The private equity industry is investing in every state across the country. Our industry supports 5.8 million jobs, invested $3.4 trillion across America over five years, and is currently working to help improve over 35,000 American companies. We have invested in communities across America in a range of businesses (including Hilton Hotels, Dollar General, Dunkin Donuts, Jiffy Lube, LA Fitness, Tate’s Bake Shop, and Beats headphones). Independent analysis proves that our investments are successful over 94% of the time. Additionally, private equity investments are consistently the best-returning asset class for pension funds over the long term.
Her legislation specifically discriminates against one industry through new oppressive taxes and regulations. In doing so, her plan will stifle economic growth, long term investment and the health of pensions and workers she claims to represent. Her plan:
- Destroys Investment. Warren’s proposal would impose new legal liabilities on private equity that do not exist for shareholders elsewhere in the economy. The excessive liabilities would make it next to impossible for investors to invest in struggling businesses that need capital.
- Imposes Oppressive New Taxes. Warren’s proposal would subject private equity investments to a series of punitive tax increases. This would harm investors like pension funds and the companies private equity invests in.
- Destroys the tax code’s incentive for long-term investment and growth by eliminating carried interest capital gains.
- Imposes an investment-killing restriction on the deductibility of interest.
- Imposes a 100% tax on fees received from portfolio companies.
- Rolls Out More Red Tape. Warren’s proposal would impose duplicative and excessive regulations. For example, private equity firms are already highly regulated under the Investment Advisers Act of 1940 and other laws. Warren attempts to impose requirements that already exist in law, such as a fiduciary duty on private equity advisers.
- Harms Pension Funds and Other Investors. Warren’s proposal makes it more difficult for private equity funds to generate strong returns for pensions plans, university endowments, charitable foundations and other investors. For example, Warren’s proposal places unnecessary time restrictions on mainstream investment strategies, such as dividend recapitalizations.
❌ Fundamental Misunderstanding of the Private Equity Business Model. Senator Warren claims the business model for private equity firms is to load up portfolio companies with debt, profit from extracting high fees, and receiving guaranteed payouts for themselves regardless of how the investment preforms.
- In reality, PE funds and the PE sponsors who run the funds only truly succeed when the portfolio companies they invest over the long-run (typically 3 to 7 years) succeed. Typical PE funds managers charge a 1.5 to 2% management fee based on the capital committed by the fund’s limited partner (LP) investors. This fee is fixed (i.e., it does not increase as the fund’s investments grow) and is taxed as ordinary income. PE fund managers charge fees to portfolio companies as well for the services they provide to those companies and the PE fund, but those fees are almost always used to offset management fees paid to PE sponsor by the fund (and indirectly by LP investors). LPs share in those fees often until 100% of their own fees are paid back. Thus, the effect of the proposed 100% surtax would likely be an increase in the fees paid by fund LPs.
- The notion that PE sponsors enjoy large guaranteed payouts for themselves regardless of how an investment performs is simply false.It also ignores the fact that the PE sponsor and its management generally invest significant amounts of their own capital in the fund.PE sponsors align their interests with their fellow investors such that they only realize capital gains on an investment if the investment performs well and their investors receive back: their initial capital invested, the management fees they paid to the PE sponsor to run the fund, plus a hurdle rate of return, typically 8%.Only then do the funds split remaining profits with 80% going to LP investors and 20% to the PE sponsor.Plus that 20% gain is subject to a clawback if subsequent fund investments dip the fund’s overall performance below the hurdle rate of return.This is an appropriate structure that aligns interests.
❌ Anecdotal Bankruptcy Rhetoric Does Not Comport with Reality. Warren uses a false talking point that private equity drives companies into bankruptcy at a higher rate than the rest of the economy. However, according to a report from Moody’s, private equity-backed companies are no more likely to go into bankruptcy than non-sponsored backed companies. In fact, during times of economic stress, PE-backed companies fare better than similar non-PE backed companies.
❌ Ignoring Skin in the Game. Senator Warren claims that PE fund sponsors do not have any “skin in the game.” This is simply false. PE fund sponsors have tremendous skin in the game. They invest their own capital in the funds they create and they invest 10+ years of expertise in each fund that they manage.
❌Flawed Economic Analysis. The biased Center for Economic and Policy Research (CEPR) produced the economic analysis for Senator Warren’s proposals. Embarrassingly, some of CEPR’s analysis relies on outdated research that has since been updated. More specifically, CEPR, on page 8 of its analysis, references the research of Steve Kaplan in making the argument that private equity does not outperform the stock market. In 2019, Kaplan updated his research to find private equity does outperform the stock market, noting, “This report refutes earlier research that found, in recent years, private equity does not outperform public markets.”
Instead of attacking the private equity industry, Senator Warren and all presidential candidates should make it easier for our industry to invest across the country, support jobs, and strengthen the pensions of millions of retirees.
Today, the Washington Post quoted Steve Biggar, an equities analyst at Argus Research, who covers the sector and described the Warren bill perfectly: