Private Equity firms have made $billions by buying and looting businesses, but some investors are taking a longer view and deplore this activity. Wall Street investor Lee Hindery Jc., writing in Fortune, believes that the destructive behavior of many PE firms creates lasting damage to communities:
You can see a practice escalating across the economy, a practice that has already had disastrous effects on workers generally and a practice with the potential to take down hundreds of thousands more jobs and put investors and consumers alike in jeopardy.
That practice is the unchecked and reckless overuse of heavy burdens of debt, and then of bankruptcy laws, by some private equity (PE) firms and hedge funds to the overwhelming detriment of employees and retirees.
Hindery sees much to admire in Senator Warren’s Stop Wall Street Looting proposed legislation.
This is why this week’s legislation matters so much. The aptly-named Stop Wall Street Looting Act would finally hold predatory private equity firms and hedge funds liable for the damage they cause, close tax loopholes that encourage excessive debt and let executives avoid paying their fair share of taxes, and limit the debt that predatory firms can access to seize control of companies.
And, tremendously importantly, the bill would protect workers when employers go bankrupt, giving them added recourse to pursue the severance that is currently denied them.
The legislation cannot come soon enough. Take the retail sector, which has been ravage by private equity. A staggering 597,000 people working at retail companies owned by private equity firms and hedge funds have lost their jobs. An estimated additional 728,000 indirect jobs have been lost at suppliers and local businesses, meaning Wall Street’s gamble on retail has led to more than 1.3 million job losses in total. A million more US jobs are risk as PE-owned retailers continue to shutter stores at a fast pace. For the first three months of 2019 33 retailers — mostly owned by PE investors — have announced 7,000 store closures.
The promise of private equity was that struggling firms could be acquired and made more profitable through “management expertise” and “financial engineering” — a win-win for employees and management. The reality is that the practice of layering excessive debt on the acquired companies in order to reward the PE investors with “management fees” and dividends frequently ends in bankruptcy and — as in the case of Toys”R”Us — liquidation.