Industry says private equity is engine for economic growth
The Des Moines Register
By Drew Maloney
July 29, 2019
Most Americans probably don’t realize the positive role private equity plays in their lives. But you should, if you’ve ever stayed at a Hilton Hotel or enjoyed a cup of Dunkin Donuts coffee. Private equity firms raise funds from pension funds, charitable foundations, universities, and other long-term investors to purchase businesses, grow them, and sell them.
In presidential politics, when there is no crisis, you have to invent it. Unfortunately, some politicians are tapping into populist fervor by painting private equity in a negative light. They ignore indisputable facts about the industry to score political points, often to push policies that would harm the businesses – and their employees – that depend on private equity investments.
Massachusetts Sen. Elizabeth Warren took the negative attacks to a new level recently on the presidential campaign trail by employing reckless and divisive rhetoric to unveil a series of radical proposals to punish an industry that has become a major engine for job creation and economic growth in this country. Her extreme ideas would only hurt the workers she says she wants to help.
When Sen. Warren uses false and divisive terms like “vampire” and “looting” to describe private equity, she ignores the crucial role the industry plays in the American economy. Our industry supports millions of jobs and invests everywhere across the country. Earlier this year, the American Investment Council released its Top States and Districts Report, which examined the level of private equity investment in areas across the country. The results speak for themselves. In the past five years, private equity invested an estimated $3.4 trillion in 25,000 companies. In total, private equity currently backs some 35,000 businesses. Together, they employ 5.8 million Americans in all 50 states.
In Iowa, private equity invested over $14 billion in roughly 120 businesses over a five-year stretch from 2013 to 2018. In total, businesses backed by private equity employ over 11,800 workers in the Hawkeye state. Real jobs. Real lives.
But private equity doesn’t just help private businesses and their workers. Public pension funds are the largest investors in our industry. This means that every private equity success story helps secure the retirements of dedicated public servants. In 2018, private equity investments delivered a 10-year median annualized return of 10.2 percent for public pensions. This is higher than the returns generated by fixed income, public equity, real estate and other similar assets. These high returns are critical for teachers, first-responders and other dedicated public servants at a time when many pensions struggle to meet their obligations.
Again, Sen. Warren’s extreme policies would hurt workers in Iowa. The Iowa Public Employees Retirement System has invested over $4 billion in private equity, accounting for 13 percent of the fund’s total investments. In 2018, private equity generated an 18.92 percent return in a year when the S&P 500 was down over 4 percent. Private-equity’s above-market returns strengthen the retirement accounts of millions of workers across the state.
How exactly does our industry generate these returns? Private equity firms partner with investors, including pension funds, to buy companies that need capital to purchase equipment, hire more workers and expand operations. Once a private equity firm acquires a company, they often bring in industry experts to retrain management and update the business model to meet the challenges of a changing economy. Simply put, private equity works directly with companies to improve their performance, create jobs and add long-term value.
This is the exact business model private equity applied to Hilton in 2007 when the industry saw the company’s potential to improve upon its position as a global leader in hospitality. The hotel chain grew tremendously during the 11 years that private equity owned it, almost doubling the number of hotels and rooms in its portfolio and growing to more than 5,300 properties, 863,000 rooms and nearly 400,000 employees. The company committed to hiring 10,000 veterans and military spouses by 2018, which it achieved early, and has committed to an additional 20,000 military hires by 2020. The company has been recognized as #2 on the World’s Best Workplace list and was recently recognized as the #1 Best Company to Work For in the U.S, becoming the first hospitality company to ever achieve the prestigious honor. Since 2008, Hilton has also reduced carbon emissions and waste by 30% and energy and water consumption by 20%, saving more than $1 billion.
Not every private equity investment will be as successful as Hilton, largely because our industry invests in companies that tend to need capital and industry expertise to improve. But the clear majority of private equity ventures help turn around struggling businesses, create well-paying jobs and secure the retirements of public servants across America.
This is not a story Sen. Warren wants to tell on the campaign trail. Her policies would destroy an industry and negatively impact the economic stability of the same workers she says she wants to protect.
Drew Maloney is the president and CEO of the American Investment Council (AIC).