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Elizabeth Warren wants to put private equity firms "vampires" to the stake

Retailers expected to shutter 12,000 stores
  • Sen. Elizabeth Warren has introduced a bill to significantly limit what private equity firms can do when they take over struggling companies.
  • The legislation would make investors responsible for part of their targets' debts and prioritize workers' pay and pensions in case of bankruptcy. 
  • Private equity executives say that acquiring companies via leveraged buyouts helps keep ailing enterprises from going out of business.

White House hopeful Elizabeth Warren is proposing new regulations on the private equity industry, pitching constraints designed to end what she decries as "legalized looting" by investment firms that take over troubled companies.

"[F]ar too often, the private equity firms are like vampires -- bleeding the company dry and walking away enriched even as the company succumbs," the Massachusetts senator wrote in a Medium post.

The plan, which counts Democratic rivals Sen. Kristen Gillibrand and Sen. Bernie Sanders among its co-sponsors, is the latest in a series of policy ideas that have propelled Warren into the top tier of contenders in the party's presidential primary. The bill aims to hold private equity firms financially liable for the debts and pension obligations of the companies they acquire. It also would restrict the firms' ability to pay dividends as well as high fees that shift money out of acquired companies. 

"It is time for the American people to say that Washington should work for them instead of for private equity, instead of for Wall Street, instead of the folks who already have all of the money and all of the connections," Warren said in Washington, introducing the bill.  

Barbarians at the gate?

Private equity, also known as "buyout," firms make money by collecting an annual fee, typically 2%, for managing investor assets. As an added incentive, they also often get to keep 20% of the profits generated by their investment funds, assuming those hit specified return targets.  

PE firms have been involved in some of the biggest acquisitions, or "leveraged buyouts" in reference to their use of debt to fund the transactions, in U.S. corporate history. Some of the largest: Kohlberg, Kravis, Roberts & Co.'s 1989 purchase of RJR Nabiso, a deal that became a symbol of Wall Street greed; a $27 billion purchase of media company Clear Channel (now iHeartMedia) by Bain Capital and Thomas H. Lee Partners in 2006; and a 2013 deal in which 3G Capital Partners teamed with Warren Buffett's Berkshire Hathaway to buy H.J. Heinz (now part of food giant Kraft) for some $23 billion. 

Critics accuse buyout firms of swamping company balance sheets with debt while profiting handsomely using the "2 and 20" fee model, then stripping them of their remaining assets if their business declines. But private equity executives defend their approach, saying they breathe life into failing enterprises. 

Toys "R" Us closes its doors

More recently, private equity has been implicated in a large number of retail store closings since 2016. Already this year, more retail stores have closed than during all of 2018. Women's apparel chain Charlotte Russe and general merchandise store Shopko, both owned by private equity, went out of business this spring, and private equity was also a factor in Toys R Us' 2017 bankruptcy.

Warren's bill includes rules that would require worker pay to take precedence over other obligations when companies declare bankruptcy, and demand that investment firms disclose their fees more openly. It also reinstates a division between commercial banking and investment banking that was a fixture for most of the 20th century, and whose repeal is often blamed for the 2008 financial crisis.

Warren, the former chair of the independent panel that oversaw the government's 2008 bailout of major financial institutions, is a longtime foe of the financial industry. Like rival Sanders, Warren is building her campaign around a promise of sweeping upheaval she says would spread around more of the benefits of economic growth.

The private equity industry pushed back at Warren's proposal on Thursday. American Investment Council President Drew Maloney, whose group represents private equity firms, said that the industry "is an engine for American growth and innovation — especially in Senator Warren's home state of Massachusetts."

"Extreme political plans only hurt workers, investment, and our economy," Maloney said in a statement.

Private equity-backed companies headquartered in Warren's home state employ nearly 400,000 people, the AIC said.

Dressbarn latest in nationwide retail store closure wave

Warren is headed to Iowa for a two-day campaign swing during which she's likely to tout her new private equity plan, the latest installment of a broader self-described "economic patriotism" agenda that also includes a $2 trillion investment in environmentally friendly manufacturing.

Besides bolstering her credentials as an antagonist of Wall Street, Warren's new proposal also gives her the chance to tout her avoidance of high-dollar fundraisers and reliance on small donors to power her campaign. Sanders has similarly vowed to forgo high-dollar fundraisers, but the private equity industry remains a notable supporter of several of their Democratic presidential rivals.

Federal Election Commission records show that employees of Blackstone, which leads Private Equity International's ranking of top private equity firms, have donated a total of $102,100 to 11 Democratic presidential hopefuls this year, with South Bend, Indiana, Mayor Pete Buttigieg topping the list of recipients at $30,800. Neither Warren nor Sanders reported receiving contributions from the private equity giant's employees.

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