they are a really powerful force for job creation
and business growth and sustainability. Without that buyout,
many of these businesses that are owned by baby boomers would
literally shutter, even though they are profitable, good
businesses that are employing people today, not because of
bankruptcy, just because there is no one there to take it and
run it.
Mr. McHenry. Okay. So if you have an investment, then you
would get debt alongside that investment in order to purchase,
right?
Mr. Palmer. That is right.
Mr. McHenry. As an individual, if I want to buy a small
business, that is what I would do, I would go to a bank and get
lending.
So how do you get lending if your business model is
bankruptcy? A great shrug from everyone. It is very difficult
to get lending if you are going to put the screws to your
lender, right? And then, there is the question of liability.
So, Mr. Moore, you are an important member of the board for
the investors, right? Do you have individual liability for the
decisions that you as a board member make on behalf of your
investment fund?
Mr. Moore. No.
Mr. McHenry. Okay. Does any individual here on behalf of
their association or their employer have individual liability
if their employer makes a bad decision?
I will take that as a ``no'' across the panel.
As Members of Congress, for the decisions we make on behalf
of our constituents, do we have individual liability? No.
The Warren bill here today would apply liability to the
employees of the private equity firm and the investors of the
private equity firm. That would be a new form of investing,
which would be a real regression for investment capital and
business structures. Along those same lines, the business model
of bankruptcy doesn't get lending. So, therefore, the
bankruptcy rate question, I think, is a material one here.
Now, the decision for your pension fund, Mr. Moore. I read
that, recently, the board made a unanimous decision to deploy
150--was it million or billion?
Mr. Moore. Million.
Mr. McHenry. Million--$150 million--it is Washington; I
have to ask those questions, sorry--in a buyout fund. Is that
correct?
Mr. Moore. Yes.
Mr. McHenry. And did you support that decision?
Mr. Moore. Yes, I did.
Mr. McHenry. Okay. So in terms of private equity, even with
the high fees that you pay, as you testified, is private equity
still your top performing investment for your fund?
Mr. Moore. It has been for about the last 10 years.
Mr. McHenry. Okay.
Mr. Moore. So we are active in the industry.
Mr. McHenry. Even after fees?
Mr. Moore. Even after fees.
Mr. McHenry. Okay.
Mr. Moore. It could be even more if the fees were lower.
Mr. McHenry. Of course. And I think in California, CalPERS
and your fund have significant power in that. So with that, it
looks like the business model is--we have a better
understanding of that, the understanding of bankruptcies no
higher than nonprivate equity firms, and the idea of new strict
liability for individuals employed by private equity is not
commensurate with who we are in our American capitalist
structure.
I yield back.
Chairwoman Waters. Thank you.
The gentleman from New York, Mr. Meeks, who is also the
Chair of our Subcommittee on Consumer Protection and Financial
Institutions, is recognized for 5 minutes.
Mr. Meeks. Thank you, Madam Chairwoman, and thank you for
having this hearing today where I think that we need to have an
important conversation and discussion, because I think we do
get confused at times with where to go, and sometimes you want
to knock the whole industry out as opposed to looking to see
who may be on the bottom. What we can do, what is our
responsibility as Members of Congress to make sure that
individuals like Ms. De La Rosa and her family have a softer
blow. But at the same time, we know, as I have heard from Mr.
Moore, that we have individuals who are pensioners and others
who are dependent upon a return on investment from private
equity so that they can retire and live in a decent space. We
want to make sure that they get that return on investment also.
We are still trying to figure out how we work it out so
that the average, hardworking American gets the benefits that
they deserve. And what do we do when we have a company that
is--and going by what Mr. Maloney was saying, that is
distressed, about to go bankrupt, about to go out of business?
I have right now a scenario where there is a company, it
happens to be a minority-owned company in full disclosure, that
I am trying to get some private equity dollars in, because if I
don't, they are out of business. They are out of business. They
have no--they are coming to me to say, ``Help me. Can you help
find somebody that would invest?'' And part of my struggle is
to make sure that some private equity firms are investing more
in minority-owned firms so that they can continue to exist and
grow and be part of the road capital. Because oftentimes,
minority-owned firms don't get the road capital so they can
expand their existing businesses and move forward, and I find
the discrepancy therein.
And so part of what I want to do is to make sure that we
are able to make sure that there is diversity in regards to my
community, for example, JFK Airport. I demanded, working with
my governor, 30 percent equity for minority firms in that
airport, and we are getting it. And they need some investment.
And oftentimes, some of those minority firms that are those 30
percent partners are getting that investment so that they can
then do and they work in cooperation with the community, and in
my case, in cooperation with SEIU and the Teamsters and other
labor unions so that we are working collectively together,
because the labor unions are also concerned about their
pensioners. So we are all working together, and that is why
this conversation is important.
I think, furthermore, what we need to explore, and I raised
it previously in this committee, that I do have concern about,
because when you talk about the overall economy, and I go back
and forth and here is what effects--and I think this happened
with Toys R Us and others--does leveraged lending have, and can
that overburden us so that we can get into a financial crises
in the manner that we did in 2008? And so, I want to continue
to have dialogue and conversation. I don't fully understand it
to be--you have made a decision, but I want to make sure that
we look at it. I think we have a responsibility as a committee.
That is why this hearing and others are tremendously important
as a committee to look at what effects does leveraged lending
have on our overall economy and what effects do take place.
I think what Chairwoman Waters was talking about, which I
think is tremendously important, when you talk about public
institutions, whether or not there are sacrifices that maybe we
have to go overboard. For example, I know we had this big
crisis in regard to the VA hospitals and timing and what
happened. So do you put in measures that may increase the time
that a medical person or a patient gets to see a doctor because
of trying to manage it? What are the pros and the cons? I think
that is a good discussion to have. And I think that is what she
was talking about with reference to some of the evidence, and
that is a good, healthy discussion to have.
I am about to be out of time, and I wanted to ask Mr.
Maloney, specifically, though, because I see on the minority
private investment companies, and you represent a lot of them,
that they have outperformed a lot of the best market of all
U.S. private equity firms. But despite that evidence, the
number of diverse private equity firms remains very low.
So I was wondering what, if anything, that we can do to
address the biases against diverse private equity firms that I
see that is taking place in our country today.
Mr. Maloney. Congressman, thank you for that question, and
thank you for your leadership on this issue and your support of
the JFK project. And I think the JFK project is one that
highlights what we are continuing to do and can do on a
national basis, which is not only do we partner with labor, but
we also partner with minority-owned firms like we are in New
York. And we all understand that diversity makes us stronger,
and we are committed to working with you on projects like that
and expanding this project.
Thank you.
Chairwoman Waters. Thank you.
The gentlewoman from Missouri, Mrs. Wagner, is recognized
for 5 minutes.
Mrs. Wagner. Thank you, Madam Chairwoman. And I want to
start by thanking the witnesses for being here to testify today
to examine the private equity industry.
Private equity helps grow American jobs and gives everyday
Americans more comfortable retirements by providing returns to
pension investments. The private equity industry supports
American companies and jobs throughout the country.
And a recent study found that in 2018, the U.S. private
equity sector directly employed 8.8 million workers who earned
approximately $600 billion in wages and benefits. The average
worker in a private equity-backed company earns approximately
$71,000 in wages and benefits, and that translates to around
$36 per hour.
In my congressional district alone, there are over 47,000
constituents working at private equity-backed companies. And
over the past 5 years, Missouri's Second Congressional District
has received $17 billion in private equity investment.
Without access to private equity, many American businesses
would not be able to expand, hire workers, and provide the
crucial services for their local communities.
Mr. Palmer, there have been claims that private equity
funds are underregulated. What sort of regulations are private
equity firms subject to?
Mr. Palmer. It depends a little bit on the type of private
equity fund. You actually have a buyout fund in your district.
Holly Huels, whom I think you have met in the past--
Mrs. Wagner. Correct.
Mr. Palmer. --with Deloitte Capital. It specializes in
investing in small manufacturers and taking them to the next
level as they have generational transfers. But private equity
funds are regulated as far as who is allowed to invest into
them. If they are small business investment companies, they are
regulated by the SBA. If they are conventional private equity
funds, they are regulated by the SEC. There have to be all
sorts of disclosures. There have to be controls on what they do
and how they do it.
There are all sorts of protections that are in regulations
that actually aren't formal government regulations that
institutional partners like Mr. Moore put on private equity
funds in a limited partner agreement. They require transparency
and require good practices and prohibit bad actors and
investing in businesses that institutionals would not be proud
of. There are a lot of restrictions that are out there, but the
funds themselves need to be able to move at the speed of
business.
Mrs. Wagner. How would the additional regulations being
proposed today impact not only the private equity industry, but
the companies backed by private equity, the employees of those
companies, and the smaller pension funds seeking to maximize
returns for pensions?
Mr. Palmer. The Stop Wall Street Looting Act, though well-
intentioned, actually harms Main Street far more than it limits
Wall Street.
Mrs. Wagner. Absolutely.
Mr. Palmer. And it would cut off capital and create a
significant disincentive to be investing in businesses because
of the liability of being transferred up even for founders,
because if you maintain 20 percent ownership in the business,
which is in the bill, you are a control person. So if you have
a founder who is retiring, buying out, but that he or she still
owns a piece of the business for 3 or 4 years while they are
helping the next generation take that business on, if that
business were to fail because of some technological change or
some market shock, that person not just loses their share, they
have all this liability transfer. They lose everything. That is
not the way this is supposed to work.
Mrs. Wagner. The Stop Wall Street Looting Act, which is
Senator Elizabeth Warren's bill, would establish vast
liabilities on private equity investors and impose controls on
when and how investors can receive their money back.
Mr. Palmer, in your view, what would the impact of this
bill be on the private equity industry and on the middle market
economy?
Mr. Palmer. I think there would be a lot less investing in
businesses. There would be a lot less lending to businesses.
Most lending works. And bankruptcy exists for a reason, but
most lending works. Most of it is constructive, most of it is
positive, most of it is growth-oriented, particularly for
smaller businesses that aren't liquid. They can't just sell
their stocks on the NASDAQ or the New York Stock Exchange. They
have to go to private equity in the private markets. If they
don't have access to capital, they don't grow. They get stale.
They lose in the global competitive market.
Mrs. Wagner. How many jobs would be jeopardized if the
private equity industry was unable to provide capital to small
and middle market businesses?
Mr. Palmer. You would have the ceasing of--for one, you
would have some jobs that are lost immediately, but also on a
going-forward basis, you would have millions of jobs that just
wouldn't be created. And a lot of those jobs that wouldn't be
created are in manufacturing and businesses that need to
constantly be changing and that aren't in necessarily Silicon
Valley or Wall Street--
Mrs. Wagner. I don't have much time. Plainly, would there
be more jobs or fewer jobs in America if H.R. 3848 became law?
Mr. Palmer. A lot fewer.
Mrs. Wagner. Would there be more investment or less
investment?
Mr. Palmer. Less investment.
Mrs. Wagner. Would the university endowments be better off
or worse off?
Mr. Palmer. Worse off.
Mrs. Wagner. Thank you, sir.
I yield back.
Chairwoman Waters. Thank you.
The gentleman from Colorado, Mr. Perlmutter, is recognized
for 5 minutes.
Mr. Perlmutter. I am just going to take a minute.
I guess on this subject, I am more where Mr. Moore is.
There is a continuum of private equity folks, from good actors
to bad actors, from those who are going to put in primarily
equity and capital to those who are--it is mostly going to be
debt driven, those who want to bring good management skills and
grow the organizations and stabilize the organizations to those
who want to strip out whatever golden nuggets might be, you
know, find gold under some retail operation. And so, this is
definitely a one size-doesn't-fit-all.
And I practiced bankruptcy law for a long time before I was
elected to Congress and business bankruptcy, and we saw
leveraged buyouts where there were some real bad actors,
primarily in the mining business and in the extractive
industries. But a lot of this has to do with the chicken and
the egg. Is there a problem? And I would say to Ms. De La Rosa,
is there a problem with the organization going in? Are they
struggling financially? Is retail sort of on the ropes because
of an Amazon? Or is it because a group comes in that is
predatory in nature and is just going to strip out the good
things and leave nothing but the bones, those we call the
vulture funds or the vulture capitalists?
So, Mr. Moore, I would like you to expand on your
testimony. I would like to see the pension funds and the others
have more information available to them. I certainly would like
to see that.
And then, Ms. De La Rosa, I want to talk to you a little
bit about the retail business and the future of it.
Mr. Moore. Mr. Perlmutter, first off, I think it is a false
narrative to say that money will not flow into companies that
needed it to grow and expand just because they can't receive it
through a private equity construct. The money will flow to
where it is needed without regard to whether it comes through
private equity, a bank, individuals, and multiple other
sources.
Secondly, you were saying that there is a whole continuum
of private equity investment strategies, and we have been
successful at LACERA, at our pension fund, in identifying
strategies in industries that looked promising, that didn't
have negative impacts on our workers, and that looked like they
were going to be in the future. For example, we were early
investors in Silver Lake and Vista, and those companies focused
in technology and family-owned businesses and helping them
grow.
And no one can deny that some of the buyout firms' specific
strategy was to go into companies that had value and extract
that value and leave the company, because their timeframe is 5
to 7 years. They are not in it for the long term, many of them.
So in conclusion, I would just say that the strategies that
are being employed by the companies are very important, and
that is why we need to have transparency, and the regulations
or the rules that are promulgated through H.R. 3848 would help
us get the information we need, and all the other pension funds
need, to make good, reasonable decisions on who to invest in,
so that we don't have the type of problems that we had with
Toys R Us.
And the last thing about Toys R Us is, if Toys R Us had not
been layered with all of this debt, without the ability to
invest in the infrastructure they needed to be an online
retailer, they might still be here today, and all of those
people would still have their jobs. But the buyout firms went
in, took all the value and all the money they could get out of
the firm, and then left it high and dry.
Mr. Perlmutter. Okay, thank you.
And I would just say, for you and the other pension funds
and those that really bring the money, ordinarily, I am not
sure we have to have legislation, but I am happy to deal with
that, but usually those with the gold make the rules. And I
want to make sure our pension funds do get to develop the
contracts.
Ms. De La Rosa, when you were working at Toys R Us, when
they came in and made the buyout, did you see them strip out
the value right away, or how did that work?
Ms. De La Rosa. Yes, sir, it was right away. cutting of
jobs, positions, changing of operating companies that we used,
contracts.
Mr. Perlmutter. Okay. Thank you for your time.
Chairwoman Waters. The gentleman from Florida, Mr. Posey,
is recognized for 5 minutes.
Mr. Posey. Thank you, Madam Chairwoman, for holding this
hearing, and I thank the ranking member, as well.
Today, we have before us a piece of legislation that could
restrict one of the longstanding features of our market-based
system of finance. The feature is a concept of limited
liability or a limited liability corporation.
