The private equity industry came under the microscope — and, at times, under attack — Tuesday at a House Financial Services Committee hearing on private equity practices that showed deep divisions between Democrats and Republicans.
"While there are some examples of private equity firms playing a beneficial role in the U.S. economy, there are far too many examples of private equity firms destroying companies and preying on hardworking Americans to maximize their profits. Today we are going to take a hard look at those practices and examine whether Congress should take action to prevent the predatory practices of some private equity firms and hedge funds," Committee Chairwoman Maxine Waters, D-Calif., said at the start of the hearing.
Some possible actions discussed at the hearing were several legislative proposals, including H.R. 3848: The Stop Wall Street Looting Act of 2019, that would require private equity funds to share debt liability, prohibit capital distributions for two years after buyouts, create new marketing disclosure regulations, among other measures, a companion to legislation introduced by Sen. Elizabeth Warren, D-Mass.
Other legislative proposals on the drawing board include one calling for board composition disclosure by private equity firms and the proposed Investment Adviser Alignment Act, which would require SEC reporting on fees and expenses, impose a fiduciary duty on private equity funds and allow communication among limited partners.
Wayne Moore, trustee of the $58.4 billion Los Angeles County Employee Retirement Association, Pasadena, Calif., testified that more disclosure of private equity fees and expenses will help public pension fund investors. "My fiduciary duties include making sure we get what we pay for," he said. "Private equity is one of our best performing assets, but it is also our most costly asset," he told the committee, adding later that "information is critical, and we lack the information we need."
A committee memo noted that state legislatures in California, Washington and Virginia have passed laws requiring public disclosure of information about private fund fees and expenses.
"I think investors are seeking more transparency and improved governance. Our focus is on establishing some minimum standards for investors," said Chris Hayes, Institutional Limited Partners Association senior policy counsel, in an interview. "We are big supporters of the (proposed) Investment Advisers Alignment Act."
Representatives of private equity advocacy groups American Investment Council and Small Business Investor Alliance testifying at the hearing stressed job creation and strong returns. AIC President and CEO Drew Maloney testified that 91% of public pension funds have private equity investments that in 2018 generated the strongest return of any asset class over the last 10 years. "These strong returns have become increasingly critical for pension funds at a time when many do not have enough money to meet their existing obligations," he said.
