Elizabeth Warren's attack on private equity is good for lobbyists, and may be a game-changer in a war between firms like KKR and Blackstone and investors
- Elizabeth Warrenwants to wage war on private equity. One group is sure to benefit: the small club of lobbyists and advocates representing the industry and its investors on Capitol Hill.
- Warren wants to impose a 100 percent tax on the fees private equity firms charge for managing a company and change bankruptcy law to protect American workers who lose jobs in buyouts.
- The industry is racing to illustrate the good that private equity firms do. Some lobbyists see Warren's plan as an in for investors in private equity firms, or "limited partners," to also push for change.
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Elizabeth Warren has waged war on private equity, and the small cadre of industry lobbyists and advocates on Capitol Hill may be the big winners.
Historically, advocacy for the industry has been relatively low-key, with firms like The Carlyle Group, KKR and Apollo Global Management lobbying in Washington around issues like disclosure that don't have much mainstream appeal.
But that has changed now that Warren, a long-time Wall Street critic and 2020 presidential hopeful, has jumped into the fray. She's proposing a 100 percent tax on the hefty fees private equity firms charge for managing a company once they buy it, and changes to bankruptcy law that she says would protect American workers who lose their jobs in a buyout.
Within hours of Warren unveiling her plan on July 18, lobbyists were on the phones with clients and reporters discussing whether the "Stop Wall Street Looting Act" had any legs. Others issued press releases and dug up statistics to argue that Warren's plan would cause more harm than good by curtailing an industry they say has created millions of jobs and helped communities.
The American Investment Council, an industry advocacy group, issued a statement the same day Warren unveiled her plan, saying that private equity is an "engine" for growth - especially in Massachusetts, Warren's home state.
The Democratic senator's bill is generally seen as unlikely to make it through Congress, but the proposal jump-started long-running criticism from large investors known as "limited partners," about the firms where they put their money. The plan has also taken private equity onto a national stage, opening up the business to a fresh round of criticism and re-writing playbooks of the public policy advisors, lawyers and lobbyists who have been arguing for changes for years.
With Warren's plan likely to be a key talking-point in the 2020 primaries, limited partners like pension funds, foundations and insurance companies are also seeing fresh ammunition to raise issues with money managers at the large private equity shops, industry insiders say.
Some investors have argued that private equity firms should be required by the Securities and Exchange Commission to provide more detailed disclosures about their investments, ideally on a quarterly basis, and to report conflicts of interest. They have also engaged with policymakers in Congress and private equity firms directly about their disclosure concerns.
That's taken on more prominence after the collapse of Dubai-based private equity firm, Abraaj, Mustafa, Abdel-Wadood, whose executives were arrested in April on charges that they defrauded investors, including the Bill & Melinda Gates Foundation. Prosecutors said they inflated fund performance and used investor money for personal use. The firm's former managing partner pleaded guilty last month.
Warren's bill has created more awareness of "transparency challenges" in private equity, said Chris Hayes, senior policy counsel to the Institutional Limited Partners Association (ILPA), a trade association comprised of big private equity investors.
"We appreciate the fact that folks are realizing this industry needs to be improved," he said, adding that changes can be made that preserve the "long-term health" of the industry.
Hayes said he is speaking with investors about Warren's proposal and discussing next steps about how to respond. Other industry insiders say the proposal could encourage more collaboration between Warren and limited partners pushing for more transparency.
"I think it gives them a potential champion of their interests ... with a fairly prominent public profile that there hasn't been before," said Michael Hong, a partner at Davis Polk & Wardwell who has represented private equity firms and some of their investors.
"It would seem to suggest that there is now an audience" for their issues to be heard by Congress, he said. "I view it as an emboldening of their efforts."
Warren, through her office, issued a statement to Business Insider highlighting that her proposed bill aligns with investors' interests.
"The Stop Wall Street Looting Act will require private equity funds to disclose standard information about their returns, their fees and the effects of their investments to empower limited partners to make good investments that are consistent with the goals and values of their investors" she said.
Paolo Mastrangelo, a public policy advisor at Holland & Knight who has represented private equity investors, said the Warren proposal could give limited partners a bargaining chip and encourage the private equity industry to make changes that satisfy both sides in order to head off more lawmaker involvement.
"It will push window open a bit to give them more reason to say 'OK, now we have these more extreme proposals from these senators and other folks who don't really understand the industry," he said. "You are going to have some investors and [private equity firms] being like, 'Oh, this is going to drive a discussion to where we don't want it to go.'"
The need for increased advocacy has been been anticipated by the American Investment Council, the primary trade association of large private equity firms with members like Blackstone, KKR and Apollo.
The association, led by an advisor to Mitt Romney's 2008 and 2012 campaigns, hired three new staff members in January as it geared up for the presidential election. Now, there are three registered lobbyists on its staff of 11, with others including communications professionals and researchers.
The organization expressed skepticism about private equity investors' outright endorsement of Warren's bill.
"I would be surprised if ILPA members supported Senator Warren's extreme bill because it will hurt their returns," said CEO Drew Maloney. "Private equity continues to be the best performing asset class to pension funds, and our members work closely with our investors to achieve these strong results."
Other advisors who represent private equity include law firms like Akin Gump Strauss Hauer & Feld and Brownstein Hyatt Farber Schreck and lobbying shops Harbinger Strategies and Cypress Hill. Representatives there did not respond to requests for comment.
Tom Spulak, a public policy advisor at King & Spalding who has been monitoring Warren's bill, said that Washington has until now generally not given much attention to private equity firms.
"I do think that to a great extent, perception is reality in Washington," he said. "If other people think this is a problem, you might find other members of Congress getting onboard."