November 21, 2019

Breakingviews: Private-equity bosses will come under scrutiny yet

by Breakingviews.

Two things were missing from Tuesday’s Congressional hearing on private equity: a smoking gun, and the companies themselves. Nonetheless, there’s almost certainly more discomfort to come for Blackstone, KKR and peers – and the billionaire barons who run them.

A session of the House Committee on Financial Services entitled “America for Sale?” was predictably pointed. While Drew Maloney of the American Investment Council argued his members help firefighters retire comfortably, much questioning revolved around the buyout industry’s role in rising healthcare costs, opaque incentive structures and the grisly bankruptcy of retailer Toys R Us.

Ultimately, though, there was neither progress nor consensus. While some committee Democrats railed against lost jobs, others said private equity could be a helpful force in their communities. Wayne Moore, a public-sector pension-fund trustee, testified that he wanted more clarity on fees but conceded that private equity is the best-performing asset class.

The industry has been in the spotlight before and managed to emerge intact. Senator Elizabeth Warren’s “Stop Wall Street Looting” bill, demanding more disclosure and greater accountability, may be a long shot. But the industry is far bigger now than during previous periods of scrutiny. Blackstone and KKR’s investees employ well over 1 million people. Leveraged U.S. loans have hit a record $1.2 trillion, according to S&P Global, and buyout valuations are at unprecedented levels. That suggests more victims if investments sour, and greater chance they will.

Private equity’s greatest vulnerability, though, is probably the fortunes it creates. Warren and her rival presidential contender Bernie Sanders have put billionaires in the crosshairs, and buyout firms have plenty. Blackstone’s Steve Schwarzman collected $568 million of dividends and pay for 2018, Reuters reported in March. KKR’s Henry Kravis and George Roberts got roughly $200 million combined. The three founders of Carlyle were close behind.

A wealth tax proposed by some Democrats may be a blunt tool, but other measures make more sense. One is to finally close the tax loophole that enables private-equity bosses to pay a much lower rate on investment profit than on regular income. Even President Donald Trump once pledged to end that free lunch. The buyout barons’ no-show may be an acknowledgement that if the ultra-rich are the real target, their best bet is to lie low.

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