Dubious debts are back again after the pandemic, and so is Elizabeth Warren, who’s renewing efforts to keep private equity firms from forcing new loans on companies they own to extract dividends that they can’t afford.
Warren, the former Harvard bankruptcy professor turned U.S. senator, is reintroducing legislation that would ban such payouts for two years after a company is acquired, a move that aims to reduce the risk that the business will collapse.
The bill, which faces long odds in a closely divided Congress, would also ban outsourcing jobs over the same span, and if the company goes bust anyway, workers would get more priority for severance and other payments they’re owed. Under current bankruptcy law, employees often wind up near the back of the line behind lawyers, bankers, executives and creditors, with little left over for workers.
“The abuses accelerated during the pandemic,” Warren, a Massachusetts Democrat, said in an interview. “There is not a person in the United States Senate who does not represent people who have lost jobs, pensions or even loved ones because of private equity.”
Warren tried before in 2019 without success to get enough support for her bill, which she plans to resubmit Wednesday. It originally debuted following the collapse of retailers like Sports Authority, Shopko and Gymboree under the weight of buyout debt, and the failure of owners at defunct chains like Toys ‘R’ Us to provide for their workers.
Whether the senator will get more traction this time isn’t clear. Warren, who sits on the powerful Senate Banking Committee, has lined up several sponsors in her own the chamber and in the House for her bill, with the unforgiving title of the “Stop Wall Street Looting Act.” It’s likely to be opposed by Wall Street’s buyout and alternative asset firms, which have billions of dollars in profit at stake and would be required to disclose more about their fees and returns, which some firms keep carefully guarded.
Record Deals
“This bill should be renamed the ‘Stop Main Street Investment Act,’ because that’s what it would do,” Drew Maloney, head of the American Investment Council trade group, said in a statement. “As families and local economies across the country continue to struggle, Senator Warren’s irresponsible bill would discourage small business investment, destroy jobs, hurt retirements, and threaten investments in important fields including sustainability and life sciences.”
What’s different this time is that private equity deals are running at record levels, and Warren’s fellow Democrats now hold thin majorities in Congress. By coincidence, some of Wall Street’s most prominent practitioners were meeting this week at the annual at the Milken Institute Global Conference in Beverly Hills, California, where credit quality has been decried as “terrible.” The situation is being made worse by rising inflation and declining government aid, according to investors who specialize in troubled debt.
Meanwhile, the pandemic has highlighted the vulnerability of service-industry workers who are contending with maskless and sometimes ornery customers at retail stores, hotels, airlines and health-care facilities that have been hit hard by the pandemic.
The bill ran into immediate pushback during a Senate Banking Committee hearing on Wednesday, with Louisiana Republican Sen. John Kennedy saying the bill would “gut private equity like a fish,” while others said it would stifle innovation, cause layoffs and curtail productivity. David Burton, a senior fellow at the conservative Heritage Foundation, said the bill would stymie takeovers and protect incompetent managers.
Backers had plenty to say, too. Eileen Appelbaum, co-director of the Center for Economic and Policy Research, said private equity didn’t deliver better returns to investors than the stock market while exposing them to more risk. Illinois Treasurer Michael Frerichs said lack of transparency made vetting investments more expensive and onerous.
Private Data
Private equity firms have done a brisk business during the pandemic, selling off a total of $633 billion of portfolio company holdings this year, and about $366 billion in all of 2020, according to the Center for Economic and Policy Research.
Warren’s bill also would put PE owners the hook for the debts and pension obligations of their portfolio companies and would restore a provision to the crisis-era Dodd-Frank Act that forced arrangers of securitized debt to assume some of the risk of of the loans. The bill is being led by Warren, Tammy Baldwin and Sherrod Brown in the Senate, and Mark Pocan and Pramila Jayapal in the House. It’s co-sponsored by senators Bernie Sanders, Jeff Merkley and representatives Eleanor Holmes Norton and Chuy García.
Warren made curtailing the influence of Wall Street over ordinary workers a centerpiece of her 2020 campaign for president and has probed private equity practices in sectors including health care, housing and retail. But the pandemic has given extra impetus to the need for increased transparency, Warren said.
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Read more articles by Lauren Coleman-Lochner, Eliza Ronalds-Hannon