The history of our financial system is marked by
innovations that have helped us manage risks that might have
otherwise discouraged investment and growth in our remarkable
economy.
One of those innovations was the limited liability
corporation. New York law created the limited liability stock
company. Robert Shiller, Nobel economist, says the law further
democratized finance by clarifying that shareholders would
never be held liable for the debts of corporations.
The law made it possible, for the first time, for a small
investor to hold a diversified portfolio consisting of stocks
in many companies. Prior to the advent of limited liability,
one could not have done such a thing, for fear of a lawsuit
from any of the companies that he held stock with. This
development created a ready pool of investors with whom
investment bankers could place newly issued shares.
After seeing the steady supply of capital for new
businesses this innovation produced, countries all over the
world copied it. We, of course, need to be cautious about
restricting such an invention that has served us so well over
the years.
I say this while also understanding the pain of business
failures and the loss of jobs, tax revenues, and other economic
contributions to our communities. I believe we have to realize
that a private equity firm doesn't acquire a company to have it
fail. They intend to make money from a stronger firm.
Unfortunately, their aims are sometimes frustrated by the
market for goods or services of the underlying firm. But we
must understand that success means stronger firms, job growth,
and overall great contributions to our community and our
countries.
Mr. Maloney, can you share with us your assessment of the
economic impacts of the Stop Wall Street Looting Act of 2019,
specifically which sectors of the economy are most likely to be
affected if this bill becomes law?
Mr. Maloney. Thank you for that question and your concerns,
Congressman, about eliminating sort of the traditional limited
liability protections that allow for investment in the current
marketplace.
In a recent study by Professor Swenson from the University
of Southern California, he suggests that the loss of jobs would
be between 6.2 million and 26.3 million jobs in the U.S., and
that the loss of tax revenue could be between $109 billion and
$475 billion, and that public pensions would lose up to $329
million.
So what would happen is, if the public pensions don't have
this top asset class to go to--and as Mr. Moore said, at his
fund last year they returned, I believe, 21 percent--
Mr. Moore. No, no, that is wrong. Sorry.
Mr. Maloney. That's okay. But my point is, it is a high
performer and you would have to switch asset classes to a class
that doesn't perform as well.
Mr. Posey. Okay.
Mr. Palmer, do you agree?
Mr. Palmer. I do. And you asked the question of which
businesses would get less capital and what would come out. The
businesses that are asset-light--and a lot of businesses in the
new economy are asset-light--would not be able to get loans,
they would not be able to get access to capital, and so you
would really have a shrinkage in the access to capital.
Would capital be available? Yes, potentially, but it might
be more expensive, and in many cases, it might not be available
at all.
Mr. Posey. Okay. The critics of private equity (PE) funds
promote the perception that PE firms makes lots of money, even
when one of its acquisitions goes bankrupt. Can you clarify the
impacts of a typical case of such bankruptcy for a PE firm? Mr.
Maloney, and then Mr. Palmer?
Mr. Maloney. As we have discussed, bankruptcies in private
equity are very rare, and nobody succeeds in a bankruptcy. We
try to grow businesses and increase jobs.
Mr. Posey. Thank you.
Mr. Palmer?
Mr. Palmer. With bankruptcies, you lose money. It is just
that simple. There is no good way. You might be able to save a
business in buying a business out of bankruptcy and try to
reinvigorate it. That is possible. But in bankruptcies, there
is no winning strategy.
Mr. Posey. My time has expired. Thank you, Madam
Chairwoman.
Chairwoman Waters. The gentleman from Illinois, Mr. Foster,
is recognized for 5 minutes.
Mr. Foster. Thank you, Madam Chairwoman, and thank you to
our witnesses.
As a scientist, and a businessman, I find myself a little
bit frustrated. We seem to be having this argument by anecdote
rather than statistics.
And the difficulty is--I guess I put myself to sleep last
night reading one of the papers that was mentioned in the memo
distributed by the committee from the University of Chicago
called, ``The Economic Effects of Private Equity Buyouts.''
And there were some interesting numbers in there. For
example, the employment at targets of private equity buyouts
rises 13 percent in firms that were previously under private
ownership and 10 percent on what are called secondary buyouts,
where it is sales from one PE to another. However, the
employment falls by 13 percent in buyouts of publicly listed
firms and falls by 16 percent in divisional buyouts.
And so, trying to understand the multiple faces of private
equity that we have been talking about is, at least to me, sort
of frustrating. And there are many variables in that. We have
what sector the firms are operating in, what the holding period
is, the target holding period is, whether they are public
versus private firms, whether they are generational transfers
or ongoing businesses, and, of course, just the size and degree
of leverage.
Can any of you or all of you maybe come to an agreement on
what the red flags are that signal a troublesome aspect of this
versus things that tend to result in good results? What
variables should we be looking at to try to separate the wheat
from the chaff here?
Ms. Appelbaum. I think that one thing that we have to say
about the private equity business model that has not been said
is that the debt is put on the company that is acquired. It has
to repay it. But the decision to put the debt on it is made by
the private equity firm.
So the private equity firm goes out, decides how much
leverage to use, and then it is the company that has to pay it
back. And the private equity firm and the general partner have
no responsibility for this whatsoever.
This is the crux of the problem. In the small and medium-
sized companies that we have been talking about, they have very
little in the way of assets that can be mortgaged, and so the
level of debt is quite reasonable. Those companies are not
going to be affected by the Stop Wall Street Looting Act
because the level of that is so low.
In the case of those publicly traded companies that you
mentioned where all the jobs are lost, these are big companies.
They are publicly traded. They already have good operations in
place. They already have good business strategy in place.
Mr. Foster. Is that necessarily true? It is not clear to
me. I don't know the history of Toys R Us, but a lot of big box
companies, public and private, have had rough times in the last
decades.
Ms. Appelbaum. I did an analysis, looking at Albertson's,
which is a private equity-owned supermarket, compared to
Kroger's, which is not. They both faced the same kinds of
problems: e-commerce, Amazon, Walmart, whatever you want to
call it.
Kroger, because it controls its own resources, is not
paying out to any private equity firm, it does not have high
leverage, it is not paying interest on debts, so it has been
able to modernize. It can do anything that Amazon can do. Its
Moody's rating has gone up, its contributions to its workers'
pension fund to make up for the financial crisis has gone up.
And Albertson's is on the ropes. It can't go back to the
public markets. Nobody wants to buy it. It tried to do a
reverse merger with Rite Aid, and those shareholders rejected
it. It is on the ropes because it has not made the necessary
investment.
Mr. Foster. You mentioned that by and large, you thought
the smaller buyouts were not problematic and that--
Ms. Appelbaum. That is correct.
Mr. Foster. --private equity was a plus--
Ms. Appelbaum. That is correct.
Mr. Foster. --in sort of limited size buyout.
Is that something that the entire panel would agree with,
at least that sector is probably an area where private equity
is a net plus across the economy?
Mr. Palmer. That is where a lot of my folks are, and they
certainly see it that way. There is certainly the greatest
opportunity for growth because you are small. You can't shrink
it and cut costs because if you shrink small, it goes to
nothing.
So really, it is more growth-oriented in a buyout, but
there is also much greater access to capital at the higher ends
and much lower access to capital, both debt and equity, at the
lower ends. In my written testimony, on page 5, I sort of have
a visual of that. The small buyouts are good, but middle
buyouts are also very good.
Mr. Foster. I am trying to understand, if there is a
consensus that small or, say, middle, however you define,
``middle,'' is also probably an area where private equity is a
net positive and the existing regulation is perhaps adequate?
Is that sort of the consensus here? And the problem, if it
exists at all, is in the largest?
If any of you could follow up with me on whether we can
actually segregate off one segment for higher supervision, I
would appreciate it.
Chairwoman Waters. The gentleman from Missouri, Mr.
Luetkemeyer, is recognized for 5 minutes.
Mr. Luetkemeyer. Thank you, Madam Chairwoman, and I thank
the panel for being here this morning.
I was kind of curious, I think Mr. Maloney, you said
something about 780 private equity investments last year. Is
that what you said in your testimony a while ago?
Mr. Maloney. 4,700.
Mr. Luetkemeyer. 4,700, okay. I missed the ``4'' in front
of it. Wow. Okay. Fantastic. And one of the charts up on the
board hints that 35 businesses filed for bankruptcy since 2003.
I guess that is major companies. But those seem to me to be an
awfully small percentage of businesses filing bankruptcy versus
businesses getting into business. Is that your take on that?
Mr. Maloney. Yes. The bankruptcy rate in private equity and
nonprivate equity is 6 percent. It is a low rate.
Mr. Luetkemeyer. Very good.
I was kind of curious, Mr. Moore, what is the breakdown on
returns with your investments on private equity versus other
stocks and bonds--other bonds and CDs and other types of
investments? What is the difference in rate of return?
Mr. Moore. I can't give you the exact numbers, but I will--
Mr. Luetkemeyer. Just ballpark is fine.
Mr. Moore. Okay. Ten-year average, private equity for us is
about 13 percent; public equity is in the range of 10; real
estate, 8; and then the fixed income is less--
Mr. Luetkemeyer. Okay. Would it be a fair statement to say
that the more return you get, the more risk there is with the
investment that you are making?
Mr. Moore. You could say that.
Mr. Luetkemeyer. So to me, as somebody who has been in this
financial services world for years, return, interest rate,
dividends, whatever it is, is reflective of the risk you take.
So, when you have private equity and you are getting much, much
better return on that versus on less risky investments, you
want a mix in your portfolio. So, it is important that you have
a mix.
But you have to understand that when you make that
investment in equities, there is more risk there. As we have
just seen, there is the risk--6 percent of businesses are going
to go under.
You indicate, Mr. Moore, you need more transparency in
being able to, as a board member, be able to see how you want
to invest in these equities. Can you give me some examples of
things that you would like to see more transparency in, as an
investor in equities?
Mr. Moore. First of all, this bill talks about issues, at
least from my perspective, that I am concerned about in just
collecting information on how much it costs and what
performance metrics are being used, and have that apply
industry-wide and be available to everybody, so we can do
comparisons.
But going beyond that, which is not in this legislation, we
would probably want to be more engaged in seeing what kind of
companies are in the pipeline, getting more financial
information from portfolio companies, so we could have a better
assessment of the risks that the companies are taking.
You mentioned risks. We want to try to control risk as much
as possible. So, if we are noticing that there is a private
equity company that wants us to give them an allocation, and
they have been heavily engaged in these extractive financial
engineering type of activities to generate returns, that might
be something we would want to stay away from and look for less
risky, more long-term beneficial investments.
Mr. Luetkemeyer. It almost seems as if you have to have a
crystal ball sometimes to see the trends in industries. For
instance, if I was somebody 30 years ago and I was going to
make an investment in somebody who builds rotary phones, lo and
behold, I wouldn't have anything left today, would I?
Mr. Moore. Not a dime.
Mr. Luetkemeyer. So, you almost have to have a crystal ball
to see what the trends will be, where technology will take you.
Nobody who invested in a blacksmith shop 125 years ago is in
business today either. So what could be a good investment
today, tomorrow's technology or the fad or the general public's
twist on things or preferences could change and suddenly what
would seem in your situation to be a really solid investment to
make could suddenly go south on you, couldn't it?
Mr. Moore. Yes, but the better information and the more
information you have, the better informed decisions--
Mr. Luetkemeyer. Right.
Mr. Moore. --you are going to be able to make, and over the
long run, you are going to perform better.
Mr. Luetkemeyer. Mr. Maloney and Mr. Palmer, I only have 15
seconds left. What about transparency, do you guys have some
ideas on that as well?
Mr. Palmer. For low or middle market and middle market
private equity funds, they get every bit of information that
any LP asks for, and LPs can ask for anything and they will
pretty much get it. So if they want it, they get it, and they
do their diligence.
Mr. Luetkemeyer. Mr. Maloney, very quickly.
Mr. Maloney. I agree. And we value the partnership we have
with Mr. Moore and his pension funds.
Mr. Luetkemeyer. Thank you.
Chairwoman Waters. The gentlewoman from New York, Ms.
Velazquez, is recognized for 5 minutes.
Ms. Velazquez. Thank you, Chairwoman Waters.
Dr. Appelbaum, I am looking at an op-ed that you wrote in
2015 in The Hill paper, entitled, ``Investors will benefit from
greater transparency on performance.'' Can you summarize your
position? And do you believe that limited partners should have
more access to the fees and expenses and even disciplinary
actions by the SEC of the general managers?
Ms. Appelbaum. Yes, absolutely, for all the reasons that
Mr. Moore has said. At the moment, all of the decisions in a
private equity fund are made by the general partner. The
limited partners, which are the pension funds, do not get to
make those decisions.
So, Mr. Moore has to figure it out before he makes the
investment. He has no control once he has given them the money.
Having transparency, understanding, for example, the
monitoring fees that were taken out of Toys R Us, or taken out
of many other companies, the limited partners generally have no
knowledge of that. They have no idea of what the side contract
is between the private equity firm and the company, and the
limited partners in general do not have access to that
information.
And so they have no idea how much is being taken out, which
of course will affect the price that the private equity fund
gets when it resells the company back to the public markets or
to another private equity fund.
So, absolutely, they need that transparency in order to be
able to do their own due diligence on behalf of their
beneficiaries.
It is very difficult for most limited partners to get
information, and those that ask for it or say, ``I need to make
public the contract that I have with you,'' they have been
disciplined by the private equity firms.
You would think, because this is the source of the money,
that they would have control. Somebody has already said that.
My view is, the limited partners need a union, because if they
acted together, they could demand information. But at the
moment, the private equity firms have the power.
Ms. Velazquez. Thank you.
Mr. Moore, would you care to comment?
Mr. Moore. I agree with Ms. Appelbaum.
I am a policymaker, so I don't have the depth of
information and knowledge about the contracts. I set policy, I
review processes and procedures, and I allocate resources to
our staff to implement the policies that we establish, the
asset allocations that we want to engage in.
And as I stated earlier, information is critical.
Ms. Velazquez. Right.
Mr. Moore. And we lack everything that we need. We do a
good job in our firm, our pension fund, because we allocate the
resources and staff to do due diligence and travel around the
world and pound on our private equity firms that we have money
invested in. But before we make those investments, we still
have to engage in significant resources in order to dig up
information that should just be available, not only to us who
are actively engaged in it and allocate resources, but smaller
pension funds that may not have the same level of resources.
Ms. Velazquez. Thank you.
And the fact that we, as legislators, care about that, more
transparency, access to information, to look at the strategy in
terms of making financial decisions, that doesn't make me a
socialist, does it?
Mr. Moore. No.
Ms. Velazquez. Okay. Good.
Mr. Moore. It just means you are establishing the
guidelines for capitalism that works for everybody.
Ms. Velazquez. Wonderful. Thank you.
Mr. Maloney, in March, New York City Comptroller Scott
Stringer announced a $600 million expansion of the New York
City retirement system in-house emerging managers program in
private equity, which is intended to amplify opportunities for
smaller managers, including minority and women-owned managers.
Are you supportive of programs like the one that
Comptroller Stringer announced? And what steps are your
organization and your members taking to expand opportunity for
smaller managers, particularly minority and women-owned
managers?
Mr. Moore. I had a meeting last month with all of our asset
class managers--
Ms. Velazquez. I'm sorry, I would like to hear from Mr.
Maloney.
Mr. Moore. Oh, okay.
Ms. Velazquez. Mr. Maloney. Thank you.
Mr. Maloney. Thank you, Congresswoman, for that question
and for your leadership on the diversity issues.
As I stated with Congressman Meeks, diversity makes us
stronger. We are very supportive of the comptroller's plan. A
lot of our firms take this very seriously.
Ms. Velazquez. What does ``seriously'' mean?
Mr. Maloney. We are actively engaged with organizations
like SEO, we partner with Harlem Capital Partners in New York,
and the JFK project is another good one. But we are committed
to working with you going forward on this.
Ms. Velazquez. Thank you.
Chairwoman Waters. The gentleman from Michigan, Mr.
Huizenga, is recognized for 5 minutes.
Mr. Huizenga. Thank you, Madam Chairwoman.
And I do need to correct myself from my opening statement,
briefly. I misstated a number. The State of Michigan retirement
system, which has a pension system for 515,000 members, has $71
billion in total assets, of which $11 billion of that is
directly invested in private equity.
I have a number of things I want to go through quickly.
But, Mr. Moore, I do have a quick question for you. CalPERS has
invested $150 million in a PE buyout fund, correct? I think
that is what you had told the ranking member?
Mr. Moore. Yes.
Mr. Huizenga. Okay. So, H.R. 3848, which is the House
version of the Warren bill, would impose joint and several
liability on PE funds, including their partners, their limited
partners (LPs). How does your board feel about being on the
hook with liability?
Mr. Moore. Well, I can't speak for the board because I am
just one member.
Mr. Huizenga. Okay, then, are you comfortable with that?
Mr. Moore. I am where our board is, which is we have a
staff--
Mr. Huizenga. Wait a minute, are you speaking for the board
or not speaking for the board?
Mr. Moore. No. What I am saying is, I can't speak for the
board. I am just one member of the board.
Mr. Huizenga. Yes.
Mr. Moore. So as a member of the board, I am going to defer
to my staff and my counsel to review this issue, to work with
the--
Mr. Huizenga. Wait a minute. So, you are supportive. Okay.
I thought I heard you say you were supportive of the Warren
bill.
Mr. Moore. I didn't say that.
Mr. Huizenga. Okay. My misunderstanding.
Mr. Moore. I said the provisions that I would like to see
implemented. I never said I support the Warren bill.
Mr. Huizenga. Got it, okay. I want to move on here. The
Popeye's versus Chick-fil-A debate, Taylor Swift not being real
happy with her private equity situation, notwithstanding, we
have heard a lot about PE and about private equity being
raiders and parasites and how they have basically failed
businesses on purpose and a number of those types of things.
What I am really concerned about is, one, I think that
those anecdotes that are out there really are not very
insightful. But I do want to know why the private sector is
turning to private equity versus IPOs. I mean, 20 years ago, we
had 7,000 publicly traded companies. We are at about half of
that right now.
And, Mr. Maloney, Mr. Palmer, feel free to jump in here.
Why do companies turn to private equity instead of raising
capital through IPOs or other more traditional methods?
Mr. Maloney. Congressman, that is a great question, and it
is one that I think you see much more often of a lot of
companies staying in the private markets longer. It allows them
to grow and sometimes not--as I said in my original testimony,
that they don't have to meet a quarterly earnings statement
where they can, if they have a growth stream ahead of them, it
is much easier to do that in the private markets than it is in
the public markets.
Mr. Huizenga. Mr. Palmer?
Mr. Palmer. A lot of these businesses are just too small,
and they are companies that are never going to go public.
Certainly, it is too expensive and too problematic to be public
in many cases. There are too many burdens.
But in many of these cases, they are small businesses going
to medium, and in many cases, they don't want to be publicly
owned. They want to stay inside of a family, they want to stay
closely held. And so, it is a longer-term patient form of
capital where they have greater control over their businesses.
Mr. Huizenga. In fact, I have a number of those in my own
district--Challenge Manufacturing, JR Automation, Custom
Profile, Hadley Products, Brillcast, just a couple of examples
from west Michigan.
And I might add, I have about 5,700 jobs in my district
attached to this. Sixteen Members on the other side of the
aisle have 2 to 3 times those numbers of jobs, yet we are
seeing the other side vilify an entire industry which is
providing tens of thousands of jobs in their districts. I am a
little confused by that.
But ultimately, it gets down to risk is a part of it. And
Mr. Moore, I wrote this quote down from you. You want to
control risk, yet it seems to me you want a full return on your
money.
Well, less risk typically means lower returns. And these
companies, for various reasons, sometimes can be riskier
investments. Is that not true, Mr. Palmer?
Mr. Palmer. They can be riskier investments, and in many
cases they require a whole lot more hands-on activities than
institutional LPs, like large pension funds, can do. They just
don't have the time to get in every business, and, frankly,
they shouldn't be in every business.
Mr. Huizenga. In my remaining 2 seconds, I am going to let
you know that I am going to be writing some letters, because I
would like to hear how instead of demonizing your industry,
what we can do to increase capital markets and make them more
attractive.
Thank you.
Chairwoman Waters. The gentleman from New Jersey, Mr.
Gottheimer, is recognized for 5 minutes.
Mr. Gottheimer. Thank you, Madam Chairwoman.
If I can start, please, with Mr. Moore.
You serve on the board of the L.A. County Employees
Retirement Association. Does your agency invest in private
equity funds?
Mr. Moore. Yes.
Mr. Gottheimer. Do you know how much? Your 2018 annual
report talked about a percentage. Do you know what percentage
of all your assets that is?
Mr. Moore. It is pretty close to 10 percent.
Mr. Gottheimer. About 10 percent. Thanks. And is that
consistent today?
Mr. Moore. That is what our allocation policy states, is
that is the range we want to be in.
Mr. Gottheimer. And why does your agency invest in these
funds, sir?
Mr. Moore. Because it is our best performing asset
historically, and going forward, I think there was a question
just now about the private markets.
Mr. Gottheimer. Yes, sir.
Mr. Moore. That is where a lot of activity and a lot of
growth activity takes place. And we want to be part of the
growth in our country and the world, so that is where you have
to be at some level.
Mr. Gottheimer. Would you please speak to the returns and
other fees your agency receives from these investments? Like
maybe the last 10 years, if you could, a number on that.
Mr. Moore. We have done extensive analysis in our fund, and
I can tell you that our private equity fees and expenses have
run about 4.5 percent.
Mr. Gottheimer. And overall return, do you know the last
10-year returns?
Mr. Moore. The returns, the 10-year returns have been about
13.1 percent.
Mr. Gottheimer. 13.1 percent. And I think the stock market
during that time--do you know what the--
Mr. Moore. I can't tell you that.
Mr. Gottheimer. We did a little research on that. I believe
it was 7 percent. So, 7 percent versus 13 percent. And I know
if you look at some of the other States, like Massachusetts,
over that period of time, at a 13.6 percent return; Ohio, 13
percent; Minnesota, 11.7 percent.
Can you speak to the impact that some of the laws in front
of us might have on the assets your association has under
management, sir?
Mr. Moore. I am particularly focused on disclosure and more
information on fees and expenses.
Mr. Gottheimer. Fees and expenses.
Mr. Moore. Because that is like low-hanging fruit. If you
reduce your costs, you have more money in the corpus of your
fund. You can grow your fund a little bit more. You can fund a
few more pensions. And in the long run, that is what we are
looking for, to be able to deliver the benefits that we
promise.
So, controlling costs is very critical to me, and those
provisions in H.R. 3848 that deal with fees and returns get to
that.
Mr. Gottheimer. It is interesting, I represent the Fifth
Congressional District in New Jersey, and pensions in my State
support many of the hardest working members of our communities,
our law enforcement officers and teachers and firefighters, who
rely on their pensions to provide financial stability in their
retirement.
Unfortunately, pensions in New Jersey and across the
country, as you know, are struggling from years of
underfunding, and that is why these returns are so important,
and lower performance from low performance in the public
markets.
The Wall Street Journal recently reported that New Jersey's
teacher and public workers pension funds have an average of 43
cents for every dollar in benefits promised; a retirement
crisis is happening before our eyes.
So you talk about these numbers, and the rates of return
are incredibly important to make sure that we can shore these
up and have the best rate of returns for our teachers and our
firefighters and, of course, law enforcement.
The New Jersey Division of Investment, a public pension
fund, has nearly 800,000 members and $78 billion of assets
under management, $8.7 billion of those invested in private
equity. The pension's private equity portfolio produced an
annualized return of more than 10 percent over the past decade
after expenses. Compare this to the long-term Treasury bond
yield of below 2.5 percent or the historic 7 percent return in
the stock market.
It is clear why we are hearing from you, and why we are
hearing from institutional investors looking to invest in
private equity as part of their asset allocation strategy. And
I think our job in the committee is to, of course, make sure
that we are punishing bad actors while not interfering with
those that produce good returns.
I don't know if you want to comment on that?
Mr. Moore. No, that is exactly the way I see this bill. The
bill doesn't attack the private equity industry as it is being
portrayed. The objective that I see, and I can't vouch for the
validity and the outcome of every single provision, but the
trajectory is to try to rein in and put some guidelines around
how we operate to keep the bad actors under control.
Mr. Gottheimer. Because you don't want to walk away from
this investment tool?
Mr. Moore. No. We want the good actors to continue to
receive our money and continue to grow our portfolios. And we
want to do just like Walmart. Every year, we want to negotiate
the costs, so we can get them down.
Mr. Gottheimer. Thank you. Thank you, sir.
I yield back. Thank you, Madam Chairwoman.
Chairwoman Waters. Thank you.
This side of the aisle has not vilified an entire industry,
as was indicated by the previous speaker.
The gentleman from Ohio, Mr. Stivers, is recognized for 5
minutes.
Mr. Stivers. Thank you, Madam Chairwoman. I appreciate you
holding this hearing to illuminate a lot of issues in and
around private equity.
My first question is for Mr. Moore. Following up on the
gentleman from New Jersey, I understand you are concerned about
fees. Can you tell me, first of all, what your best performing
class of investment was at your pension over the last 10 years?
Mr. Moore. I have said this 4 or 5 times. It has been
private equity.
Mr. Stivers. Oh, okay, thank you. I appreciate you
restating that.
So does your pension fund calculate returns net of fees?
Mr. Moore. Yes.
Mr. Stivers. Always the best performing class, net of fees?
Mr. Moore. Yes, that is what the performance measures--
Mr. Stivers. Could you repeat it again, what is the best
performing class net of fees?
Mr. Moore. Yes, it is net of fees. That is the--
Mr. Stivers. What is the best performing class?
Mr. Moore. Private equity.
Mr. Stivers. Thank you.
Mr. Moore. Private equity is the best performing class, net
of fees.
Mr. Stivers. Thank you. So, that is really my first point.
I have a million pensioners in Ohio who are part of the
public retirement system, either OPERS or the school employees
system or the police and fire system. That is teachers,
policemen, firemen, public servants. They are getting, in Ohio,
an annualized return over the last 10 years of about 13.3
percent from private equity, compared to about 7 percent from
the stock market over the same 10-year period. Just to put it
in perspective, that is almost twice the return from the stock
market.
I understand you are concerned. That is why I asked about
the return net of fees, that is really the point here, is even
after the fees, the return is much, much greater.
My next question is for Mr. Palmer. In your testimony, you
talked about how small businesses are seen as too risky for a
lot of financial institutions now. Have the post-crisis capital
and liquidity rules made it more or less difficult for middle
market companies, Main Street companies, to obtain the funding
they need through banks?
Mr. Palmer. In many cases, yes. The banks--
Mr. Stivers. More difficult or less difficult to get?
Mr. Palmer. More difficult, yes.
Mr. Stivers. More difficult to get financing. So, who
typically fills that void today for middle market companies?
Mr. Palmer. Private equity does. Private equity comes in,
and then sometimes enables the banks, but private equity is
filling the gap.
Mr. Stivers. I would like to ask the whole panel if they
have heard of any of these companies in my district. CCPI,
Blanchester? Probably not. Plaskolite in Columbus? Probably
not. You might have heard of this one, The Oneida Group in
Lancaster, Ohio. Nope. And Rolling Hills Generating in
Columbus, Ohio.
These are mostly middle market companies. Oneida is the
biggest one. It used to be called Anchor Hocking. Anybody heard
of Anchor Hocking Glass? Still no? Okay.
They compete against China to make glassware all around
this country. It is a tough market to compete in, and if it
wasn't for private equity, thousands of employees at Anchor
Hocking Glass would be out of a job, unemployed. They come in,
and they keep the company going. Thousands of employees every
day report to work, a lot of them union employees. And I am
glad private equity was there to do that.
One last question, this one for Mr. Maloney. Do you think
it is to the benefit of a private equity firm to drive one of
its portfolio companies out of business?
Mr. Maloney. No. That is never the goal, and that is not a
successful form of business.
Mr. Stivers. And we did talk about, in the past, there have
been a few business models, very bad examples--and by the way,
there is good and bad in everything--of people who essentially
raid and split up companies. Everybody thinks of the corporate
raiders of the 1980s. That was a long, long time ago.
Is that a frequent business model today, Mr. Maloney?
Mr. Maloney. No, sir, it is not.
Mr. Stivers. I have not seen that to be the case. And the
small and medium-sized companies in my district have grown as a
result of private equity.
I will tell you a story about a company called HFI, that
the owner was ready to do something else, but he had a growth
opportunity and he wanted to continue to grow his company. He
brought in private equity. They now employ 200 more people in
Canal Winchester, Ohio, than they did before. The company is
thriving and doing well. It is an example of private equity at
its best.
I know there are people who could point to bad examples,
but there are a ton of great examples. And 26 million Americans
are employed as a result of private equity investments, and I
think we need to basically acknowledge that.
I am the co-Chair of the Middle Market Caucus, these middle
market companies that dot this country and are in every
congressional district in America, and private equity helps
them. So I want to say, while there may be some more things
that we can do, it is the best performing class, net of fees,
and it is helping to grow jobs.
I yield back.
Chairwoman Waters. The gentlewoman from Iowa, Mrs. Axne, is
recognized for 5 minutes.
Mrs. Axne. Thank you, Madam Chairwoman, and thank you to
the witnesses for being here. I appreciate it.
We have spent a lot of time in this committee talking about
affordable housing and the crisis that is hurting so many of
our constituents across the country.
One possible solution to the crunch in my district is
manufactured housing, which can be more than 30 percent cheaper
than traditional housing. Nationwide, almost 3 million
manufactured homes are anchored in land-leased communities,
which means that residents own the homes, but lease the land
underneath them, and many of these communities are being
purchased by big outside investors, and increasingly, private
equity firms.
So I would like to talk about how tenants are affected by
increased private equity investment in land-leased communities.
Dr. Appelbaum, I would like to start with you. Why are
these attractive investments for private equity firms?
Ms. Appelbaum. Private equity is always looking for
someplace where it can jack up prices, usually to pay off debt
that it has put in place, not necessarily if these are smaller
loans. But they are looking for a situation where people don't
have a choice.
It is the same story as it was with the emergency room
doctors. You have already bought the manufactured house. You
have already put it on this spot. You are a low-income person
or you would not be living in this situation, generally
speaking. The rent has been very affordable. This has been a
good opportunity for people who are low income to have a decent
standard of living.
And then somebody comes along, a company, often private
equity, not only private equity, buys up the company that
controls the land, and then jacks up the rent. Why they do it,
besides the fact that they make more money when they jack up
the rent--there may be many different reasons for it. It may be
that the actual physical real estate is valuable in the sense
that if it had other kinds of businesses on it, for example,
there would be a huge return.
We have seen this, for example, with Hahnemann Hospital in
Philadelphia. Private equity buys the hospital. It was already
failing. It did nothing to turn it around. But the minute it
bought it, it separated the real estate, because it realized
that real estate, which was previously in a poor neighborhood
but is now a gentrifying area, could be sold for other uses at
much higher rates.
So, there are many motivations for these companies coming
in and doing it. The jacking up of prices is usually to evict
the tenants, to make them move someplace else, and do something
else with the land.
Mrs. Axne. Thank you for that.
So essentially, for these investors, it is a recession-
proof revenue. They have a captive investment, and they are
going to capitalize on it at the expense of hardworking people.
One trend we have seen in the market is when these
communities are sold, rents can skyrocket. I saw how this
happened firsthand to my constituents at Midwest Country
Estates in Waukee. It is one of five manufactured housing
communities that Havenpark Capital recently bought, and they
are raising rents between 20 and 70 percent.
I want to reiterate that. Many of these people are on fixed
incomes, and they are now being asked to pay 70 percent more in
rent, on a fixed income.
If they can't afford it, they have very few options, as you
implied. They can try to find a buyer, they can abandon all the
equity that they have put into their home, or they can somehow
come up with thousands of dollars, miraculously, that they
couldn't find before.
Rent increases like this not only hurt the tenants by
raising costs, but they also decrease the value of the homes
that they live in.
Does this practice surprise you at all?
Ms. Appelbaum. I just want to be clear, we do have many
companies that are not behaving like this. But this is
certainly one part of the business model, is to see about not
how to make a business operate better, but how to maximize the
returns that the private equity firm can get out of it.
So here you have a situation that you have described where
the private equity firm owners are interested in their returns.
They are not interested in whether this property can continue
as a manufactured home property.
Mrs. Axne. I appreciate that.
We all know that the homes in mobile home parks are truly
not mobile and that the residents are effectively a captive
audience.
What I would like to reiterate here is that manufactured
homes can be a solution for affordable housing, a great
solution, but only if we can address the problem of outside
investors buying up MHCs and raising rents to extract as much
profit as they can from the people who live there. So, we
absolutely need to address that. We want to make sure that
every person in this country has access to a nice roof over
their head, and that their children can grow up in a safe
environment.
Thank you so much for your testimony.
And I yield back.
Chairwoman Waters. The gentleman from Kentucky, Mr. Barr,
is recognized for 5 minutes.
Mr. Barr. Thank you, Madam Chairwoman.
Many of my Democrat colleagues today have highlighted
instances where private equity-backed companies have
restructured the business model or cut jobs or filed for
bankruptcy. And while it is true that successful buyouts may
include cost-cutting, there are plenty of success stories that
demonstrate how small businesses prosper through private
investment and benefit from strategic insight that private
funds can offer.
Mr. Maloney, I was impressed with your testimony that
private equity invested $685 billion in more than 4,700
businesses across the United States in 2018, and that 94
percent of PE investments are successful.
One example of this success is Big Ass Fans, headquartered
in my district in Lexington, Kentucky. As the colorful name
suggests, this company makes, among other things, very large
fans for commercial and residential facilities.
This private equity-backed business has grown at an
astounding annual rate of 30 percent. Since their private
equity investment, Big Ass Fans has added nearly 200 jobs,
developed and introduced new products, and increased their
distribution channels. They have international offices in
Australia, Canada, Malaysia, and Singapore, sell products in
more than 170 countries, and employ over 700 people, 550 of
whom work in my district in Kentucky.
Their CEO, Lennie Rhoades, has told me that the stability
provided by their private equity backers allows them to
confidently make investments in their workforce, facilities,
and technology because they have a partner with a shared goal
of success. Big Ass Fans is innovating and pioneering the
industry happily in the heart of central Kentucky and thriving
no longer just as a fast-growing small company, but as the
trusted producer on a global scale.
This is a shining example right in my backyard of the
direct impact private investment can have on job creation,
technological innovation, and community development.
Now, everyone here is sympathetic to Ms. De La Rosa's story
and what happened to her. Everyone here is sympathetic to the
other Toys R Us employees. And bankruptcies are unfortunate.
And PE-backed companies are susceptible to market conditions
just like other companies.
But, Mr. Maloney, the question is, what was a larger impact
on the Toys R Us bankruptcy, was it the private equity firms,
or was it the competitive pressures of Amazon?
Mr. Maloney. Congressman, thank you for that question. And
while I don't know the particulars, what I can tell you is that
at the time, you saw much different market forces. People were
buying a lot more online and, as you know, there were other toy
manufacturers and toy stores that went out of business. Some of
them were backed by private equity, and some of them weren't
backed by private equity.
Mr. Barr. Let me ask you the question this way. Did private
equity forestall bankruptcy of Toys R Us or did it cause it?
Mr. Maloney. During the time of private equity's ownership
of Toys R Us, they actually expanded the number of stores. It
is just unfortunate that it ended up this way, and that is
largely because of market forces, as you say.
Mr. Barr. Again, kind of a follow-up on Mr. Stivers'
question, do private equity firms generally make more money
investing in companies that go bankrupt or in companies that
are successful?
Mr. Maloney. We make more money for our investors when we
are successful and we can exit.
Mr. Barr. That makes a lot of sense, because we see that at
Big Ass Fans in Lexington, Kentucky.
And I want to add that the private equity backers of Big
Ass Fans is a firm that touts, as one of its managers, former
Obama Treasury Secretary Jack Lew. And I am just glad to see
Democrats so actively involved in the provision of equity
capital, like Mr. Lew, that has created a very positive
difference in Lexington, Kentucky. I'm glad to see that this is
a bipartisan issue.
Quickly, on leveraged lending, this hearing is obviously
about private funds, and private credit deserves attention as
well. Some of my Democrat colleagues have suggested that
leveraged lending is systemically risky. I have noted this
before. It is important to make the distinction between credit
risk, which is simply the cost of doing business in the credit
economy, and systemic risk.
In September, before this committee, SEC Chairman Clayton
testified that he does not believe that leveraged lending poses
a systemic threat. Mr. Maloney, do you agree with the SEC
Chairman that leveraged lending does not pose a systemic risk
to our economy?
Mr. Maloney. Yes, Congressman, we agree with the regulators
on that approach.
Mr. Barr. And final question, Mr. Palmer, can you elaborate
on the stability that private funds can provide to the economy,
especially in periods of distress?
Mr. Palmer. Sure. I will give you a real-world example.
When the financial crisis happened, banks had to pull their
loans on small businesses. Private equity funds stayed in them
and kept those businesses alive. If you were backed by private
equity, you were more likely to survive that downturn than if
you just had a normal bank loan.
Mr. Barr. Thanks. I yield back.
Chairwoman Waters. The gentleman from California, Mr.
Sherman, is recognized for 5 minutes.
Mr. Sherman. I am not hostile to private equity. We have
seen private equity attacked for doing things that are done
elsewhere in our economy.
I think the gentlelady from Iowa is right, it is
unconscionable to see these massive rent increases at mobile
home parks. But I have seen that done by private owners, where
you just have one owner. I have seen it done by traditional
publicly owned corporations.
We see private equity companies acting like capitalists,
raising rents when they can, making money, not caring, and
responsible to investors who are demanding an extra tenth of a
percent rate of return, otherwise the money will shift
elsewhere. So if they do care too much, they don't get any
equity investments.
We have seen a lot of stores close. We have seen stores
close for a lot of reasons. I am not sure it is the private
equity model.
But if private equity is no different from or should be
treated similarly as other major economic institutions, this
raises the issue of whether we should get disclosures from
private equity consistent to what we get from other ownership
models. When we passed the Dodd-Frank Act, we didn't demand
that every public company give us a complete report on all
their societal impacts, but we did require reports on conflict
minerals, mine safety, and resource extraction, three areas
that this committee decided were so important that corporate
America should give us a report on it.
A report released by the Trump Administration critiqued
these requirements, saying if the intent is to use the law to
influence business conduct, then this effort will be undermined
by imposing such requirements only on public companies and not
on private companies.
Dr. Appelbaum, should we require large companies owned
through private equity to make the same kind of disclosures
that we require of publicly held companies?
Ms. Appelbaum. I think we should require them to make the
same kinds of disclosures, and I think that they should be
subject to the same kinds of regulation that other financial
firms are subject to.
We do not have this kind of risky behavior from mutual
funds, for example, because they are subject to other kinds of
regulation.
The problem with leverage is not the use of leverage. It is
the excessive use of leverage.
Mr. Sherman. Yes, I am not even talking about leverage. You
could make a completely non-leveraged purchase of a company
that does terrible mine safety and has resource extraction
agreements with Third World countries that are rife with
corruption, and there could be no leverage involved.
The focus here is on these disclosures. And I will say as a
shareholder, because all of us are in the pension plans, and I
see Mr. Moore here representing so many of my constituents in
the L.A. County plan, they know, when you invest in a public
company, their resource extraction rules. But when you invest
in private equity, the ultimate owners, your pensioners, don't
know, and they should.
I look forward to working with people here on legislation
to require companies big enough to be public companies,
companies with $50 million that happen to be private equity or
privately owned, to make these disclosures that the Trump
Administration says are unfair to require only of public
companies.
Mr. Moore, we have the private equity companies not making
some of the same disclosures to investors--that means you--that
some would like. Would it make sense to form a union or
association of pension plans and others to demand that the
private equity firms provide you with information, particularly
about fee and cost transparency?
Mr. Moore. We do have the International Limited Partners
Association that has been very vocal directly to the SEC and in
support of this legislation on that very issue of disclosures.
And the best disinfectant is always sunlight.
Mr. Sherman. I would hope that in addition to lobbying us,
that association would lobby you and say, don't invest in a
public equity firm that doesn't give you the disclosures.
I yield back.
Chairwoman Waters. The gentleman from Colorado, Mr. Tipton,
is recognized for 5 minutes.
Mr. Tipton. Thank you, Madam Chairwoman.
I appreciate the panel taking the time to be here today.
Mr. Palmer, I wanted to go back to a comment that you had
just made a little bit earlier in regards to PE being riskier
investments. And ultimately, I would like to know, is the goal
to be able to lose money or is it to be able to make money?
Mr. Palmer. The goal is to make money.
Mr. Tipton. The goal is to make money. So, you don't want
to be able to force anybody into bankruptcy?
Mr. Palmer. No.
Mr. Tipton. The goal is to be able to provide an actual
return, to be able to get the businesses going, and to be able
to create some real job security for those businesses?
Mr. Palmer. Yes.
Mr. Tipton. What is the best job security, really?
Mr. Palmer. The best job security is a good business, and
for an employee to have options. If you have a strong economy,
you can have a business that you are staying in forever or you
can go some place else because you have other choices. Right
now, we have an incredibly low unemployment rate, and private
equity funds have a real vested interest in keeping and
maintaining and supporting their employees, because getting new
ones is hard.
Mr. Tipton. Right. And I think that is an important point.
We are at record lows when it comes to unemployment in this
country. We have more jobs available than there are people to
fill them. But the role that private equity can play is
something that is of concern, actually, to me. I come from
rural America, and we haven't really talked an awful lot about
the makeup of the private equity industry. We know about the
big private equity firms. The Carlyle Group has been mentioned.
What is the real composition of that market right now?
Mr. Palmer. The composition of the market is--for the
venture world, the early stage is overwhelmingly concentrated
in northern California, in New York to Boston. Most of the
smaller private equity is the inverse of that. Rural areas face
unique challenges with that.
I was actually just with Congressman Hill last week in
Arkansas talking about that, and we have a type of private
equity fund called a rural business investment company that is
fairly new, that we are trying to work with to help grow that
part of the market, because rural areas have far more
challenging access to capital than pretty much anybody else.
Mr. Tipton. For me, that is an important point. A lot of
the focus in this committee is, we get into the metropolitan
areas, and I do not dispute the importance of that. But for
rural America, when we are talking on a per capita basis, the
impact of being able to have those businesses, we actually have
one that is in my district, a polymer company that produces a
very unique product. They have to be able to be innovative in
terms of design, in terms of being able to market, ship
worldwide, and rely on some private equity dollars to be able
to have that. But the access to those dollars in rural America
out of the traditional financing sources is actually difficult.
So that does play a real role in trying to be able to maintain
those jobs in those economies in areas that are underserved.
I would like to maybe follow up, and, Mr. Maloney, you may
want to speak to this as well. Is it reasonable for companies
like the polymer company that I just described, for them to be
able to look to private equity to be able to meet their
financial needs?
Mr. Maloney. Absolutely, and that is what role we play,
Congressman, in the marketplace, is providing growth capital
for companies like that to expand and grow their companies.
Mr. Tipton. I do want to follow up because some of the
conversation today is obviously on H.R. 3848. When we are going
to be adding new regulations coming into place, all of a
sudden, we have personal liability that you may actually be on
the line. Is there going to--everyone understands. We are
capitalists. We live in a free market. There are going to be
good players, and bad players. I think many of us would argue
that the majority, overwhelmingly, are people who are trying to
do the right thing, but if we add those new regulations, is
there actually some potential that we could be drying up some
of that access to capital dollars, particularly when we are
talking about rural America?
Mr. Palmer. Yes.
Mr. Tipton. Mr. Maloney?
Mr. Maloney. Absolutely, Congressman. And it is a real
concern because there are a lot of businesses out there, as we
talked about, in the mature space that need growth capital and
need to be able to turn around. And if you impose liability,
joint and several liability on the fund managers, no fund
manager will ever take a risk and invest in any company. Again,
they just won't do that, and that will leave a lot of
businesses to fail much quicker than they will today.
Mr. Tipton. Let's maybe explore, just kind of wrap up a bit
here, in terms of some of the bankruptcies. Would you maybe
determine these were caused by mismanagement within the
company? Was it because private equity had stepped in? Or is it
just market forces, primarily?
Mr. Palmer. I think it is a case-by-case basis. Generally,
it is market forces, but sometimes, it is international issues.
It can be--a flood could happen. There are innumerable reasons
why things can go wrong, but it happens rarely.
Mr. Tipton. Thank you, sir. I yield back.
Chairwoman Waters. The gentlewoman from California, Ms.
Porter, is recognized for 5 minutes.
Ms. Porter. Thank you, Madam Chairwoman.
Dr. Appelbaum, you noted in your September 4, 2019, study
on private equity and surprise medical billing that we the
American people and those that we are elected to serve need to
decide if the goal of healthcare is to increase profits or to
improve patient outcomes. And hospital outsourcing of various
departments has allowed physician practices to grow
exponentially and operate those services independently. Once,
there used to be solo practitioner doctors and very small
partnerships. But today, private equity firms have become major
players, as you said, buying out doctors' practices and rolling
them up into large corporate physician staffing firms. We see
it in a lot of different ways and creating a lot of different
harms, including surprise billing. I have personally been a
victim of surprise billing and I know how devastating it can be
to receive one of those bills when you are trying to recover
from an illness.
Families today are also buried in medical debt. The new
report from the Consumer Financial Protection Bureau shows that
debt collectors pursuing medical debt is making a sharp
increase. We know that about half of all bankruptcy reasons
have a component of illness or injury in medical debt to them.
One Stanford study found that the likelihood of receiving a
surprise bill rose from 32 percent in 2010 to 43 percent in
2016.
Do you think the involvement of private equity in physician
contracts has increased the incidence of surprise billing?
Ms. Appelbaum. Yes, absolutely, because what we have seen
is that there are two really large doctor staffing firms. It is
not unusual for a hospital to say to a local doctor's practice,
we would like you to staff our emergency room. Those doctors
come in. They are in network, the same network that the
hospital is in. You go to the emergency room, you are treated
by a doctor, and it's taken care of by your insurance.
In this situation, you have a very large company owned by
private equity staffing the emergency room. Those doctors are
not responsible for the billing, it is the overall company, and
what they do is they take their doctors--either they take the
doctors out of network, that is one company, and then they can
charge you anything they want. If the doctor you see is out of
network, you can be charged anything. You have done your due
diligence. You are in a hospital that is in your network. You
think the doctors will be covered, and then you get that big
bill.
The other company uses the threat of surprise billing when
it negotiates for in-network returns. And in both cases, what
you see is that the doctors employed by these private equity-
owned companies get payments that are way, way higher than the
doctors who previously did the job or doctors in other
hospitals not owned by private equity. So, this is a major
driver of healthcare costs. We have healthcare costs rising.
Ms. Porter. Yes. And the same Stanford study found that the
amount of surprise bills went up from $220 in 2010 to $628 in
2018. So it is both the incidence and the harm.
Mr. Palmer. Yes.
Ms. Porter. I received an ad at my own home from a shadow
group known as Physicians for Fair Coverage, and that group,
backed by private equity firms, including KKR; Blackstone; and
Welsh, Carson, Anderson & Stowe spent more than $4.1 million
lobbying against solutions to the problem of surprise billing.
What would be the primary goal of those firms in trying to stop
Congress from addressing surprise billing?
Ms. Appelbaum. Of course, it is to protect their profits.
Ms. Porter. Thank you. I have one last question.
Ms. Appelbaum. Yes.
Ms. Porter. Does the involvement of private equity in
healthcare improve patient outcomes in any apparent way?
Ms. Porter. There is no evidence that it does, and there is
some evidence that the quality of care goes down. The price
evidence is very strong. The failure of quality is not quite as
strong, but definitely, we don't see improvement for the extra
money we are paying.
Ms. Porter. Thank you so much.
Mr. Maloney, if a private equity fund owns the equity, the
debt, and credit default swaps, might that private equity firm
in some cases have an incentive to force a company into
bankruptcy?
Mr. Maloney. I don't see a scenario, Congresswoman, where
that would be beneficial to the--
Ms. Porter. Do you understand the concept of a credit
default swap?
Mr. Maloney. Most of our transactions don't involve the
same private equity firm owning the debt and the equity.
Ms. Porter. How would we know, since credit default swaps
are not--they could own the debt, and they would have to
disclose that in the bankruptcy petition. But if they bet the
other way, that the company would go under by taking on a
credit default swap, that very problem would be hidden from the
bankruptcy court and the public, the employees, and all of
those who are harmed by the bankruptcy.
Mr. Maloney. I think that is a very unusual case, but thank
you.
Chairwoman Waters. The gentleman from Texas, Mr. Williams,
is recognized for 5 minutes.
Mr. Williams. Thank you, Madam Chairwoman.
I am a small business owner, and have been for 50 years. I
am a Main Street guy, and I believe that the private equity
industry is the epitome of capitalism. Large groups of
investors pool their money together to look for businesses that
can be restructured or infused with capital to expand product
lines, hire more workers, and make a greater impact on
communities in which they serve. Hundreds of thousands of jobs
are being created throughout this country, and our schools'
endowments are seeing huge returns, and innovative products are
being brought to market because of this industry.
For those people who fundamentally think capitalism is
broken, private equity is an easy bogeyman to place blame on
when something goes wrong. The bottom line is if you take a
risk, you should get a reward.
So before I go on to my next question, I would say, Mr.
Maloney, you represent a sizable amount of people, and would
you say that those folks are capitalists or socialists in your
group? A quick answer.
Mr. Maloney. Congressman, I would say that they are
capitalists.
Mr. Williams. Are you a capitalist or a socialist?
Mr. Maloney. Congressman, I am a capitalist.
Mr. Williams. Good. And, Mr. Palmer, would you agree, the
same situation are the people you represent yourself?
Mr. Palmer. Unapologetic capitalist.
Mr. Williams. Okay. Well, you are a capitalist.
Mr. Palmer. Heck, yes.
Mr. Williams. Okay. I would just say this: Where I come
from in Texas, private equity has invested almost $10 billion
since 2013 and supports over 700,000 jobs. Not only have these
investments pumped money into the Texas economy, they are
necessary for the health of the pension system within the
State. The Teachers' Retirement System in Texas, which has $154
billion in assets under their management, has $21 billion
invested in private equity. Over the past decade, the
annualized returns have been over 10 percent. We have heard
that from many of you today on these investments to help
support teachers' retirement throughout the State.
Before we consider any drastic changes to such a large
contributor to our economy, we need to take an extremely close
look at the consequences that this would have across a variety
of industries.
Mr. Palmer, I know you have talked about this already, but
I think it bears repeating again. Can you talk about the
effects that the Stop Wall Street Looting Act would have on
various sectors of the economy should it become law?
Mr. Palmer. It would be particularly damaging to the small
private equity and medium-sized private equity economy. I
showed a video, not a politicized video, but an actual video of
the Senate sponsor of this bill explaining how private equity
works and what this bill would do to a room of 500 small
business investors, and the air left the room. It would really
be profoundly damaging. And the intent of the bill on the
Senate side--I am not saying the House side--the intent on the
Senate side seems awfully hostile. We want this industry to
work. We want to create jobs, but it would be bad.
Mr. Williams. Okay. It seems like my friends on the other
side of the aisle believe that there is a perverse incentive as
a result of the structure of private equity investments. I
would like to read a quote from the Houston Firefighters'
Relief and Retirement Fund chairman, Brett Besselman. He said,
``We are very confident in the prospects for private equity
investments in our long-term investment mix. Private equity
opportunities far exceed those available in the stock market
investing for the foreseeable future and are a welcome addition
to our portfolio diversification effort.''
If the incentives were off, I do not assume they would be
receiving such high praise from the firefighters in Houston.
So, Mr. Maloney, can you explain how private equity funds are
set up in regard to the general and limited partnerships? And
give your thoughts on if you think the incentives of the two
parties are properly aligned?
Mr. Maloney. Yes. Thank you for that question, Congressman.
These investors are very aligned because the pension fund
succeeds and gets a return when the private equity fund
succeeds. And when that happens, everybody's a winner at the
end of the day.
And I would say that both of these contracts between the GP
and the LP are carefully negotiated. The LPs get full
transparency from the fund and can ask any questions from the
GP that they want to. And we are very committed. They are very
important partners for us, and we share as much information as
possible with the LP.
Thank you.
Mr. Williams. Okay. Thank you. I yield back.
Chairwoman Waters. Thank you.
The gentleman from Illinois, Mr. Casten, is recognized for
5 minutes.
Mr. Casten. Thank you, Madam Chairwoman. And thank you all
for being here today.
I am here in no small part because of private equity. I am
a freshman Member of Congress. I spent 16 years as the CEO of a
couple of different companies. We put several hundred million
dollars of private equity to work. We built projects inside
industrials that recovered energy they were wasting, recovered
it, and sold it back to them. They were really complicated
projects. And I can say with complete confidence that there is
no pocket of capital in the country that really maps to the
investment size and the deal complexity of what we were doing.
And I think I can expand that more broadly to the broader
challenge we have to invest in our infrastructure, clean or
otherwise, that there is just a deal size and a complexity that
public markets aren't very well-structured to do so. Venture is
too small. And that is a positive thing.
I am also no longer in that company because of private
equity, because the incentive structures within that private
equity model, the 2 and 20 structure, the mid-teens return
targets create this massive pressure for a steady stream of
liquidity events. And so, having built a company and built a
team who knew how to do something really important, I couldn't
sustain it. Because once you have people with single digit
money out there, you sell down. And when you sell down to
cheaper money, you sell down to money that is less risk-
tolerant. They don't build things.
I mention all that because one of my favorite
descriptions--we had a limited partner whom we were pitching a
deal to once, and he said, the central challenge we have with
building infrastructure in this country is we that have a
glacier of investment opportunities in the infrastructure--an
ocean of investment opportunities in the infrastructure space
that deliver really attractive dividend returns that is
beautiful to this ocean, this glacier of money we have
upstream, and we all hate the rivers. And I put that to you as
a challenge.
Mr. Maloney, these are not ``gotcha'' questions, but I want
to just run through a couple of quick yes/noes to get to the
meat of this. One of my investors described his industry,
private equity, as custodians of wealth. Would you acknowledge
that there is a tension between the financial goals of the
owners of wealth and the financial incentives, sometimes, of
the custodians of wealth?
Mr. Maloney. Congressman, it is a very good point, but I
would say most of the time, the interests are aligned.
Mr. Casten. Okay. Do you agree that the mid-teens return
targeted by private equity creates a very real incentive to
take on debt and lever up equity returns?
Mr. Maloney. I think that they invest in these companies
and try to deliver the mid-teen target for the pension funds
and the retirees, as we have talked about. And I think you have
to have a careful balance between how much debt you load on to
grow the companies, and I think that they make those
determinations on a case-by-case basis.
Mr. Casten. Would you agree that having mid-teens return
targets creates a very real incentive to sell to people with
cheaper money if the opportunity presents itself?
Mr. Maloney. I think it just depends on how you try to grow
the company, and each case is separate.
Mr. Casten. Would you acknowledge that sort of the
traditional 2 and 20 structure or the variants thereof
incentivize private equity managers to create liquidity events
either through debt raises or through sales?
Mr. Maloney. I think the liquidity event is meant for the
investors, which are the pension funds and the college
endowments. So at some point, you need to give your investors
and the retirees the return, and I think that is what the
motivation factor is.
Mr. Casten. I guess I would put that back to what my LP
said--we are a wealthy family office, and he once said to me,
``I know I am smart, I know I am really good. The last thing I
want to do is to give my grandchildren an obligation to make an
investment decision. They want yield. They don't necessarily
want to have to reinvest.''
Would you agree that the carried interest deduction
turbocharges the incentive to create liquidity events to the
extent you can structure those liquidity events as capital
gains?
Mr. Maloney. Look, I think the carried interest provision
encourages the building of long-term capital and rewards and
aligns the incentives between the LP and the GP.
Mr. Casten. The reason I asked all those questions--and I
get it, it is hard in a public forum like this to be totally
forthcoming, but we have a massive need for investment and
infrastructure in this country. And we can acknowledge that
private equity is much better at that than a lot of other
pockets of capital, but we have to acknowledge that it is still
deeply flawed. And I want to work with you to try to figure out
how to take away those flaws, but we have to first acknowledge,
because I think every question that you said it depends, I
disagree. I think those were all hard yeses, but we don't want
to fix this by mandate.
I yield back.
Chairwoman Waters. The gentleman from Arkansas, Mr. Hill,
is recognized for 5 minutes.
Mr. Hill. I thank the Chair. Thank you for holding this
hearing today. I appreciate that you are showcasing Senator
Warren's economic proposals. Perhaps after Thanksgiving, we can
have a showcasing of Senator Sanders' economic proposals. I
appreciate the opportunity to hear their impact on our economy.
A couple of weeks ago in Arkansas, I had the pleasure of
hosting a venture ecosystem summit. And, Mr. Palmer, we
appreciate you coming to Arkansas and graciously attending our
event and talking about the current private funding market. It
was very well-received.
Arkansas has a vibrant entrepreneurial community, and I
wanted to bring together the stakeholders from across the State
for a roundtable discussion to collaborate on ways we can
foster the growth of our investing community, our
entrepreneurial community, and craft better Federal legislation
that will push and help growing businesses onto that next stage
of success.
Mr. Palmer discussed some of the challenges associated with
securing funding in States like Arkansas, and potential ways to
overcome those funding challenges. And much like his testimony
today, he strongly advocated for the need for private equity
and its investment in growing businesses all over the country,
particularly off the East and West Coast. I agree completely.
As an entrepreneur myself, and now Chair of the House
Entrepreneurship Caucus, I want to emphasize how important it
is to have a wide universe of funding options for new
entrepreneurs to draw on of companies of all sizes. This is
entrepreneurship week across the country, so whether you are an
angel investor or a venture capital fund or a private equity
fund, all of these forms of investment are important cogs in
our nation's economy and they impact all of our citizens. Just
in my district in Arkansas, private equity has created over
1,600 jobs and invested more than $2 billion over the last 5
years.
Pension funds, which touch a large portion of the American
public, are clear examples of private equity beneficiaries. Mr.
Maloney, public pension funds are large, sophisticated
investors. Is that right?
Mr. Maloney. Yes, sir, they are.
Mr. Hill. They are not mandated to invest in private
equity, are they?
Mr. Maloney. No, they are not.
Mr. Hill. And they have a lot of high-paid lawyers who work
for them?
Mr. Maloney. They do, indeed.
