    [House Hearing, 116 Congress]
    [From the U.S. Government Publishing Office]

                        AMERICA FOR SALE? AN EXAMINATION
                       OF THE PRACTICES OF PRIVATE FUNDS

    =======================================================================

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED SIXTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               NOVEMBER 19, 2019

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 116-66

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                                   __________

                        U.S. GOVERNMENT PUBLISHING OFFICE
    42-474 PDF                  WASHINGTON : 2021

    --------------------------------------------------------------------------------------

                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                     MAXINE WATERS, California, Chairwoman

    CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina,
    NYDIA M. VELAZQUEZ, New York             Ranking Member
    BRAD SHERMAN, California             ANN WAGNER, Missouri
    GREGORY W. MEEKS, New York           PETER T. KING, New York
    WM. LACY CLAY, Missouri              FRANK D. LUCAS, Oklahoma
    DAVID SCOTT, Georgia                 BILL POSEY, Florida
    AL GREEN, Texas                      BLAINE LUETKEMEYER, Missouri
    EMANUEL CLEAVER, Missouri            BILL HUIZENGA, Michigan
    ED PERLMUTTER, Colorado              STEVE STIVERS, Ohio
    JIM A. HIMES, Connecticut            ANDY BARR, Kentucky
    BILL FOSTER, Illinois                SCOTT TIPTON, Colorado
    JOYCE BEATTY, Ohio                   ROGER WILLIAMS, Texas
    DENNY HECK, Washington               FRENCH HILL, Arkansas
    JUAN VARGAS, California              TOM EMMER, Minnesota
    JOSH GOTTHEIMER, New Jersey          LEE M. ZELDIN, New York
    VICENTE GONZALEZ, Texas              BARRY LOUDERMILK, Georgia
    AL LAWSON, Florida                   ALEXANDER X. MOONEY, West Virginia
    MICHAEL SAN NICOLAS, Guam            WARREN DAVIDSON, Ohio
    RASHIDA TLAIB, Michigan              TED BUDD, North Carolina
    KATIE PORTER, California             DAVID KUSTOFF, Tennessee
    CINDY AXNE, Iowa                     TREY HOLLINGSWORTH, Indiana
    SEAN CASTEN, Illinois                ANTHONY GONZALEZ, Ohio
    AYANNA PRESSLEY, Massachusetts       JOHN ROSE, Tennessee
    BEN McADAMS, Utah                    BRYAN STEIL, Wisconsin
    ALEXANDRIA OCASIO-CORTEZ, New York   LANCE GOODEN, Texas
    JENNIFER WEXTON, Virginia            DENVER RIGGLEMAN, Virginia
    STEPHEN F. LYNCH, Massachusetts      WILLIAM TIMMONS, South Carolina
    TULSI GABBARD, Hawaii
    ALMA ADAMS, North Carolina
    MADELEINE DEAN, Pennsylvania
    JESUS ``CHUY'' GARCIA, Illinois
    SYLVIA GARCIA, Texas
    DEAN PHILLIPS, Minnesota

                       Charla Ouertatani, Staff Director

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        November 19, 2019............................................     1
    Appendix:
        November 19, 2019............................................    65

                                   WITNESSES
                           Tuesday, November 19, 2019

    Appelbaum, Eileen, Co-Director, Center for Economic and Policy
      Research.......................................................     5
    De La Rosa, Giovanna, United for Respect Leader, and former Toys
      R Us employee..................................................     8
    Maloney, Drew, President and CEO, American Investment Council....     9
    Moore, Wayne, Trustee, Los Angeles County Employees Retirement
      Association (LACERA)...........................................     6
    Palmer, Brett, President, Small Business Investor Alliance.......    11

                                    APPENDIX

    Prepared statements:
        Appelbaum, Eileen............................................    66
        De La Rosa, Giovanna.........................................    83
        Maloney, Drew................................................    94
        Moore, Wayne.................................................    99
        Palmer, Brett................................................   102

                  Additional Material Submitted for the Record

    Waters, Hon. Maxine:
        Written statement of the AFL-CIO.............................   115
        Written statement of Americans for Financial Reform..........   124
        Written statement of the California State Teachers'
          Retirement System..........................................   175
        Written statement of the Center for Popular Democracy........   177
        Written statement of the Communications Workers of America...   190
        Written statement of the Economic Policy Institute...........   192
        Written statement of the Fire and Police Pension Association
          of Colorado................................................   200
        Article submitted by David Halperin entitled, ``Warren Probes
          Private Equity Owners of For-Profit Colleges,'' dated
          September 17, 2019.........................................   201
        Written statement of Leo Hindery, Jr.........................   207
        Written statement of the Institutional Limited Partners
          Association................................................   210
        Written statement of Manufactured Housing Action.............   216
        Written statement of NewsGuild-CWA...........................   219
        Written statement and Report of the Private Equity
          Stakeholder Project........................................   228
        Written responses to questions for the record submitted to
          Eileen Appelbaum...........................................   255
        Written responses to questions for the record submitted to
          Wayne Moore................................................   271
        Written responses to questions for the record submitted to
          Brett Palmer...............................................   282
        Written statement of the State Board of Administration of
          Florida....................................................   286
        Article from the Times Herald-Record entitled, ``New Windsor
          mobile home park residents protest upcoming rent hike''....   288
        Written statement of the Transportation Trades Department,
          AFL-CIO....................................................   292
        Op-Ed from Truthout entitled, ``Let's Stop Wall Street
          Predators From Banking on Displacement''...................   298
        Article from The Washington Post entitled, ``A billion-dollar
          empire made of mobile homes''..............................   309
        Written statement of Worth Rises.............................   319
    Gottheimer, Hon. Josh:
        TRU Financial Assistance Fund Final Protocol.................   331
    McHenry, Hon. Patrick:
        Written statement of the International Franchise Association.   343
    Riggleman, Hon. Denver:
        Center for Capital Markets Competitiveness report entitled,
          ``Economic Impact Analysis of the Stop Wall Street Looting
          Act (S.2155/H.R. 3848).....................................   345

                        AMERICA FOR SALE? AN EXAMINATION
                       OF THE PRACTICES OF PRIVATE FUNDS

                                  ----------

                           Tuesday, November 19, 2019

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 10:08 a.m., in
    room 2128, Rayburn House Office Building, Hon. Maxine Waters
    [chairwoman of the committee] presiding.
        Members present: Representatives Waters, Maloney,
    Velazquez, Sherman, Meeks, Clay, Green, Perlmutter, Foster,
    Beatty, Vargas, Gottheimer, Gonzalez of Texas, Lawson, Tlaib,
    Porter, Axne, Casten, McAdams, Ocasio-Cortez, Wexton, Adams,
    Dean, Garcia of Illinois, Garcia of Texas, Phillips; McHenry,
    Wagner, Lucas, Posey, Luetkemeyer, Huizenga, Stivers, Barr,
    Tipton, Williams, Hill, Emmer, Loudermilk, Mooney, Davidson,
    Budd, Kustoff, Hollingsworth, Gonzalez of Ohio, Rose, Steil,
    Gooden, and Riggleman.
        Chairwoman Waters. The Committee on Financial Services will
    come to order. Without objection, the Chair is authorized to
    declare a recess of the committee at any time.
        Today's hearing is entitled, ``America for Sale? An
    Examination of the Practices of Private Funds.'' I now
    recognize myself for 4 minutes to give an opening statement.
        Today, this committee convenes for a hearing to examine the
    impact of private funds on businesses and workers. While there
    are some examples of private equity firms playing a beneficial
    role in the U.S. economy, there are far too many examples of
    private equity firms destroying companies, and preying on
    hardworking Americans to maximize their profits. Today, we are
    going to take a hard look at those practices and examine
    whether Congress should take action to prevent the drastic
    increase from the $250 million it spent in 2009 on those
    industries.
        After the devastation of the foreclosure crisis in which
    millions of people lost their homes through no fault of their
    own, private equity firms swooped in and purchased hundreds of
    thousands of foreclosed homes at discounted prices. In many
    cases, they converted these homes to rentals, charged
    excessively high rents, and became absentee landlords without
    community ties. Private equity firms increasingly hold
    ownership of hospitals, nursing homes, and emergency services.
    In 2018 alone, private equity firms spent a total of $10.4
    billion buying up hospitals and medical clinics, a drastic
    increase from the $250 million it spent in 2009 on those
    industries.
        A New York Times investigation found that an ambulance
    company owned by private equity Rural/Metro Corporation had
    slower response times under private equity ownership and
    undertook, ``more aggressive billing practices.'' According to
    the report, ``Rural/Metro once sent 761 collection notices to
    an infant girl born in an ambulance.''
        In the retail industry, 10 of the last 14 companies that
    have declared bankruptcy are owned by private equity firms. For
    example, Toys R Us was acquired by private equity firms in a
    real estate investment trust in 2005. By 2018, Toys R Us had
    declared bankruptcy, laid off all 30,000 of its employees, and
    closed all of its stores. Meanwhile, the company's private
    equity owners had pocketed $470 million in fees and interest
    payments from the company.
        Today, we will hear testimony from Ms. Giovanna De La Rosa,
    a former Toys R Us employee and advocate.
        These are just a few examples of the harm that private
    equity firms have caused. Unfortunately, the private equity
    firms the committee invited to testify at this hearing today
    declined to send representatives to engage and answer questions
    about their activities. So I would like to thank Drew Maloney,
    president and CEO of the American Investment Council, which is
    a trade group that represents private equity firms, for joining
    us today and testifying on behalf of the industry. But while he
    will testify on private equity as an industry, Mr. Maloney will
    not be able to adequately speak to the practices or activities
    of specific firms.
        And so, while we will get started with this today, we are
    going to have to determine what other actions we may have to
    take in order to get the information that we think we need in
    order to make some determinations about what exactly is going
    on in our society with private equity firms.
        I now recognize the ranking member of the committee, the
    gentleman from North Carolina, Mr. McHenry, for 4 minutes for
    an opening statement.
        Mr. McHenry. I thank the chairwoman for holding this
    hearing today. And while my Democratic colleagues are not only
    down the hall attempting to undo the 2016 election, it appears
    today that committee Democrats are working to predetermine the
    2020 Democratic nomination for their party.
        Today's hearing is devoted to H.R. 3848, the House
    companion to Senator Elizabeth Warren's bill, and a key tenet
    of her Presidential platform. Hooray. We are here today to
    debate Presidential politics. Moreover, one of our witnesses
    testifying here today is cited in Senator Warren's press
    release from her Presidential campaign as providing ``the
    economic analysis'' of the bill and its impact.
        This bad bill strikes at the foundation of American
    capitalism. I know there is a socialist lane in the Democrat
    primary for President. This clearly is that fight for that
    socialist lane. It has harmful effects as well. A recent, more
    detailed analysis of the bill found that in a modest-case
    scenario, the low range, this bad bill would reduce the
    American workforce by 6 million jobs and lead to $109 billion
    per year in lower tax revenue. That is the tax revenue piece
    only. To repeat, that is a conservative estimate. In fact, the
    worst-case scenario says that over 26 million jobs could be
    lost. To sum up the Warren bill, this bad bill, if enacted,
    would be a disaster for American workers.
        Congress should be focused on policies that make the
    economy more free, open up opportunities, and make the capital
    markets more attractive and more competitive against our
    competitors around the globe, rather than bills that add
    regulatory cost and harm our markets and hurt jobs. Good
    policies such as the bipartisan bills we passed in the last
    Congress could lead to greater opportunity and choices for
    everyday investors to grow their savings. Instead, this
    committee wants to use Full Committee hearing time to go after
    and vilify one industry.
        There will likely be several misconceptions presented today
    by my Democrat friends, so I want to use some of my time here
    to address those. First, private equity is not just about large
    investors buying out large companies. Generally speaking,
    private equity is a variety of private investment from venture
    capital, to capital injections for small businesses, to lending
    so that small businesses could buy mismanaged other businesses
    that have potential, huge potential, if just managed correctly.
        Second, the private equities business model does not
    involve intentionally bankrupting companies. Bankruptcy is
    failure. Failure is not a part of the business model; success
    is. That is where you see the job growth. That is where you see
    the returns. And so the idea that an industry could benefit by
    failing doesn't make sense.
        Third, a misconception that some will present is that
    private equity is just about Wall Street. It is not. Private
    equity creates investment opportunities that lead to jobs.
    According to a recent Ernst & Young study of the impact of
    private equity in the U.S. last year, private equity supports
    at least 100,000 jobs in 27 States and over 10,000 jobs in each
    State.
        Additionally, Americans directly benefit through pensions.
    U.S. pension funds invest about 9 percent of their portfolios
    in private equity, and that same study found that private
    equities outperformed investment in public equity, fixed
    income, and real estate over the last decade. That means that
    everyday investors, including teachers and firefighters and
    police officers, all benefit. But don't take my word for it.
    The chief investment officer of CalPERS recently said the
    following, ``We need private equity to be successful, we need
    more of it, and we need it sooner rather than later.''
        With that said, I do want to note that private equity has
    become more important in the American economy due in no small
    part to increased regulatory barriers on public companies. We
    should remedy that public company piece, not have a
    Presidential rally for Senator Warren.
        Chairwoman Waters. I now recognize the gentlewoman from New
    York, Mrs. Maloney, who is also the Chair of our Subcommittee
    on Investor Protection, Entrepreneurship, and Capital Markets,
    for 1 minute.
        Mrs. Maloney of New York. Thank you, Madam Chairwoman.
        Many private equity funds have caused needless suffering
    for ordinary workers, especially in the retail sector. All too
    often when a private equity fund buys a company, they pile an
    excessive amount of debt onto the company and then use the
    bankruptcy system to slash pensions and benefits for ordinary
    workers. While not all private equity funds are created equal,
    it is clear that our committee needs to closely examine these
    practices.
        I am also pleased that this hearing will examine the Stop
    Wall Street Looting Act, which has been introduced in the House
    by Mr. Pocan and Ms. Jayapal. This bill would require private
    equity funds to share the liability for the debt that they pile
    onto their portfolio companies. I believe that there is a good
    case to be made for increased risk sharing between private
    equity funds and portfolio companies in order to deter the
    ``heads I win, tails you lose'' mentality.
        Thank you, and I yield back. And thank you for having this
    important hearing.
        Chairwoman Waters. I now recognize the ranking member of
    the subcommittee, the gentleman from Michigan, Mr. Huizenga,
    for 1 minute for an opening statement.
        Mr. Huizenga. Private equity (PE) is an important aspect of
    the U.S. capital markets that helps create jobs and bolster
    pension returns for Main Street Americans. Most PE firms make
    long-term investments in companies poised for growth as well as
    undervalued or underperforming businesses by providing critical
    working capital that would otherwise be unavailable through
    traditional banks. It is important to note that the U.S.
    private equity sector drives a significant amount of economic
    growth in the United States and supports more than 26 million
    American jobs, which contributes $475 billion in annual
    Federal, State, and local tax revenues.
        Additionally, the profits from private equity are funding
    the retirement security of millions of pensioners. According to
    the American Investment Council, 91 percent of U.S. public
    pension funds have invested a portion of their portfolios in
    private equity. In Michigan, for the State of Michigan's
    pension fund, that means $71.2 billion. Needless to say,
    investments made by the private equity industry in our local
    communities all across the nation are playing a vital role in
    job creation, wage growth, and retirement savings.
        In my district alone, private equity firms have helped
    create or sustain over 5,700 jobs, and private equity
    investment was $4 billion, helping companies such as JR
    Automation in Holland, Brillcast in Grand Rapids, Challenge
    Manufacturing in Walker, and I could go on. Private equity is a
    fundamental part of our economy and plays a direct role in our
    districts by working to make businesses more successful.
        I look forward to hearing from our witnesses today, and I
    yield back the balance of my time.
        Chairwoman Waters. I want to welcome today's distinguished
    panel: Eileen Appelbaum, co-director, Center for Economic and
    Policy Research; Wayne Moore, trustee, Los Angeles County
    Employee Retirement Association; Giovanna De La Rosa, United
    for Respect, and a Toys R Us employee for 20 years; Drew
    Maloney, president and CEO, American Investment Council; and
    Brett Palmer, president, Small Business Investor Alliance.
        Each of you will have 5 minutes to summarize your
    testimony. When you have 1 minute remaining, a yellow light
    will appear. At that time, I would ask you to wrap up your
    testimony so we can be respectful of both the witnesses' and
    the committee members' time.
        And without objection, all of your written statements will
    be made a part of the record.
        Ms. Appelbaum, you are now recognized for 5 minutes to
    present your oral testimony.

