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💸 Visible Hands: Can't Spell Pensions Without PE
With private market assets exceeding $4 trillion and the number of US private equity owned companies increasing by 60% over the past decade, we are taking a closer look at the industry in today’s news
With private market assets exceeding $4 trillion and the number of US private equity (PE) owned companies increasing by 60% over the past decade, we are taking a closer look at the industry in today’s newsletter.
Just last month, the Securities and Exchange Commission had a meeting to discuss the PE industry and whether private investments should be recommended to the general public. The American Investment Council (AIC), the advocacy and resource organization for the industry, showed up in full force to highlight how PE funds have delivered superior returns for investors. (According to Axios, the AIC PAC donated over $243K to congressional candidates and committees since the 2018 midterm, of which ~65% went to Republicans, including senators such as Mitch McConnell, Susan Collins, and Thom Tillis.)
PE funds own everything from streetwear brands (check out Hasan Minhaj’s recap of Carlyle, owner of Supreme, here) to doctor’s offices to tear gas. Remember Taylor Swift calling out “the unregulated world of private equity” during her dispute last year with her Carlyle-backed record label? Or the demise of Toys R Us?
Investors often turn to PE to earn returns that can outperform the public stock market. PE usually involves a leveraged buyout (aka LBO, buying a controlling interest in a company with as much debt as possible) whereby PE funds restructure, cut costs, and / or grow the company before selling it again. Relative to investing in a S&P 500 index fund, a PE strategy is considered higher risk, and higher reward.
The limited partners (the institutions that provide the capital for PE funds, namely public pension funds) have been balking at the hefty fees PE firms charge to justify their supposed outsized returns. (The California Public Employees’ Retirement System paid $3 billion in fees between 1998 to 2015 on returns of over $24 billion.) Research from Bain & Co. highlights that the industry has been making 15% returns on average over the last ten year, which sounds attractive until we see that return is matched by the public market.
PE funds are usually diversified across industries. This can lead to tensions as evidenced in the case of Blackstone’s investment in Oatly earlier this year. Critics lambasted the sustainability-focused beverage company for “selling out.” Blackstone is a fund owned by a Trump-supporting billionaire that also invests in companies involved in Amazonian deforestation, sparking calls for a boycott of Oatly. Of course, these are not the only companies owned by Blackstone; they are also investors in Bumble and Ancestry, among many other non-consumer facing companies, which have not been the target of similar boycotts.
Although many PE firms, including the aforementioned Carlyle and Blackstone, have Environmental, Social, and Governance (ESG) teams and policies, the impact of their portfolios still raises many questions. In fact, research into the UN Principles for Responsible Investment (a group that supports better ESG practices and reporting among funds) found that becoming a signatory did little to change investment practices and decision-making.
All of this leads to the question -- does PE investment actually boost our economy, and is it worth the fees? Well, the research is mixed.
Industries with PE investments have grown more quickly in terms of productivity and employment
During the 2008 financial crisis, PE-backed companies increased investments relative to their peers, while also experiencing greater equity and debt inflows
LBOs have a bankruptcy rate of approximately 20%, “an order of magnitude greater” than the 2% amongst non-LBO companies
And average earnings per worker fall by 1.7% at target firms after buyouts
And the impact of PE is being further complicated by the Labor Department’s proposal earlier this year to open up 401(k) investments to PE funds. If even more capital pours into this industry, how can we hold the investors and their portfolio accountable?
As an investor:
Large limited partners, including university endowments, are being pressured by stakeholders to address the climate crisis and divest from fossil fuels. Check out this research on “Divestment, Investment Sanctions, and Disinvestment” a case study at the different approaches to protesting apartheid in South Africa.
As an employee:
Private Equity Stakeholder Project is an organization that supports workers, communities and other stakeholders impacted by PE and private funds investments. Check out their recent report on the industry’s impact on retail jobs amid post-COVID bankruptcies here.
It is probably unsurprising that the PE and finance industry lacks diversity. For those who work in financial services, check out this BCG report on how the PE industry can stand up for diversity and inclusion.
As a citizen:
Elizabeth Warren ran on an “anti-Wall Street looting” platform. You can see her proposed Stop Wall Street Looting Act here and her layman’s explanation here. Suggested regulations include “Putting private equity firms on the hook for the debts of companies they buy, making them responsible for the downside of their investments so that they only make money if the companies they control flourish.”
Local decisions matter. Take, for example, former Chicago Treasurer, Kurt Summers, who revamped the city’s approach to become the first city to run 100% of its treasury's corporate investments through an environmental, social and governance filter. Granted, the city was not invested in PE or other alternative assets, but we can and should keep those who have access to local and state pursestrings accountable.
As a consumer:
Boycotts often seem like an appealing way to make your voice heard. However, boycotts in a vacuum can be a dead end: “It runs the risk of prioritizing our identity as consumers, at the expense of our identities as workers and citizens. It can intensify individualism, rather than building the level of social solidarity that labor unions or political campaigns do.” So buy Oatly (or don’t), but that action alone will not address the problems in PE.
The Short Tenure and Abrupt Ouster of Banking’s Sole Black C.E.O: “Mr. Thiam confided to associates his fear that the board wanted him out. Their unspoken message, he said, was: You cleaned up the mess. Now leave. It’s a pattern known as the “glass cliff” — the tendency of institutions to install women and minorities as leaders only when there’s big trouble, and then shunt them aside.”
The Sackler Family’s Plan to Keep Its Billions: “If such a deal is struck, it is probable that no Purdue [maker of OxyContin] executives will face felony charges...In an added irony, if the Trump Administration does seek a fine, the funds could come not from the Sacklers but from...more than a hundred thousand individuals—victims of the opioid crisis, people who have lost loved ones or struggled with addiction themselves—[who] have filed claims as “creditors” of Purdue.”
ExxonMobil Projects Emissions Increase from Fossil Fuel Production: “The company estimates that annual emissions will increase 17 percent by 2025, or by about 21 million metric tons of carbon dioxide per year. The assessment includes what are called “direct” emissions, or emissions caused by the company’s direct activities like drilling for oil, and does not include emissions from customers’ burning of the fuels.”
Moderna Vaccine Trials Slowed by Insufficient Minority Participants: “Moderna executives and vaccine researchers told Reuters that the Moderna-hired private contractors did not enroll enough Black, Latino and Native American participants, leading the company to slow enrollment to address the problem...Moderna hired PPD, a contract research organization, to supervise the sites. Two of the commercial companies reported receiving an overwhelming interest in participation from white volunteers.”
Some U.S. Employers Are Finally Offering Paid Parental Leave. Working Moms with Kids at Home Say They’re Afraid to Use It: “While it was “amazing” to see such an outpouring of empathy from management, she is still unsure of how much time she is being encouraged to take. She can’t exactly follow by example, she said: At her 30-person company, only three other employees are parents.”
Warp Speed's Focus on Vaccines May Have Shortchanged Antibody Treatments: “‘I think we need to do some very serious soul searching after this is over,’ Woodcock said regarding the state of U.S.-based Covid-19 clinical trials in general. ‘It’s like starvation in the midst of plenty,’ she said, as competition for enrolling patients in different trials in academic medical centers is fierce, even as one thousand or more people are getting sick and dying on a daily basis and cannot access any trial.”
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