Mr. Hill. And they do insist on measuring performance
before they make an investment as a pension fund?
Mr. Maloney. Yes, sir.
Mr. Hill. Would you say that pension funds are pushovers
when it comes to negotiating with private equity funds?
Mr. Maloney. I think they drive a hard bargain.
Mr. Hill. Okay. We have talked a lot about performance. So,
you would say pension funds are generally--they have
benefited--and I appreciate Mr. Moore's repeated answers to
those questions. I have a chart I put up which is public
pension fund investment in private equity since 2000. And you
can see it has grown from around 3 percent of assets under
management up to about 8 percent of assets in that 20-year
period. That is a pretty significant increase.
So, generally, I think the panel would agree that pension
fund investors are pleased with their participation in private
equity investing.
And pension funds are so important to the working people of
this country. Whether you are a retired city councilman in
Boston or a retired law professor in California, you earn
pensions, and we have such an underfunding problem, anything
that incrementally is better than the average return is so
helpful to preserving those pension assets and retirement
assets. And I think that is why CalPERS has argued we need
private equity, we need more of it, and we need it now.
All that to say that limiting private equity is not the
answer. The Majority has claimed today that private equity is
bankrupting American companies and laying off thousands of
American workers, and that limiting private equity somehow can
stop that. In my view, it will have the opposite effect.
Limiting private equity will hinder business growth, constrain
local employment, and hurt Main Street communities.
We need to work to lower the cost to investment burdens,
whether it is in the public forum or in a venture capital
environment or an SBIC fund or private equity, and encourage
more investment. And that is what I think we have done by
lowering the corporate tax rate and bringing capital back to
the country. We haven't talked about that today, that by
encouraging capital to come back in the United States, some of
those profits now not double taxed will flow into the investing
community and in through both angel investing and through firm
investing.
Mr. Palmer, you have looked at rural States like Arkansas.
What do you think is the best thing that we can do to enhance
investing in a rural State?
Mr. Palmer. I think Arkansas is working on it right now,
bringing together the universities, bringing together the
financial leaders, the banks, the private equity funds that are
there, and really trying to coordinate and get to critical mass
with the entrepreneur ecosystem and incubators and others.
Mr. Hill. Thank you. I yield back.
Chairwoman Waters. The gentleman from Utah, Mr. McAdams, is
recognized for 5 minutes.
Mr. McAdams. Thank you, Chairwoman Waters, for holding this
hearing. And thank you to the witnesses for your testimony
today.
In a previous life, I was the mayor of Salt Lake County,
and one of the areas where I was proud of our work was the
ability to bring private sector resources to help address
public sector problems. I often teamed up with many of the
financial institutions in Utah to pursue innovative
investments. For example, Salt Lake County pioneered many of
the first pay-for-success or social impact bond programs in the
nation. We expanded access to early childhood education, we
targeted homelessness, and we reduced recidivism in our jails.
And we couldn't have done these projects without financial
partners.
But I know that the desire to invest in projects that have
more than a monetary return is not just limited to government
problems. You see a range of investments in clean energy
technologies and social welfare issues, for example. Our State,
local, and Federal Governments and nonprofits don't always have
the resources to solve problems by themselves, and I know that
firsthand. Establishing a framework to use capital markets for
problems isn't just harnessing capitalism for the greater good.
I also believe it is smart public policy.
Obviously, not every PE investment works out, and I don't
agree with every decision or practice that PE funds make, and
often employees of those companies that fail are,
unfortunately, left behind. We should clearly do better by
employees who are laid off to ensure that they can reenter the
workforce, ensure that they have job training that they need to
succeed, and also ensure a profit safety net.
With that said, I am interested in the trend for private
equity firms to look at impact investing or investments that
incorporate environmental, social, and governance goals into
the fund's investment strategy.
So I guess my first question, Mr. Maloney is, for many of
your member companies, are you seeing a growing desire from
either the fund managers or the limited partners when they make
investments to incorporate social impact projects or ESG
targets into the fund's investment strategies? And could you
give maybe a couple of examples or maybe general trends?
Mr. Maloney. Yes. Congressman, thank you for that question,
and thank you for your leadership on that issue in Salt Lake.
Many of our members are very interested in this. We are
committed as an industry to responsible investing. AIC, our
organization, adopted a set of comprehensive, responsible
investment guidelines that cover environmental, health, safety,
labor, governance, and social issues, and we did that 10 years
ago. And we have several of our funds that have specific social
impact funds. And everyone sort of looks through a lens of ESG,
and we are looking forward to working with you and coming in
and speaking with you about how we can expand on that.
Mr. McAdams. Great. Thank you. And do funds report ESG
metrics on their investments to the limited partners?
Mr. Maloney. Yes. And many limited partners are actually
asking for that information.
Mr. McAdams. I would be interested in exploring, maybe
offline we can do this or later down the road, any legal or
regulatory impediments to social impact investments or ESG
investments that firms may see.
In my State of Utah, several pension plans invest in
private equity funds. As others have discussed, this comes in
the form of a limited partner with a contractual agreement with
the general partner who manages the fund. For instance, the
Utah Retirement System (URS) provides retirement benefits for
more than 200,000 members in Utah, representing public sector
employees. And I think at the end of 2018, URS' investment
portfolio was at roughly 12 percent in private equity, and the
rate of return for 2018 in that private equity investment was
at 18 percent, clearly higher than other asset classes that URS
has investments in. And I know the board and officers of the
retirement system take seriously their obligations to provide
retirement security to all of its members.
So, Mr. Maloney, in your members' conversations with
limited partners, especially with retirement plans, why are
they choosing investments in private equity versus other asset
classes that they could be investing in? And has the share of
private equity as a percentage of retirement system asset class
changed over time, and any particular reason you could
contribute to that?
Mr. Maloney. Yes, Congressman. Great question. As we saw
from the chart that was on the screen just a couple of minutes
ago, the asset allocation for private equity has almost tripled
over the past 20 years, and I think the reason for that is it
is an asset class that has proven to outperform other asset
classes. And for a lot of pension funds that are underwater
right now, they need that extra delivery and investment income.
Mr. McAdams. Thank you. I thank the panel for their
testimony, and I yield back.
Chairwoman Waters. The gentleman from North Carolina, Mr.
Budd, is recognized for 5 minutes.
Mr. Budd. Thank you, Madam Chairwoman. And again, thank you
to each of the witnesses for your time here today.
My colleague, Mr. Barr, touched on this earlier, and I
think it is important to reiterate the point that during
periods of economic downturn or strain, traditional financial
institutions may pull back from providing commercial credit. So
when that happens, it is private credit funds who step in to
provide counter-cyclical support to businesses when they need
it most.
This question is for you, Mr. Palmer, and also Mr. Maloney.
Can you tell us how private funds support the commercial credit
market during economic downturns when funding from traditional
institutions may slow down?
Mr. Palmer. They can be more patient, and patience matters,
particularly for smaller businesses that don't have access to
public markets or just selling shares. And so, they are in it
for the long haul, and they sustain those businesses. North
Carolina is uniquely positioned to have, for its size, having
an extraordinary number of capital providers that do that type
of capital, not just in Charlotte, but also in Raleigh, in
Greensboro, and now in Wilmington.
Mr. Budd. Thank you.
Mr. Maloney?
Mr. Maloney. Congressman, it is a great question, a great
point. Private equity is there to help these companies grow.
And over 70 percent of the companies in America are not
investment grade, so a lot of times, the banks won't lend to
them, and they have to go to these private credit funds that
can facilitate their ability to grow.
Mr. Budd. Thank you both.
Ms. Appelbaum, I appreciate your time here today.
Yesterday, Senator Elizabeth Warren and Senator Bernie Sanders
released a letter criticizing third-party research about the
private equity industry. Ms. Appelbaum, do you produce third-
party research about the private equity industry?
Ms. Appelbaum. I am not sure what you mean by third-party
research. I go out and collect data, I interview private equity
firms, and I report on what I have learned.
Mr. Budd. And it is research, right? You are not directly--
Ms. Appelbaum. It is definitely research.
Mr. Budd. Okay. Right. So, it sounds like third-party
research. And does your organization accept donations from
outside groups or from special interests?
Ms. Appelbaum. No.
Mr. Budd. AARP, AFL-CIO, Open Society Foundations, none of
those?
Ms. Appelbaum. We accept grants from foundations, so we may
have--
Mr. Budd. Okay. And those foundations typically have an
interest--
Ms. Appelbaum. We don't accept money from corporations,
from governments, from foreign interests, but we do accept
money from individuals and from foundations.
Mr. Budd. Foundations. Okay. Understood. Can you tell this
committee how your research on private equity was funded?
Ms. Appelbaum. Yes. This is a very good question, because I
spent 4 years--Rose Batt and I spent 4 years on a $25,000 grant
from the Russell Sage Foundation. It was a labor of love. When
we got into it, we started out by saying, hey, we do a lot with
labor. Teachers of labor, economics don't understand what is
going on. We should write something for them. We had in mind a
small pamphlet. And then as we got into it, we discovered it is
a very complex subject and a very interesting subject, and so
we spent 4 years learning about it, writing about it, and
producing a book that was a finalist for a very prestigious
award from the Academy of Management. I think if you read the
book, you will find it is very balanced.
Mr. Budd. I mean, $25,000 over 4 years, that is definitely
a labor of love.
Ms. Appelbaum. It was a labor of love.
Mr. Budd. I just wonder if any of these--do you think that
some of the other contributions helped sort of offset that?
Ms. Appelbaum. We have unrestricted funds that we get, at
that time from the Ford Foundation, and that is--of course,
somebody paid my salary with that.
Mr. Budd. I understand.
Ms. Appelbaum. But the money for--it is very difficult, to
tell you the truth, to get money for private equity research
because usually we are interested in labor issues, and it is
really hard. Eyes glaze over when you mention finance to people
who care about labor issues.
Mr. Budd. Thank you.
Another question, Senator Warren actually linked to your
research in her official press release announcing her anti-
private equity legislation, referring to it as the
legislation's economic analysis. So I assume you are in
communication and in close coordination with Warren's team
about this?
Ms. Appelbaum. No. Actually, they wrote the legislation. It
turned out they had read my book. They asked me for a meeting
because they had other questions, and then when I got there,
they said, you are probably in a room with the only four people
who have read your book cover to cover. So I think the book may
have inspired the legislation. Afterwards, they asked me if I
would write a letter.
I want to say the legislation is not anti-private equity.
It is anti-excess leverage, and this is what the problem is. It
is true that most of the private equity-owned companies do not
end up in bankruptcy, but in the last recession, 27 percent of
the bankruptcies were highly leveraged companies.
Mr. Budd. Just in the remaining few seconds--thank you so
much--was there any discussion or coordination with the Warren
team during the report's development, timing of release, or
preparation for this hearing?
Ms. Appelbaum. For this hearing?
Mr. Budd. Yes.
Ms. Appelbaum. No.
Mr. Budd. Thank you. I yield back.
Chairwoman Waters. The gentlewoman from North Carolina, Ms.
Adams, is recognized for 5 minutes.
Ms. Adams. Thank you, Madam Chairwoman. Thank you for
holding this hearing. And thank you to all of the individuals
here to testify.
Dr. Appelbaum, a recent report published by Ernst & Young
celebrated private equity's role in the economy, noting that
they employ 8.8 million workers, but another report found that
private equity investments have led to a loss of 1.3 million
jobs in the retail industry alone. So should we be concerned
that so many workers are vulnerable to private equity
strategies and efforts to maximize their profits, often at all
costs, with little to no regard for the devastating impact that
they can have on workers, consumers, and communities?
Ms. Appelbaum. Publicly traded companies would never put 83
or 87 or any large amount of debt like that on the company. It
is not that private equity firms want to drive companies into
bankruptcy, but if they use excessive amounts of debt, then, in
fact, those companies are going to struggle. And in retail,
where there are always changes going on, new fashions, new
technology and so on, publicly traded retail companies have low
levels of debt so they can make the changes they have to make.
Private equity-owned companies do not, and that is why we see
those particular failures.
Ms. Adams. Okay. So let's talk about a specific example
that I find truly heartless and despicable. In 2018, Apollo
Global Management funded the purchase of the Hahnemann
University Hospital, an historic hospital that had been serving
Philadelphia's poorest residents since 1848. That is 171 years
in the community, providing a critical public good. And despite
making no capital investments, the management company closed
the hospital less than a year-and-a-half later, claiming that
it wasn't profitable.
The closure of the hospital left over 2,500 union workers
without jobs, and tens of thousands of Philadelphians without
access to healthcare, yet the company still stands to profit by
selling off the hospital's assets and prime real estate. So can
you explain how the owner of the hospital can profit by
shuttering the hospital and eliminating a huge source of the
City's healthcare services?
Ms. Appelbaum. Yes. This was truly outrageous behavior. The
private equity firm came in, and bought the hospital with the
idea that this is a possibility where you might want to improve
things. The day that they bought the hospital, they separated
the real estate and put it in a property company from the
hospital, which was the operating company. And then--I studied
healthcare as well. I won't go into details, but there are many
things they could have done that would have helped turn that
hospital around. They didn't lift a finger to do even one of
those things, and so a hospital that was in trouble continued
to be in trouble. Eighteen months later, they said, oh, well,
the hospital is in trouble. We are going to declare bankruptcy,
but the real estate was not included in the bankruptcy. The
hospital has closed.
Ms. Adams. Okay.
Ms. Appelbaum. The private equity fund still owns the real
estate.
Ms. Adams. Right. So do communities or governments have any
recourse when an institution like a hospital is shuttered by a
private equity?
Ms. Appelbaum. They have no recourse after the fact, no. My
recommendations going forward, because this is the first time
this has happened, and it is going to be a model for cities
with failing--communities that have been poor that are
gentrifying. When a not-for-profit hospital becomes for-profit,
the city and the State have a lot to say about what happens.
They need to put in the charter that if this property is not
used for healthcare, then the property reverts back to the
community.
Ms. Adams. Thank you, ma'am.
Mr. Maloney, as the head executive at the American
Investment Council, you represent some of the largest private
equity firms in the world. And given the profit maximizing
model often employed by firms, do you believe that there are
certain asset classes or investments that private equity firms
should avoid, particularly industries related to public health
that are incredibly sensitive in nature?
Mr. Maloney. Congresswoman, thanks for your question, and
thanks for your concern on these important health issues. I
will say that we have a role to play and a positive role to
play across the entire economy. Some of these hospitals and
some of these medical facilities are private equity-backed.
Some of them aren't private equity backed, but they are still
private. And I think we can have a positive role to play in
that, and we would love to work with you and others on the
committee to continue that positive role.
Ms. Adams. Mr. Moore, as you know, in California public
pensions are required to publicly disclose the fees and
expenses paid to private equity funds. So why do you think this
disclosure is necessary or helpful to investors?
