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John Engle
John Engle
Articles (482) 

The Private Equity Industry Faces Historic Public Scrutiny

Congress is taking notice, sparking an industry-wide debate over transparency and reform

December 16, 2019 | About:

Operating adjacent to the shadows has allowed the private equity industry to grow with only limited political and public scrutiny for many years. That era of salutary neglect now appears to be coming to an end. As public and political scrutiny intensifies, private equity players will have to learn to adapt – or perish.

Warren on the case

Private equity has been thrown into the spotlight of late thanks in large part to the efforts of Senator Elizabeth Warren of Massachusetts. The Democratic senator and presidential hopeful has put private equity firmly in her sights, citing it frequently as an example of corporate excess. On Oct. 11, Warren called out the industry for its use of asset-stripping tactics to extract value at the expense of companies:

“Private equity firms are sucking value out of our companies, putting people out of work and wiping out newspapers and digital news outlets like Splinter News. I have a plan to hold these firms accountable.”

Warren has done far more than complain about the private equity industry. In July, she introduced the Stop Wall Street Looting Act, a bill promising to force private equity funds to have real “skin in the game” when taking over companies, denying them the capacity to insulate themselves from the long-term negative effects of such practices as asset-stripping and levering up balance sheets:

"For far too long, Washington has looked the other way while private equity firms take over companies, load them with debt, strip them of their wealth, and walk away scot-free – leaving workers, consumers, and whole communities to pick up the pieces. Our bill ends these abusive practices by putting private investment funds on the hook for the decisions made by the companies they control, ending looting, empowering workers and investors, and safeguarding the markets from risky corporate debt."

Congress gets interested

Warren is not alone in her stance on private equity. The list of co-sponsors and supporters of the Stop Wall Street Looting Act is quite impressive, spanning the membership of both the Senate and House of Representatives. 

The bill enjoys the support of both established heavy-hitters and rising stars of the Democratic Party. However, it has failed to garner any support from Republicans. According to Pitchbook, a November congressional hearing laid bare the stark partisan divide over private equity:

“Today's political climate can be summed up in one word: polarized. Thursday's private equity hearing was no exception. Republicans were squarely in the pro-PE camp, while Democrats mostly opposed private equity to varying degrees. Rep. Roger Williams (R-TX) shared a quote from the chairman of the Houston Firefighters' Relief and Retirement Fund, who said ‘private equity opportunities far exceed those available in stock market investing for the foreseeable future.’ (Not surprisingly, he didn't mention the TXU fiasco.) Rep. Denver Riggleman (R-VA) described how private equity investments helped his own small business grow after he couldn't get a bank loan. And Rep. Ann Wagner (R-MO) shared that in her congressional district, ‘there are over 47,000 constituents working at private equity-backed companies.’”

While partisan division makes the prospect of a near-term legislative crackdown unlikely, there can be little doubt that political sentiment has shifted in a decidedly negative direction.

How to make friends and influence people

While private equity firms may be safe for the time being from legislative constrictions, partisan gridlock can only be viewed as, at best, a temporary reprieve. With a presidential election next year, there is a distinct possibility that the White House will be occupied by a stern opponent of private equity as it is currently practiced.

Private equity has always been a fairly insular industry. A fairly closed club of elite money managers and corporate operators, private equity professionals work in a market that undergoes far less scrutiny than the public market, since business information is not publicly disseminated. More than a decade ago, Cerberus Capital Management founder Stephen Feinberg expressed this industry-wide penchant for secrecy in uncompromising terms:

"We try to hide religiously. If anyone at Cerberus has his picture in the paper and a picture of his apartment, we will do more than fire that person. We will kill him. The jail sentence will be worth it.”

While insularity has served private equity companies’ interests for many years, it is starting to become a liability. The increasing congressional scrutiny (and mounting antipathy) is clear evidence of that. Some private equity companies, such as KKR Inc. (NYSE:KKR), have tried to step out of the shadows by going public, but the industry as a whole has remained reticent to change. Yet, as a Dec. 10 Pitchbook report explained, opening up may be the only way for private equity to save itself:

“Now would be a good time for private equity firms to be more transparent, especially about their investments that don't pan out. The industry has long tried to distance itself from its reputation as corporate raiders, or ‘Barbarians at the Gate,’ a label it gained from KKR's hostile takeover of RJR Nabisco in the 1980s. And it has made strides over the past couple of decades, in part by improving operational efficiency at previously distressed businesses. But there is still more that could be done. Releasing metrics on returns and fund performance, or showing where money is being invested, would be a good start in changing the narrative. The Deadspin debacle aside, Boston-based growth firm Great Hill Partners lists case studies of successful investments on its website, giving the public a view of how it organically drives revenue. Why not follow that lead?”

Transparency and openness may be the perfect cure for an industry laboring under increasingly negative perceptions. Explaining the rationale for actions, especially when things are not going as planned with portfolio companies, could go a long way toward dispelling fears about private equity firms’ monomaniacal self-interest.


Private equity will always have its opponents, but the industry cannot simply ignore the obvious trend playing out in the public sphere. Publicity efforts like those recently undertaken by the American Investment Council, an industry group, can cast the industry in a more positive light and perhaps take some of the edge off of the worst criticisms and accusations of financial excess.

Investors in private equity, whether through publicly traded companies or private funds, have accepted opacity for a long time, but even they are showing signs of disillusionment of late. The industry simply cannot afford to remain in the shadows any longer.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

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