Nov 18, 2019

How private equity is fueled by public pension plans

Illustration: Lazaro Gamio/Axios

Private equity's loudest political antagonists were back at it over the weekend, wrongly arguing that Taylor Swift's contract dispute is illustrative of the industry's rapaciousness.

What happened: While Sen. Elizabeth Warren and Rep. Alexandia Ocasio-Cortez each tweeted that private equity must be "reined in," they'll need to publicly wrestle at some point with how private equity is fueled by public pension systems that they otherwise support.

How it works: U.S. public pensions are the single largest investor in U.S. private equity funds, according to the most recently-available data, having hundreds of billions of dollars of exposure.

  • They've also increased their participation in direct private equity deals, often via co-investments with portfolio managers, with PitchBook reporting that 2018 saw a record number of domestic PE deals with public pension participation.

Why it matters: Any new regulation on U.S. private equity could have downstream impact on U.S. public pensions, many of which already have long-term challenges in meeting their member obligations.

  • Some changes, such as around the tax treatment of carried interest, would have a relatively small impact, if any.
  • Some changes, like Warren's plan to make PE funds liable for leveraged financing, would significantly impact public pension returns and allocation plans.

Yes, but: A popular progressive argument is that public pensions shouldn't invest in fee-heavy private equity at all, instead putting that money into public equity index funds.

  • There is some data to back this up, but it tends to ignore the value of diversification for public pensions with ongoing obligations, and imply that the past decade's bull run for public equities is normal.

The bottom line: Private equity and public pensions are tightly interconnected. To see the change they want, Warren and AOC may ultimately need to focus less on Taylor and Twitter, and more on the public pension leaders who represent part of their base.

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House hearing on private equity lands with a whimper

Sens. Elizabeth Warren and Bernie Sanders. Photos: Sarah Rice/Scott Olson/Getty Images

Tuesday's House of Representatives hearing on private equity landed with a whimper, after more than a week of escalating rhetoric from progressive Democrats.

Reality check: Even if Sen. Elizabeth Warren wins the presidency, she would have a tough time getting her "Stop Wall Street Looting Act" through Congress, with or without Democratic Party control of both chambers.

Go deeperArrowNov 20, 2019

Private equity on defense in Washington

What's believed to be the first congressional hearing in recent years squarely focused on the practices of private equity firms is happening later this morning.

Why it matters: Private equity is facing "the most serious political challenge it has seen in years," per the WSJ.

Go deeperArrowNov 19, 2019

Taylor Swift crashes 2020 race with private equity broadside

Photo: Zhang Hengwei/China News Service/VCG via Getty Images

Progressive Democrats are using Taylor Swift as political leverage against the private equity industry after Swift publicly noted that The Carlyle Group had helped finance a deal whereby Swift lost control of her old master recordings.

Driving the news: Sen. Elizabeth Warren tweeted: "Unfortunately, @TaylorSwift13 is one of many whose work has been threatened by a private equity firm. They're gobbling up more and more of our economy, costing jobs and crushing entire industries. It's time to rein in private equity firms—and I've got a plan for that."

Go deeperArrowNov 17, 2019