Elizabeth Warren's Private Equity Proposal Encourages Abuses
Any struggling company, especially one with hard to predict pension, litigation or regulatory problems, would become radioactive.
Senator Elizabeth Warren wants to reform the private equity industry.
Photographer: Bloomberg/
Elizabeth Warren’s “Stop Wall Street Looting Act of 2019” is designed to curtail abuses by private equity funds. Most of the resulting commentary has focused on whether private equity is good or bad, or whether the Act would be effective. However you feel about those things, a more important point is the Act seems designed to encourage the abuses it decries.
In a typical PE deal, a fund combines the equity capital from its investors with a lot of borrowed money to buy a public company and take it private. The fund may sell some of the company’s non-core assets and restructure what’s left to create a company that in five or 10 years can be sold back to the public markets.1 The fund’s main reward is a percentage, often 20%, of the total collected from sales minus the initial equity investment. It also collects management fees from investors in the fund as well as for services provided to the company it controls.