Mr. Moore. So that we can do the proper analysis of costs
that are being charged to us and compare them between different
funds for different strategies and different potential
outcomes, but that is only one part of the data that we need.
Ms. Adams. Thank you very much.
I yield back, Madam Chairwoman.
Chairwoman Waters. Without objection, I will enter into the
record The American Prospect article, ``Private Equity's Latest
Scheme: Closing Urban Hospitals and Selling Off the Real
Estate,'' relative to Hahnemann University Hospital in
Philadelphia.
Without objection, it is so ordered.
The gentleman from Ohio, Mr. Gonzalez, is recognized for 5
minutes.
Mr. Gonzalez of Ohio. Thank you, Madam Chairwoman. And
thank you to our panel here for your attention today.
My fear as I look at the legislation and read some of the
talking points is that we are looking at some of the worst
examples that private equity has to offer, Toys R Us being one
example. I don't think anybody involved in that deal would do
it again if they had the opportunity. And we are taking a
hatchet to an entire industry that supports millions of jobs as
an important source of returns for many of our pensioners.
Mr. Palmer, I will start with you. I am going to read a
list of companies: Smile Direct Club; Slack; BeyondMe; Uber;
and Lyft. They have all gone public this year. What else do
they have in common?
Mr. Palmer. They are all backed by private equity funds, I
think.
Mr. Gonzalez of Ohio. Every single one of them.
Mr. Palmer. Yes.
Mr. Gonzalez of Ohio. Yes. From start to finish, it turns
out. And, Mr. Palmer, who ultimately is invested in these
funds? Who are the returns ultimately going to?
Mr. Palmer. They are ultimately going to university
endowments, pension funds, family offices, and individuals.
Mr. Gonzalez of Ohio. Teachers, firefighters--
Mr. Palmer. Absolutely.
Mr. Gonzalez of Ohio. --police officers. Wonderful.
And, Mr. Moore, just because I think it is such a strong
example, what is the highest returning asset class net of fees?
Mr. Moore. Let's see, I think this is the seventh time I
have just--
Mr. Gonzalez of Ohio. Just again, I like to hear it.
Mr. Maloney. It is private equity.
Mr. Gonzalez of Ohio. Okay. Wonderful. So to destroy the
industry in its entirety would rob many of our pensioners--
Mr. Moore. That is not the intent.
Mr. Gonzalez of Ohio. --of important returns. It's not the
intent, but it would certainly happen.
Mr. Palmer, in your opinion, to follow up on that, would
the Warren bill that we are talking about result in more money
in private equity funds or less, in your opinion?
Mr. Palmer. Less, and particularly for smaller businesses
which are otherwise seen as risky.
Mr. Gonzalez of Ohio. I want to talk about one specifically
which happens to be in my district, Hyland Software. Have you
heard of Hyland?
Mr. Palmer. I think I have.
Mr. Gonzalez of Ohio. You have. They are an awesome
business. They are owned by Thoma Bravo. Are you familiar with
Thoma Bravo?
Mr. Palmer. Yes.
Mr. Gonzalez of Ohio. Okay. So Thoma Bravo has owned the
business for close to a decade or maybe a little more than a
decade. They provided liquidity to the founding family, and
have supported the growth of thousands of jobs. Thoma Bravo has
been a great partner to Hyland. When I talk to folks at both
Thoma Bravo and at Hyland, it's just an incredible story for
our region.
Northeast Ohio, the community where I am from, is in need
of more private capital, frankly. We need as much private
capital into our community as we can get. We need more
businesses like Hyland Software to grow in fast-growing,
exciting industries and create jobs and opportunity for our
community.
And again, based on what you just said, I think the fear
that I have, and I think everybody should have, when we look at
this Warren bill, which I think would be a disaster for jobs,
and certainly for my community, is the effect that it would
have on the real economy. I know research papers are nice and
wonderful, but these have real implications for people on the
street. And I am happy to see that the bill is not supported
widely by my colleagues on the other side of the aisle, and I
hope it dies here and in this committee.
And with that, I yield back.
Chairwoman Waters. The gentleman from Illinois, Mr. Garcia,
is recognized for 5 minutes.
Mr. Garcia of Illinois. Thank you, Madam Chairwoman. And I
would like to thank all of the panelists for joining us today.
I would like to begin noting Ms. De La Rosa's testimony,
where you mentioned that you worked at Toys R Us for 20 years.
When Toys R Us was bought by KKR and Bain in 2005, it was
profitable. In fact, it had over $11 billion in sales the year
before it was acquired. KKR and Bain's first order of business
after they bought Toys R Us was to load it up with $5 billion
in debt. By 2007, that interest consumed 97 percent of the
company's operating profit.
Dr. Appelbaum, what kind of effect would loading up Toys R
Us with debt have on making the company more valuable and
allowing it to be sold at a profit to its new owners?
Ms. Appelbaum. The purpose of loading it up with debt--and
I agree with everyone who said that the goal is not to bankrupt
the companies. But when you load a company up with debt and you
sell it later, you make a massive profit just off of the sale
because you have so little equity there.
But, of course, debt is a two-edged sword. You can sell the
company and the private equity fund makes tons of money, but
the company itself, which is responsible for repaying the debt,
is at much greater risk of bankruptcy. I am not saying they all
go bankrupt, but the risk of bankruptcy definitely increases
with this debt. And we saw in the Toys R Us case what happened.
They tried to go public. They didn't want to own it for all
these years.
Mr. Garcia of Illinois. Got it.
Ms. Appelbaum. The public didn't want to buy it because
they could see the debt. Publicly traded companies don't have
debt at that level.
Mr. Garcia of Illinois. Okay. Ms. De La Rosa, you were at
Toys R Us both before and after private equity's takeover. How
did things start to change for you?
Ms. De La Rosa. They immediately eliminated positions, like
full-time positions, management positions, all around. We
switched operating companies that we used to manage the stores
that were--being in management, I was able to tell what the
cost was, and switching companies, we were going to companies
that were costing double what we did before. There were many
different things that definitely cost; cut of hours, cut of
positions.
Mr. Garcia of Illinois. So things changed for everyone, for
you as a manager, for workers, and many people lost their jobs.
That is precisely why I am supporting the Stop Wall Street
Looting Act, because it seeks to rein in the excesses that have
occurred and continue to occur in our economy, not because
anyone is running for President, whether it is Senator Sanders
or Senator Warren.
So to summarize, jobs were cut, hours were cut, and
inventory was cut. For private equity, investing in Toys R Us
really meant squeezing workers at every opportunity. Private
equity squeezed so hard that the company collapsed, leaving
workers and their families and whole communities to pick up the
pieces. The retail apocalypse.
Mass bankruptcies and closures of legacy retail stores is
often blamed on online shopping and technology, but that
doesn't tell the full story. As we have heard today, private
equity is playing a big role too. It is estimated that nearly
600,000 retail workers like Ms. De La Rosa have lost their jobs
at the hands of private equity over the last decade.
I want to talk about another sector that has experienced
significant disruption in recent years as well. Although
technology gets blamed, private equity is forcing layoffs in
the media as well. In 2007, things hit close to home for me
when the media company, the Tribune Company headquartered in
Chicago, was saddled with over $13 billion in debt and driven
into bankruptcy by what private equity investor Sam Zell called
the deal from hell. More than 4,200 people lost jobs after that
deal at newspapers and news stations around the country,
including the Chicago Tribune, the Los Angeles Times, the
Baltimore Sun, and more.
Dr. Appelbaum, what kind of job losses usually follow when
private equity takes over media companies?
Ms. Appelbaum. As you pointed out, I don't have the exact
numbers on this, but there have been huge job losses. There has
been huge consolidation. There has been less local news for
people to be able to get. One of the big things that we see is
not only are the jobs lost, but local people have no
information about their local governments. The old beats that
covered the things that were important to people so they could
make decisions about their lives are gone now.
Mr. Vargas. [presiding]. The gentleman's time has expired.
Mr. Garcia of Illinois. Thank you. And that is why we are
advancing this legislation, to rein in the excesses.
Thank you, Mr. Chairman. I yield back.
Mr. Vargas. Thank you.
The gentleman from Virginia, Mr. Riggleman, is recognized
now for 5 minutes.
Mr. Riggleman. Thank you, Mr. Chairman. And thank you to
all the witnesses here today.
I find this very interesting as we are talking about this
because we just had the megabank witnesses not too long ago. In
that hearing, we were talking about really wanting to stop
buybacks, especially in curbing investment returns, and private
sector growth. And one of the reasons I ran for Congress--I
have been in for 11 months now, and so I have lots of
experience--but one of the reasons that I ran for Congress,
specifically, was government overreach into my own businesses,
but also to my wife and daughters. And this is why I am so
interested in what is going on here.
When we talk about private equity, we are not just talking
about large companies, pension funds, things of that nature. I
know we have mentioned this multiple times, but I wouldn't be
here without private equity. First, in my Department of Defense
business, I had a $90,000 investment from private equity. We
were able to turn that into a 60-time multiplier on gross
revenues where we had 20 direct employees and 50 subs.
Now, my wife owns a chemical manufacturing plant of
distilled spirits, but the issue we had with private equity
then is we couldn't get a bank loan. Even though this is what
she wanted to do, and we put a lot of our own money into it, we
couldn't get the banks--they did not know how to valuate
anything when it came to cogs, when it came to overhead, when
it came to labor salaries, based on the fact that we had to
build specific types of inventory that they had no way to
valuate as we went forward.
So as we are going forward in this, what I always fear is
that the government is a board member on my company, on another
company. What I also fear is when you see legislation this bad,
which I call the ``Stop Entrepreneurship Act,'' I am wondering
if it is individuals writing this with good intentions not
understanding the law of unintended consequences or the
cascading effects of this type of damaging thing.
Let me ask a question, and I will start with Mr. Palmer and
go to Mr. Maloney. I am talking about asymmetric companies and
I am talking about companies that maybe are nontraditional. For
example, when you start a niche company, say, in the Department
of Defense and the intelligence community space, you are
talking about maybe companies that have a very specific niche
thing that they do. They can't get a loan to start. They can't
even get a loan for office space. Do you know where they have
to go? Your own money or private equity.
If you are starting a manufacturing plant, and you are one
of the first three or four to do it the way that you are doing
it, say, in a whole State that doesn't understand it, you
cannot get a loan. You have to go to private equity.
Now, you have to have, as you know, pro formas. You have to
know what pro formas are and P&Ls. You have to know all of
those things.
But I think that is why the first thing I want to do before
I get to the question is I want to--and this is a third-party
report, Mr. Chairman. I want to submit the Economic Impact
Analysis of the Stop Wall Street Looting Act and ask unanimous
consent to insert it into the record, please.
Mr. Vargas. Without objection, it is so ordered.
Mr. Riggleman. My question is this: When we are talking
about private equity, we are talking about the things that
drive the American economy. My question is, what happens to
asymmetric or nontraditional businesses, Mr. Palmer, if this
bill passes or something like this passes?
Mr. Palmer. They will have less access to capital. Private
equity fills those gaps that don't fit neatly for a simple bank
loan.
Mr. Riggleman. Mr. Maloney, same question.
Mr. Maloney. I agree with Brett, that it will dry up
capital needed for these asymmetrical businesses.
Mr. Riggleman. In this report that I am going to put in the
record, it says this can result in the loss of 6.2 million to
26.3 million jobs across the United States. That is a
projection. Do you know what that should say? 6.2 million and
31, because it is the 31 jobs in our manufacturing facility
that we wouldn't have right now. It is the 70 total jobs and
the multiple subcontracting companies that we have that would
not be in business today.
Now, I know it is not perfect. Trust me, I have dealt with
private equity and venture firms. It is fantastic, and I would
not recommend it to anyone. But anyhow, I think what is amazing
is that they were able to get us started, and they were able to
do great things. And right now, if you talk about
Charlottesville, Virginia, in my district, without them,
without that angel network, I wouldn't have 31 employees. My
wife wouldn't have locations in Virginia and Pennsylvania, and
I would never have been able to even get to that point without
private equity.
I think as we go forward--and I had all these statistics
that I wanted to throw out there, but I have 54 seconds, and
people know how fast I talk on data, so we don't want to do
that right now. This bill is not a law yet, and I think for me,
as we are going forward and some of the other questions I
wanted to ask and some of the things that blow my mind, if we
actually--right now, if we were to do this, to actually create
a loss of somewhere between $671 million to $3.36 billion per
year, about half of which would be lost to pension fund
retirees, I shudder to think that we are not going to go over
this with a fine-tooth comb to make sure that we are not
stopping the American economy in its tracks because we don't
understand the law of unintended consequences, we don't
understand cascading effects, and we don't understand the fact
that government has no idea sometimes what it is doing in
private business.
That is all I have right now. Thank you, and I yield back
my time.
Mr. Vargas. The gentleman yields back.
The gentleman from Florida, Mr. Lawson, is recognized for 5
minutes.
Mr. Lawson. Thank you, Mr. Chairman. And I would like to
thank all of you for being here today.
There is one thing that is very interesting. We have some
of you testifying that if this bill passed, what it is going to
do to the private equity market, and then we have some who are
speaking in terms of, we need more transparency.
I would like to say that the Florida government pension
system is one of the largest in the country. It plays an
important role in the lives of over a million workers. Private
equity is often the best-performing asset class for pensions.
That is true in Florida.
How can private equity funds such as the Florida government
pension system become more of a model for other private funds?
And I would ask Mr. Moore that.
Mr. Moore. The question is, how could Florida--
Mr. Lawson. How could the pension program become a model
for other pension plans, especially because a lot of them are
having trouble all over the country?
Mr. Moore. Okay. I think I met your chief executive officer
a few weeks ago, and he is a leader in the Council of
Institutional Investors, and I think that is the forum that
your pension fund can lead in bringing thousands of pension
funds in the country together to kind of look at policy
prescriptions that would make everyone more successful in
implementing their programs and follow the success that you
have had.
Mr. Lawson. Thank you.
We are speaking of more transparency, Dr. Appelbaum, and
that is what will be in this bill. What is the difference
between my colleagues here, Mr. Palmer and all of them who say
that this is going to cause a lot of problems in terms of
investments that we need in private pension funds?
Ms. Appelbaum. I think transparency is a problem for the
private equity firms that do not wish to reveal even to their
limited partners exactly what they are doing. It also makes it
very difficult for anybody to do objective research.
Unlike publicly traded funds where you--companies where you
have a lot of information available, we do not have information
available from the private equity firms about the performance
of their funds. There is no publicly available database. There
is no place that you can go. We do not have publicly available
information about any actions that have been taken by a
regulator against these firms. So they have an interest in
being able to keep private as much as they want to keep
private. That is why they are called private equity. It is in
order that they can protect that privacy, and it is not to the
advantage either of the pension funds that do the investing or
to the general public that wants to understand what is
happening in the economy or to be able to really evaluate the
returns across all of the private equity firms and all of the
pension funds. We don't have that kind of information. We
really just have snapshots, and I really don't know what
measure is used.
The internal rate of return is a very poor measure of
private equity performance. It is not used by finance
professors anywhere to talk about private equity. We use the
public market equivalent, and I don't really--which is now
published by PitchBook on a regular basis, but I don't hear
that being used. And on that basis, at the median, the middle
pension fund has not--the private equity fund has not beaten
the stock market since the financial crisis. They were great
before that, not so great since. And it is true there is a
sliver, there is 10 percent of the pension funds invested in
private equity funds that are getting really good returns. But
half of the private equity funds are not even matching the
market.
So it's good that we have somebody here who represents a
fund that does really well, but many, many pension funds are
below water if you compare them with the public markets.
Mr. Lawson. And I am very aware of it, because when I
served in the Florida legislature, we looked at all of them
across the country, and they really are. I don't have much
time, but, Mr. Palmer, would you care to comment?
Mr. Palmer. Sure. The limited partners, these
institutionals, they negotiate with the private equity fund
before you start investing and before they decide whether they
want to be in that fund or not. They get to choose what
information they get or what they don't, and so they can get
that. So Mr. Moore can get that or other institutionals can get
that.
Particularly the smaller funds, they have to be very
accommodating to pension funds in the information that they are
looking for. These large institutions have vast amounts of data
on private equity in returns that may not be public but they
have because they have done thousands of investments.
Mr. Vargas. The gentleman's time has expired.
I now recognize myself for 5 minutes.
We are not here to vilify an entire industry, but we are
also not here to canonize them either. And listening to my
colleagues on the other side of the aisle, it seems like
private equity has already been beatified and they are only
waiting for sainthood.
No, it is not the case. There are a lot of bad actors. And
I think there are a lot more bad actors in private equity than
there are in the public companies. And what happened to Toys R
Us is, I think, a good example of one of those very bad actors
in private equity.
As has been noted up on the board here repeatedly, Toys R
Us paid $470 million in fees and interest to private equity and
wanted to give nothing, absolutely nothing, zero, in severance
to the workers. In fact, after the buyout, my understanding
from the testimony of Ms. De La Rosa--and I read all of your
testimony--is they got rid of holiday pay, staff Christmas
parties, birthday gifts, and some of the full-time positions
started to get eliminated, health benefits for part-time
employees were taken away. And this was supposedly the new
technology.
It is always stated that human capital is the most
important asset a company has. To act like this certainly shows
that they didn't think that their human capital was the best
asset that they had.
And I have to say, I am familiar with that store. I hate to
shop, I have to admit, but in 1998, my daughter was 2-years-
old, and I went to buy a present for her for Christmas, and it
turned out that there was a beautiful kitchenette there. And I
bought it.
I couldn't fit it into my Toyota Supra, so I had to get
help to tie it onto the roof. And one of the employees at Toys
R Us came and helped me tie it onto the roof. I drove it back,
my daughter opened it up for Christmas, and I became a hero, of
course.
And that was Toys R Us. I enjoyed going to Toys R Us
because of the service that I got there, and also the
selection, so I didn't have to go anywhere else. But that
seemed to change quite a bit, did it not, Ms. De La Rosa, once
you had private equity come in?
Ms. De La Rosa. Yes, it did, sir.
Mr. Vargas. And how did it change in a negative way? Were
people happy that they were there? Were the employees more
satisfied with their work?
Mr. Delaney. No. People were expected to do the jobs of
three or four people. So productivity was increased, but, yes,
for the half of the crew that was left with a job.
Mr. Vargas. And I think that is one of the interesting
things that a lot of the large companies, especially banks,
have been saying recently, that it is not just about the bottom
line. It is also about the community. It is about the workers.
It is about the nation.
And I think that is one of the things we have to look at,
and that is one of the things that private equity,
unfortunately, I don't think does look at. It looks at simply
the bottom line. And so that is why I think we do have to take
a look at the law and how to change it.
Now, my colleagues on the other side of the aisle say,
well, we can't change the law at all because it is all about
letting the private sector do what it wants.
Well, we change the law all the time. In fact, we have
workers' compensation, we have workers' rights, you can't
discriminate against people based on a whole bunch of issues.
So absolutely we can have laws that demand more transparency
disclosures, more fair workers' rights, we can do this. In
fact, I think a well-running system demands this.
So, again, I am not here to vilify an entire industry,
because I do think that there are in fact opportunities and
times when private equity is appropriate. I am not here to
vilify. But at the same time, to say that somehow they are
beatified, they are somehow saintly in what they do, that is
absolutely not true. I think there are a whole lot of problem,
and I think we have to deal with them.
And again, I appreciate everyone who is here.
I would add, though, at the end, that one of the things
that I think has to happen is that we have to take a look at
what really is happening with the sense of who owns so much in
the country. We talk about private equity and why do we have so
few public companies and so many private. Because the money is
going to the very few at the top. That is why.
You talked about pension funds, yes, but you didn't talk
about the billionaires. And now we have people who are not only
billionaires, but hundred billionaires, a person who has a
hundred billion dollars. Yes, of course, they can afford then
to put it in private equity, and they are paying less and less
in taxes, and that is not right.
So that being said, I will yield back the rest of my time.
And now the gentlewoman from Michigan, Ms. Tlaib, is recognized
for 5 minutes.
Ms. Tlaib. Thank you, Mr. Chairman.
And thank you all so much for coming before our committee
and giving us a better sense of why it is important for us to
oversee some of the activities of private equity firms.
There is a case that the Michigan ACLU is working on, that
I want to talk to you all about, for one of their clients,
Davontae Ross. Davontae is a resident of Detroit who spent days
behind bars because he couldn't afford to pay the $200 of bail
related to a 5-year-old ticket for allegedly staying in a park
after dark. He missed a job interview, and even more critical
was an appointment with a government caseworker. His life was
turned upside down.
And this is a story of too many folks who live in poor
communities, and struggle with paying cash bail throughout my
district.
The largest bail bond company in the United States, Aladdin
Bail Bonds, is owned by Endeavor Capital, a private equity firm
that invests money on behalf of pension funds and endowments.
Because Congress has yet to act to restrict private equity
firms like Endeavor Capital, they continue to still be allowed
to capitalize off of people behind bars simply because they are
poor.
This question is for Mr. Moore, Trustee Moore. Is it
appropriate for a private equity firm like Endeavor Capital to
invest public employee retirement funds into predatory
industries, like the bail bond industry, who prey heavily on
poor communities?
Mr. Moore. I personally think no, and I would not vote for
us to engage in any activities with that kind of firm. Our
pension fund doesn't have any direct investments in any
organizations that are involved in private prisons and that
whole associated group of companies.
Our only issue is that in the public markets, where we are
invested in index funds--and index includes everything, so we
had have to go in and ferret out and try to exclude those
companies from our indexed and passive investments. But I would
not support that at all.
Ms. Tlaib. There is a growing bipartisan consensus
throughout our country that incarcerating so many of our
neighbors, our people, and for-profit bail is a significant
part of that problem. And The Washington Post last year
highlighted private equity firms like Endeavor Capital's
spending. They spent so much money opposing bail reform, noting
that they are the largest funder of a campaign to roll back
California's recently adopted bail reform law.
Ms. Appelbaum, you talked a little bit about this when it
came to the healthcare industry. How much money does the
private equity industry, like the cash bail industry, spend
trying to keep government officials beholden to their
interests?
Ms. Appelbaum. Yes, it would be good if we had some public
information about that.
Ms. Tlaib. That is right.
Ms. Appelbaum. But just to set the record straight on the
amount of money that was spent preventing the passage of really
good bipartisan legislation in both the Senate and the House
that would have reined in surprise medical bills and that
really had a good chance to pass, which is why they spent so
much money, they first spent the $4.1 million that was
mentioned to lobby for an amendment. They got the amendment. It
didn't do them any good, because the debt markets think that
without being able to charge these high prices, they will not
be able to make good on debt that is coming due in a couple of
years.
And their debt became distressed. So now, they--the last
figure I saw was a $28 million campaign by Doctors and Patients
United, which is actually Envision and TeamHealth, backed by
KKR and Blackstone, to prevent any legislation from passing,
and they have just stymied it for the moment.
But these are bipartisan bills with a lot of support in
both the House and the Senate. I think we are going to see
them.
Ms. Tlaib. Thank you.
And, Ms. De La Rosa, I just want you to know, I think there
are a lot of my colleagues, especially this new class, who
understand corporate greed is a disease in our country. And you
can see it just with the behavior of private equity firms.
Even when we are trying to do the right thing, a bipartisan
effort, even around incarceration in our country, around
surprise billing in our country, trying to address the issues
around healthcare, corporate greed is tainting our democracy.
And it is coming in a way that is pretty much hijacking any
opportunity for regular folks like us to be able to have some
sort of justice when it comes to issues that we feel like in
very many ways is weighing heavily on communities like mine.
I represent the third-poorest congressional district in the
country. When I come here, I represent 650,000 people. And I
have to do this and try to push for legislation like
disclosures and reporting. And what does it lead to? Going
around the table, using all of these coalitions of folks and
pushing kind of a misleading, gaslighting folks that it is not
the right thing to do.
Thank you all so much again for being here.
I yield back, Mr. Chairman. Thank you.
Mr. Vargas. Thank you very much.
The gentlewoman from New York, Ms. Ocasio-Cortez, is
recognized now for 5 minutes.
Ms. Ocasio-Cortez. Thank you, Mr. Chairman.
And thank you to all of our witnesses for coming here
today.
I have to admit that I am quite upset throughout this
hearing, because I feel like a lot of the initial questions
that we are hearing almost betray the priorities that we have
had in our economy that have eroded people's quality of life.
Because the first question that I hear from so many members
are, how are the returns? But the returns are great, aren't
they? How are the returns?
I wasn't sent here to safeguard and protect profits. I was
sent here to safeguard and protect people. And we are talking
about reining in private equity, which is responsible for
wiping out tens of thousands of jobs at Toys R Us alone. And
then we are hearing, but what about the companies that made 100
jobs here or 200 jobs there?
Toys R Us, 30,000 jobs wiped out. Shopko, 14,000 jobs.
Brookstone, David's Bridal, Payless. Not to mention the
impacts, the undemocratic impacts on media companies, Splinter,
Deadspin, Sports Illustrated, local and regional newspapers. In
the last 10 years, private equity is behind 597,000 lost jobs.
And it is not just about the number of jobs, isn't that
right, Ms. De La Rosa, it is about the quality of jobs, right?
When private equity took over Toys R Us, did you see folks'
work schedules get cut back?
Ms. De La Rosa. Yes, definitely.
Ms. Ocasio-Cortez. Did you see people's benefits in some
other ways cut back?
Ms. De La Rosa. Yes.
Ms. Ocasio-Cortez. Did your access to healthcare get
damaged after private equity took over Toys R Us?
Ms. De La Rosa. Yes, it was.
Ms. Ocasio-Cortez. Did your mental health care get--was
your mental health sacrificed as a result of how your quality
of life was changed?
Ms. De La Rosa. Very much so.
Ms. Ocasio-Cortez. Very much so.
We need to think about our economy not just in terms of the
returns for stockholders, but in terms of how the lives of
workers are impacted.
In May of this year I sent a letter, along with Senator
Warren, to Secretary Mnuchin regarding the Treasury
Department's involvement in decisions related to the Sears
bankruptcy.
I want to take a step back and think about how some private
equity companies, on the other end, take pension money on the
front, to acquire poorly rated indebted companies.
Ms. Appelbaum, because of the high returns usually
associated with private equity, pension funds invest the
retirement funds of our teachers, firefighters, and civil
servants in PE firms, correct?
Ms. Appelbaum. They do. But the measure that they use, the
metric for measuring success, is a very poor one. They use
something called the internal rate of return. With more time I
can explain why this is an algorithm that does not really
measure money you can take to the bank.
Ms. Ocasio-Cortez. Right.
Ms. Appelbaum. And so there is a lot of illusion-creating
here. They could report the public market equivalent, which
would give us a lot more information.
Ms. Ocasio-Cortez. Yes. And we hear from a lot of folks
saying, okay, we are using teachers' pension funds to buy into
private equity, and they are getting fabulous returns, this
should be great, right? Can you explain to me why that may not
be great?
Ms. Appelbaum. One of the things that we know, if we
measure this appropriately, is that since the financial crisis,
about half of the private equity funds have underperformed the
stock market. Another quarter of them have barely beaten the
stock market.
CalPERS itself had to roll back its benchmark because it
could not--it had a benchmark for its private equity returns.
They are more risky, so they should yield more return. They
could not meet that more return, so they have cut their
benchmark in half.
Ms. Ocasio-Cortez. So private equity contains more risk
than other parts of the market, correct?
Ms. Appelbaum. Oh, absolutely, that is true.
Ms. Ocasio-Cortez. And so--
Ms. Appelbaum. And the returns are good for the very top.
Ms. Ocasio-Cortez. And would you say that more of these
teachers' and firefighters' pensions are exposed to more risk
or to more private equity now than they were, say, 10 years ago
in the 2008 financial crisis?
Ms. Appelbaum. Yes. Yes, they are.
Ms. Ocasio-Cortez. They are. And if there is an economic
downturn again, would they be exposed to more risk than they
were before?
Ms. Appelbaum. What I have not been able to say is that in
the last economic downturn, 27 percent of highly leveraged
firms went under. And what we know about private equity-owned
companies is that they are highly leveraged.
So saying that today there is no difference between
publicly traded and private equity-owned companies is not
really the issue.
I agree with the regulators. Private equity, we are
spending a lot of time on it here, is really small, compared to
the rest of the economy. So those leveraged loans are not going
to bring down the whole economy. But trust me, there will be a
lot of pain. Many, many companies employing workers that we all
care about, important to communities that we all live in, are
going to go under in the next recession.
Ms. Ocasio-Cortez. Thank you. Thank you very much.
Mr. Vargas. Thank you very much.
Without objection, I would like to add the following
submissions for the record: Communications Workers of America;
Private Equity Stakeholder Project; NewsGuild; Leo Hindery, co-
Chair of the Task Force on Jobs Creation, member of the Council
on Foreign Relations, former CEO of AT&T Broadband, managing
partner of media-based private equity fund InterMedia Partners;
Institutional Limited Partners Association; David Halperin,
Republic Report; CalSTRS; the Center For Popular Democracy;
Truthout; Americans for Financial Reform; Worth Rises; the
Economic Policy Institute; Adam Levitin, professor of law at
Georgetown University Law Center; Manufactured Housing Action.
Without objection, it is so ordered.
On behalf of Chairwoman Waters, I would like to thank our
witnesses for the testimony here today.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
This hearing is adjourned.
[Whereupon, at 1:24 p.m., the hearing was adjourned.]
A P P E N D I X
November 19, 2019
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