The S&P Listed Private Equity Index, which includes industry titans Blackstone Group Inc., Apollo Global Management LLC and KKR & Co., tumbled 82% from peak to trough during the financial crisis, including dividends. That exceeded the 79% decline for the S&P 500 Financials Index, the sector whose excessive use of leverage triggered the crisis, and the 51% decline for the S&P 500. Since the crisis eased in March 2009, however, the private equity index has outpaced the financials index by 1.3 percentage points a year through October and the S&P 500 by 2.4 percentage points.
That brings us back to Warren, who has said that “private equity firms are like vampires — bleeding the company dry and walking away enriched even as the company succumbs.” Warren has also called private equity “legalized looting” that “makes a handful of Wall Street managers very rich while costing thousands of people their jobs, putting valuable companies out of business and hurting communities across the country.”
Warren introduced a sweeping bill in July titled — what else — the “Stop Wall Street Looting Act” that would, at the very least, fundamentally transform the industry. Her proposal would ratchet up the potential liability of private equity firms by putting them on the hook for debts of their portfolio companies, holding them responsible for certain pension obligations of those companies and limiting their ability to collect fees and dividends. It would change tax rules to deny private equity firms preferential rates on the debt they put on portfolio companies and close a loophole that allows them to pay lower taxes on investment profits. It would also modify bankruptcy rules to make it easier for workers to collect pay and benefits and harder for executives to walk away with bonuses.
Steve Biggar, an Argus Research Corp. analyst who covers private equity firms, called Warren’s plan an “industry-destroying proposal.”
Of course, the industry is just as vulnerable to a sustained downturn or higher interest rates, given its cocktail of leverage and high valuations. In the meantime, as more Americans encounter the fallout from failed LBO deals, support for regulation of private equity is likely to grow. And if Warren occupies the White House, she may well lead the charge.
Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.