    STATEMENT OF EILEEN APPELBAUM, CO-DIRECTOR, CENTER FOR ECONOMIC
                          AND POLICY RESEARCH

        Ms. Appelbaum. Chairwoman Waters, Ranking Member McHenry,
    and distinguished members of the committee, I am very pleased
    to be here today to discuss private investment funds.
        Most private equity deals are used to acquire small and
    medium-sized companies, and here my research shows that private
    equity can bring know-how that makes a positive difference.
    These investments generally have higher returns than
    acquisitions of big companies. But in what one finance writer
    called the paradox of private equity, most private equity money
    goes into acquiring large companies that offer few
    opportunities for improving operations and many for financial
    engineering.
        Activist hedge funds take small stakes in major companies
    and then call the shots. Hedge funds make money from short-term
    increases in share prices, then sell before the negative
    consequences are apparent.
        Exemption from regulations that rule out risky behaviors
    enables private funds to gamble with the future of acquired
    companies while funneling money to wealthy private equity
    partners.
        Private investment funds play a significant role in the
    U.S. economy. Over the past decade, assets managed by hedge
    funds and private equity funds have exploded. They doubled for
    hedge funds, septupled for private equity funds, and now exceed
    $3 trillion for each. There were nearly 10,000 private equity
    buyouts between 1980 and 2013, according to a study by Chicago
    and Harvard economists. They had data for 6,000 companies
    employing 6.9 million workers at the time of the buyout.
    Thirteen percent of workers at publicly traded companies lost
    their jobs in the next 2 years. Overall, 4.4 percent or 304,000
    workers lost jobs.
        Big private equity firms buy out large, viable companies
    and use their assets as collateral for risky levels of debt
    that the company and not its private equity owners must repay.
    This erodes the buffer that companies have to make it through
    hard times. Toys R Us is the poster child. It was purchased
    with $5.5 billion in debt. It went from a capital structure of
    87 percent equity and just 13 percent debt before it was
    acquired to an upside down 17 percent equity and 83 percent
    debt. Yearly interest payments exceeded $400 million, and total
    advisory and other payments that went straight to the private
    equity firm were another $470 million eating up profits. Toys
    failed. Its stores were shuttered, and 33,000 workers lost
    their jobs.
        It is this reckless loading of debt onto companies that the
    Stop Wall Street Looting Act would end by requiring the private
    equity firm and the fund's general partner to be jointly liable
    with the company for repayment.
        Add-ons are another favorite tactic. Private equity firms
    buy small competitors to add onto an initial acquisition,
    building national powerhouses without any antitrust
    supervision. Private equity-owned Envision and TeamHealth own
    hundreds of doctors' practices and have more than 90,000
    employees in hospitals and other health facilities across the
    country. Both have multibillion dollar loans to pay off. They
    use surprise medical bills or the threat of such bills to get
    much higher payments than other doctors receive, driving up
    healthcare costs.
        Hedge funds pursue profits through the purchase and sale of
    stock in publicly traded companies. Stock buybacks that were
    illegal before 1982 because they are a form of market
    manipulation are widely used by hedge funds to raise share
    prices and then cash out before the effects of draining
    resources, like the plant closings at General Motors, become
    apparent. As we speak, AT&T management is capitulating to
    similar demands from a hedge fund that owns just 1 percent of
    its stock. At DuPont, the hedge fund firm used a small stake to
    break up the company and shut down a premier research facility
    that was a major source of U.S. innovation. It sold its shares
    before the reorganization was completed.
        The Reward Work Act would make stock buybacks and
    manipulation of share prices illegal again. The Stop Wall
    Street Looting Act will bring the incentives for private
    investment funds in line with their stated aspirations: to
    improve operations at companies they invest in. This and other
    pending legislation will reduce opportunities for financial
    abuse and ensure that capital is deployed in support of
    economic growth and rising living standards.
        Thank you.
        [The prepared statement of Dr. Appelbaum can be found on
    page 66 of the appendix.]
        Chairwoman Waters. Thank you.
        Mr. Moore, you are now recognized for 5 minutes to present
    your oral testimony.

