Jul 19, 2019

Elizabeth Warren takes on private equity

Illustration: Rebecca Zisser/Axios

2020 contender Sen. Elizabeth Warren is proposing a bill that would kill much of the leveraged buyout industry. Not just make meaningful reform or increase regulatory oversight, but treat it like Pennywise treats the schoolchildren of Derry.

The big picture: Her bill won't become law, despite having several Democratic co-sponsors (including Sen. Kirsten Gillibrand). But Warren has a megaphone right now, and has shown a deft ability to translate complex financial matters for debate and town hall audiences.

Details: Warren's legislation would make buyout funds liable for leveraged financing. It also would:

  • End dividend recaps and most company-derived fees for at least the first two years after a buyout.
  • Make funds liable for pension obligations.
  • Make general partners individually liable for certain obligations.
  • Increase disclosure to limited partners. (note: LPs are excluded from the above liabilities.)
  • Rework bankruptcy rules in a way that favors many parties over private equity, despite the debt liability.
  • Change the tax treatment of carried interest, and limit interest deductibility.

Her intention may be to put more of the equity back in private equity, thus forcing firms to make more responsible investment decisions, but the increased risk profiles and competitive disadvantages would stop many firms in their tracks — and likely end the turnaround industry.

  • There could be industry workarounds for Warren to contend with. Such as heavily-structured joint ventures with lenders or PE firms eschewing blind pool funds in favor of special-purpose vehicles.

Private equity is obviously crying foul. Sources argue that Warren's rationale — detailed in a Medium post — is cherry-picked; focused on a pair of industries (physical retail and local news) that were self-immolating regardless of private equity's involvement. They also decry how Warren overlooked the role private equity returns play in pension returns, particularly if/when public equities turn south, suggesting her bill would rob Pension Peter to pay Retail Cashier Paul.

  • They have a point. Relatively few PE-backed companies go bankrupt, let alone liquidate, and few firms still participate in the sectors she cites.
  • They also need to buy a better mirror. Private equity's ongoing refusal to abandon such parasitic practices as dividend recaps and monitoring fees has created the environment for Warren's rhetoric to be warmly received in some quarters. And I'm not ashamed to say I told you so. Seven years ago.

The bottom line: On Monday, Peter Thiel said that Warren was the Democratic candidate who scared him most. Now he's got a lot of private equity company.

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