11/19/2019 - America for Sale? An Examination of the Practices of Private... - (EventID=110248)

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Tuesday, November 19, 2019 (10:00 AM) -- Hearing: "America for Sale? An Examination of the Practices of Private Funds" Connect with the House Financial Services Committee Get the latest news: https://financialservices.house.gov/ Follow us on Facebook: https://www.facebook.com/FinancialDems/ Follow us on Twitter: https://twitter.com/FSCDems Witnesses for the hearing are: • 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, former Toys “R” Us Employee • Drew Maloney, President and CEO, American Investment Council • Brett Palmer, President, Small Business Investor Alliance Background Investment advisers are generally required to register with the Securities and Exchange Commission (SEC). Although previously exempted from registration requirements, the Dodd-Frank Wall Street Reform and Consumer Protection Act created a limited regulatory framework for investment advisers to private funds with $150 million assets or more under management that requires them, among other things, to register with the SEC, maintain records that are subject to audit by the SEC, and file annual disclosures. A PE adviser, also referred to as a PE firm, pools investments from high worth individuals, institutions, and pension funds into a PE fund, which invests in other companies. In addition to charging investors a management fee, PE firms often charge the companies they invest in quarterly consulting fees, plus a percentage of any corporate transactions the company participates in during the PE fund’s ownership, including mergers, acquisitions, and asset sales. PE funds typically sell their ownership of the acquired company within 5 years, limiting the time to create value for investors. These strategies range from cost cutting and layoffs to reorganization, and may or may not improve the acquired company's long-term value. PE funds are playing an increasing role in the U.S. economy. At the end of 2018, PE firms managed between $6 and $7 trillion worth of assets, up from $1 trillion during the 2008 financial crisis. In 2014, the SEC found “violations of law or material weaknesses in controls over 50% of the time” in its examinations of PE firms. PE funds invest in everything from fire departments and retail stores to hospitals and voting machines, so their practices affect both businesses and consumers. A New York Times investigation found that PE ownership can lead to slower reaction times for emergency services, excessive interest rates, aggressive mortgage collection practices, and the sort of foreclosure abuses that preceded the financial crisis. In the retail industry, 10 of the last 14 companies that filed for bankruptcy were PE-owned, and all of the seven major grocery chains that have filed for bankruptcy since 2015 were owned by PE. While 9% of PE firms are women- or minority-owned, PE job losses disproportionately affect women and people of color. While bankruptcy may not be the intention of PE, the PE fund may not bear the cost of bankruptcy and, can make a substantial profit off the acquired company even if the company enters bankruptcy, creating incentives for PE firms to encumber acquisitions with high amount of debt. If the company goes bankrupt, the costs are borne by the employees, shareholders, and by smaller unsecured creditors including vendors, suppliers, and workers owed back wages and benefits. Even though the economy has added jobs for 109 consecutive months, a recent study shows that employment in the months following a PE acquisition falls 4.4% on average across all sectors. Investment Practices PE funds may invest in emerging growth companies or in established, profitable companies looking to expand. Other PE firms may invest in struggling companies using the practice known as leveraged buyout (LBO). In an LBO, a PE fund takes over a company by purchasing the company’s existing or newly issued equity shares, worth only a portion of the company (usually less than 40%) and then buying the rest of company with debt backed by the acquired company’s assets. The acquired company is responsible for paying back the debt that often lasts longer than the PE fund’s ownership, while the PE fund’s liability in the acquired company is limited to its equity investment. Research has shown that companies acquired through LBOs are more likely to depress worker wages and investments and across all industries, “PE-owned companies are twice as likely to go bankrupt as public companies.” When Toys “R” Us was acquired in 2005 by PE funds Bain and KKR, and real estate investment trust, Vornado, through an LBO, its existing $1.86 billion of debt grew to over $5 billion. By 2007, Toys “R” Us was using as much as 97% of its operating profits to service its debt, from $425 to $517 million... Hearing page: https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=404650