    STATEMENT OF WAYNE MOORE, TRUSTEE, LOS ANGELES COUNTY EMPLOYEES
                    RETIREMENT ASSOCIATION (LACERA)

        Mr. Moore. Chairwoman Waters, Ranking Member McHenry, and
    members of the committee, I am honored to be here this morning
    as a public pension fund retiree, trustee, and taxpayer. As a
    fiduciary, I am responsible for protecting public pension plan
    assets and ensuring promised benefits are delivered. That
    begins with openness and transparency between us and the asset
    management industry.
        Public pension funds will pay up to $45 billion in fees and
    expenses to the industry this year, a massive transfer of
    wealth from workers to Wall Street. My fiduciary duties include
    making sure we get what we paid for.
        More than 20 million active and retired public employees
    have accumulated over $4.5 trillion in assets to provide for
    their secure retirements. They are often overlooked during
    discussions about complex legal and financial strategies,
    profits, and bonuses. It is past time for workers to exercise
    greater oversight over their assets.
        Along with openness and transparency, we must have cost-
    efficient investment practices, fair returns, and outcomes that
    support a growing economy. My constituents expect no less. Last
    year, at the Los Angeles County Employees Retirement
    Association, where I am a trustee, 3,800 general members
    retired. They received an average annual retirement benefit of
    $45,400.
        Controlling and minimizing the cost of investing through a
    more open and transparent data collection regime as proposed in
    H.R. 3848 is not an inconsequential exercise. If we could save
    just $1 million in the cost of investing, those savings
    invested at 6\1/4\ percent would fund 2 average L.A. County
    pensions for 20 years, including a 2\1/2\ percent annual COLA.
        While private equity is our pension fund's best performing
    asset, it is also our most costly asset. While just 10 percent
    of our portfolio, private equity makes up over half of our
    investment management costs.
        Over the past decade, many initiatives have been launched
    to address transparency issues with private equity managers.
    While much has been accomplished, for example, California's AB-
    2833, more needs to be done. The disclosures proposed in H.R.
    3848 are important to investors and the public as more complete
    information means sounder and more meaningful asset allocation
    decisions.
        Public pension funds are eager to participate in the
    growing, worldwide private economy. As a matter of fact, in
    2019, Preqin reported that 31 U.S. public pension funds
    provided 35 percent of worldwide allocations to private equity
    firms. We do not, however, want to participate through
    financial engineering, destabilizing our communities, and
    undermining our future for short-term gains.
        Many fund sponsors, participants, and beneficiaries want to
    see ourselves in our investments; people who look like us
    making investments that will favorably impact our lives. If I
    lived in Ohio, I might want to see investments in
    manufacturing. In California, investments around agriculture
    and logistics are just as important as technology. Every dollar
    we earn from investment should be a good dollar.
        Being informed by the impact of investment decisions on our
    constituents is good information. Being open and transparent
    means helping investors in private equity make good decisions.
        Private equity is not a sector of our economy. They buy
    stakes in sectors of our economy. However, just buying and
    owning a company does not automatically make you a job creator
    or an engine of economic growth. It is the outcomes of what you
    do after the purchases that is important.
        As a major stakeholder fueling the private equity industry,
    pension funds must have a greater oversight role in our
    investments. After all, it is our money.
        Thank you.
        [The prepared statement of Mr. Moore can be found on page
    99 of the appendix.]
        Chairwoman Waters. Thank you.
        Ms. De La Rosa, you are now recognized for 5 minutes to
    present your oral testimony.

     STATEMENT OF GIOVANNA DE LA ROSA, UNITED FOR RESPECT LEADER,
                     AND FORMER TOYS R US EMPLOYEE

        Ms. De La Rosa. Thank you, Chairwoman Waters, for inviting
    me to speak today. I am honored to be here.
        My name is Giovanna De La Rosa, and I am from Chula Vista,
    California. I worked at Toys R Us as an assistant manager for
    20 years before private equity firms drove it to bankruptcy. I
    am here today as a leader with United for Respect to speak on
    behalf of the 1.3 million workers who have lost their jobs to
    private equity.
        I started working at the Toys R Us store in Chula Vista
    when I turned 18. I grew up in that store and have deep
    emotional ties to it. I got to work there with my sister and
    other family members. I met my husband at work, and our son was
    a true Toys R Us kid. And, of course, I gained a second family
    in my coworkers.
        We loved working at Toys R Us, especially around this time
    of year. Our job was to bring joy to kids and their families.
    We knew our customers, and I was proud to work for a company
    that cared about its employees and treated us like family.
        Then in 2005, two private equity firms, KKR and Bain, and a
    real estate investment trust, Vornado, acquired Toys R Us
    through a leveraged buyout. After that, the old culture was
    thrown out the window. From day one they started making all
    kinds of cuts that weren't needed. They cut staff and benefits,
    but we had to keep it together as a team with limited
    resources.
        I thought these new Wall Street owners were coming in to
    make our company and operations work better. I had no idea what
    private equity or leveraged buyouts were, but they were making
    things worse, and then everything fell apart. My life changed
    that spring when news hit that Toys R Us stores were shut down
    nationwide, and they laid off over 30,000 of us without a dime
    of severance pay, despite our years of dedication to the
    company.
        I started having breakdowns at home and work and had to
    pull it together for my team and for my son who has special
    needs. It was hard to imagine how I was going to make rent or
    afford healthcare for us. How could I tell my special needs son
    that someone on Wall Street made a series of decisions that
    turned our lives upside down? I couldn't find anything but
    seasonal work for over a year, despite my experience.
        My coworkers and I were left with nothing, while the
    executives and private equity owners walked away with millions.
    I heard later that Toys R Us paid $470 million in fees to
    private equity owners. That would be enough to pay over $14,000
    in severance to each employee who lost their job versus the
    $800 that I received.
        That is why I got involved in the fight to hold private
    equity accountable. I joined United for Respect, along with
    thousands of other Toys R Us workers to demand justice and
    severance pay. We told our stories everywhere, from Congress to
    pension fund meetings to the press. And because of that, KKR
    and Bain finally started talking to us about a hardship fund
    for Toys R Us workers. They set up an historic $20 million fund
    for us, which helped a little bit, but it wasn't enough, and it
    didn't help us get back the financial security we had when we
    were working.
        Luckily, Toys R Us is making a comeback, and the new owners
    reached out. Together, we formed a mirror board made up of
    three former Toys R Us employees, including me, to help guide
    the new company. I am excited for the chance to bring Toys R Us
    back the right way.
        Over the past year-and-a-half, I have learned that Toys R
    Us workers aren't the only ones who went through this buyout
    hell. Other retail workers are also going through the nightmare
    of having private equity firms or hedge funds putting their
    stores out of business. I met workers from Gymboree, Sears,
    Payless, Kmart, and Shopko, and they all had the same story as
    me, and they knew the names of the Wall Street firms that made
    them lose their jobs: ESL, Alden, Sun Capital, and many more.
        Because of private equity investments in retail, 1.3
    million jobs have been lost. That is 1.3 million people with
    kids, parents, and grandparents, who also lose their financial
    security.
        We need real change like the Stop Wall Street Looting Act.
    The last time I was in D.C. was to help introduce the bill with
    our amazing partners at Americans for Financial Reform, the
    Center for Popular Democracy, and in Congress. I believe that
    this bill can protect jobs by regulating private equity so they
    can't make money by putting people like me out of work.
        And now our fight has caught the public's attention,
    because more and more people from retail workers to nurses to
    grocery store workers are speaking out. The economy isn't
    successful and thriving when so many of us are losing our jobs.
    What would you do as a single mom raising a special needs
    child, then being left with nothing: no job, no income, no
    healthcare? We are counting on you to do the right thing and
    pass this bill. We are waiting to see which side you are on,
    working people or Wall Street billionaires.
        Thank you.
        [The prepared statement of Ms. De La Rosa can be found on
    page 83 of the appendix.]
        Chairwoman Waters. Thank you, Ms. De La Rosa.
        Mr. Maloney, you are now recognized for 5 minutes to
    present your oral testimony.

        STATEMENT OF DREW MALONEY, PRESIDENT AND CEO, AMERICAN
                           INVESTMENT COUNCIL

        Mr. Maloney. Good morning, Chairwoman Waters, Ranking
    Member McHenry, and other distinguished members of the House
    Financial Services Committee. Thank you for the opportunity to
    testify today.
        My name is Drew Maloney. I lead the American Investment
    Council. We are proud to represent private equity firms of all
    sizes. Our industry creates jobs, powers the economy, and
    strengthens the retirements of millions of Americans. Our
    industry provides businesses with the capital and expertise to
    grow.
        The term ``private equity'' is very broad, so before I go
    any further, I wanted to take a minute to talk about three main
    forms of private equity: venture capital; growth capital; and
    buyouts. Each describe investments at a different phase of the
    business cycle.
        Venture capital represents those early investments in
    startups that need capital to exist. For example, private
    equity made early investments in Uber, Spotify, and Peloton
    long before those companies became household names.
        Growth capital is when private equity invests to expand an
    existing company. Growth capital represents the largest part of
    the investment chain. A great example is Tate's Bake Shop
    founded in New York by Kathleen King when she was 21-years-old.
    She partnered with private equity to grow the business, and now
    Tate's cookies are in grocery stores across America.
        Finally, buyouts. Buyouts are private equity investments in
    well-established companies that may be distressed or
    underperforming. Private equity helped Hilton Hotels almost
    double in size during its 11-year investment in the company.
    Hilton was recently recognized as the best company to work for
    in the United States.
        The ultimate objective of each of these investments is to
    build a better business. Private equity provides patient, long-
    term capital that allows management to think beyond quarterly
    earnings and short-term fluctuations in stock price. Private
    equity also provides more than just capital. Firms bring
    operational expertise to each investment and often work closely
    with management of each company to define strategy and map out
    long-term growth objectives.
        The biggest investors in our industry are pension funds and
    university endowments. Successful private equity investments
    strengthen the retirements of public and private sector
    workers, including teachers, firefighters, and police officers.
        In total, the private equity sector in the United States
    employed 8.8 million people and paid $600 billion in wages and
    other benefits in 2018. That included more than 1.1 million
    jobs in California. Roughly a third of those private equity
    jobs were in manufacturing, construction, transportation, or
    warehousing.
        Private equity invested $685 billion in more than 4,700
    businesses across the U.S. last year. Most of these are small
    or midsized companies. Businesses of every size in every
    congressional district depend on private equity capital and
    expertise to grow.
        In 2014, private equity invested in Inland Coatings, a
    small industrial coating manufacturer in Adel, Iowa. The
    investment helped the company grow to become an industry leader
    and provided healthcare and retirement benefits to its
    employees.
        Ninety-one percent of public pension funds have invested a
    portion of their capital in private equity. And in 2018, we
    generated the strongest returns of any asset class over the
    last 10 years. The Los Angeles County Employees Retirement
    Association had one of the highest average annual returns in
    the country. Earlier this year, the chief investment officer of
    the California Public Employees' Retirement System (CalPERS),
    the country's largest pension fund, said, we need private
    equity, we need more of it, and we need it now.
        These strong returns have become increasingly critical for
    pension funds at a time when many do not have enough money to
    meet their existing obligations. Private equity is proud to
    help close that shortfall.
        Thank you again for giving me the privilege of appearing
    before the committee today. I am grateful for the opportunity
    and look forward to answering your questions.
        [The prepared statement of Mr. Maloney can be found on page
    94 of the appendix.]
        Chairwoman Waters. Thank you very much.
        Mr. Palmer, you are now recognized for 5 minutes to present
    your oral testimony.

     STATEMENT OF BRETT PALMER, PRESIDENT, SMALL BUSINESS INVESTOR
                                ALLIANCE

        Mr. Palmer. Thank you very much.
        My name is Brett Palmer, and I am the president of the
    Small Business Investor Alliance (SBIA). SBIA was formed in
    1958 to represent small business investment companies, the
    original American venture capital and private equity funds.
        As the small business investing market grew more complex,
    so did SBIA. And SBIA now includes small business investment
    companies, rural business investment companies, business
    development companies, as well as conventional private equity
    and debt funds. These private equity funds pursue a wide range
    of investing strategies because this is a continuum that spans
    from the early stage venture investors to the latest stage
    buyout and everything in between.
        While we segment these investing styles for the sake of
    simplifying and explaining them, the reality is they are all
    inextricably interconnected. Our members also include
    institutional investors such as university endowments that
    invest in private equity, where they get their best returns.
        Private equity is a real and mutually beneficial
    partnership. As such, our public policy goals are balanced and
    focused on maintaining a robust, healthy, and competitive
    market for investing in American businesses. Good public policy
    should increase the capital options available for a company's
    success, whether that company is a start-up business, proving
    its products in a competitive market; a small family-owned
    manufacturing business, managing through generational
    succession; or a larger company, including retail companies
    that are trying to adapt to a new competitive threat in the
    form of technology and e-commerce, as well as take advantage of
    those opportunities of e-commerce.
        Our members grow businesses and are rightfully proud of
    what they do, of how they do it, and of the benefits their
    actions have on people and on communities, because private
    equity is a force for good, a source of job creation, and a
    driver of innovation.
        Private equity supports the retirement security of millions
    of pensioners and provides endowments the money they need to
    provide scholarships and educational access to a new generation
    of college students. And private equity is also invested all
    over the country, including to areas of the country that are
    otherwise passed over or passed by. Most of our member funds
    are in places like Little Rock, Indianapolis, Buffalo, Kansas
    City, or other places that are far from Wall Street or Silicon
    Valley, but we do have investors there too.
        But regardless of the investing style, private equity
    investors in small and medium-sized businesses make money by
    helping the businesses grow and succeed. The idea that private
    equity funds succeed by having businesses fail just isn't true.
    The only way to be a successful private equity fund in the
    lower middle market is to find smaller businesses, and help
    them grow to be bigger, better, stronger businesses. And
    private equity provides patient capital that conventional banks
    cannot provide themselves. They help businesses make big leaps
    forward that they otherwise would not have been able to achieve
    on their own.
        And not having the resources to embrace change that happens
    in the economy on a constant basis creates more risk. The more
    capital options a company has, the better chance it has to
    survive and succeed in the long term. If a business cannot
    survive and adapt to change, it cannot maintain its employees,
    much less add new employees.
        If Congress can agree on one thing, we would hope that
    Congress should agree that regulatory and tax policy should
    promote and empower private equity to invest into more growing
    American businesses. Congress should reject policies that make
    it harder for private equity to provide access to capital,
    particularly the smaller and medium-sized businesses that
    already face disproportionate challenges to capital access. We
    need more investment, not less.
        While providing growth capital is the core of what private
    equity does, it is not just money. Successful private equity
    managers invest in people. That is why SBIA partnered with the
    Ohio State University's business school to train business
    executives on how to grow their business. Just this month, over
    45 small business executives took part in a 3\1/2\-day intense
    training seminar on how to maintain their employees, how to
    attract new employees, how to manage growth, how to
    successfully operate in a leveraged environment, and how to
    create successful strategies. In other words, our private
    equity funds are training their businesses how to grow their
    businesses by investing in their employees and by investing in
    their customers.
        Again, private equity can only succeed when the businesses
    grow, and growing businesses need to retain their employees and
    they need new employees to help that growth.
        I would like to close with a real-world example of what
    private equity does. The Florida Autism Center provides center-
    based autism therapy services to children throughout Florida.
    In 2016, Resolute Capital Partners out of Nashville invested
    both debt and equity capital in a small platform that had only
    5 centers and served 50 children with 70 employees. The company
    will end this year with 51 centers serving over 1,000 children
    with over 900 employees and has expanded into Georgia. The
    company was founded by a woman who started her career as a
    behavioral therapist. It has been led by a female CEO
    throughout this stage of growth. This is a growing business.
    This is the kind of business that changes people's lives, and
    this is what private equity does.
        With that, I yield back, and I am pleased to answer any
    questions you may have.
        [The prepared statement of Mr. Palmer can be found on page
    102 of the appendix.]
        Chairwoman Waters. Thank you very much.
        Let me thank all of our witnesses for being here today.
        Allow me to take a moment to say to Ms. De La Rosa that
    your testimony to us today was extremely revealing, and you
    have described to us the impact that this basically undermining
    of Toys R Us by private equity firms and managers such as Bain
    and KKR has had on you, your families, and other employees of
    Toys R Us. As a matter of fact, Toys R Us is our case study
    about private equity firms, and so your being here today is not
    lost on us at all. Thank you.
        Dr. Appelbaum, because people's lives and health are at
    stake, as well as concerns about equitable treatment for all
    communities, emergency medical services and other industries
    related to help and public safety do not operate like for-
    profit firms. Studies have shown that when private equity firms
    move into health-related industries, costs go up, standards and
    quality of medical care decrease, and emergency public health
    response times lag.
        Just last year alone, ManorCare, the second-largest nursing
    home chain in the United States, realized an astonishing 26
    percent increase in its total annual health code violations
    after it was acquired by the private equity firm The Carlyle
    Group. And according to The New York Times, Trans-Care EMS,
    which was taken over by the private equity firm Patriarch
    Partners, was forced to close its doors up and down the East
    Coast, including in Mount Vernon and Brooklyn, New York. Many
    have argued that there are certain sectors, especially
    industries related to public health and public safety, that are
    too sensitive for private equity firms to be operating in.
        Now, you have heard and you know all about Toys R Us. I
    don't know what you know or understand about what I just
    described in relationship to health and public safety. Can you
    tell us, Ms. Appelbaum, why you think private equity firms
    should acquire public services such as health clinics and
    hospitals and fire departments, et cetera, given the
    information that has been, basically, understood now about what
    they do when they take over these kind of public safety
    entities?
        Ms. Appelbaum. I think the place to begin is that we are
    not talking about normal marketplaces when we talk about
    healthcare, especially when we talk about emergency care,
    whether it is ambulances, air ambulances, emergency rooms.
    These are situations in which you do not say, how much are you
    going to charge me for this? I would rather have a cheaper
    ambulance. It doesn't work like that. These are services that
    you are going to use because you urgently need them and you
    have no opportunity to bargain over price, which means that the
    services are able, if they so desire, to charge whatever prices
    they want, as high as they want, without losing any business.
        Chairwoman Waters. Do you think private equity firms should
    be allowed to take over these kinds of services?
        Ms. Appelbaum. I do not think so, because--
        Chairwoman Waters. What about you, Mr. Moore, do you think
    they should be allowed to take over these kinds of services?
        Mr. Moore. It depends on the strategies that they are going
    to employ in taking over the companies.
        Chairwoman Waters. I can't hear you.
        Mr. Moore. It depends on the strategies that they are going
    to employ--
        Chairwoman Waters. We have information now that they have
    slowed down response times, et cetera, et cetera. So given the
    information that we already know about them, do you think they
    should be able to continue to take over public health?
        Mr. Moore. Given that information, I would say no.
        Chairwoman Waters. What about you, Ms. De La Rosa?
        Ms. De La Rosa. No, ma'am. The way we were--
        Chairwoman Waters. Mr. Maloney?
        Mr. Maloney. Yes. I believe we can be responsible investors
    in the healthcare investment community.
        Chairwoman Waters. I beg your pardon?
        Mr. Maloney. Yes. I believe that we can be responsible
    investors across all sectors, including healthcare.
        Chairwoman Waters. What about the evidence that we already
    have? Should we just forget about that?
        Mr. Maloney. I think there are some isolated cases that are
    unfortunate, but overall, there are very positive cases that--
        Chairwoman Waters. Our research shows that it is not
    isolated.
        Mr. Maloney. Madam Chairwoman, there are great examples of
    investments that we have out there in healthcare. For example,
    GrapeTree Medical Staffing in Iowa is a great example of
    private equity partnering with a business to increase the
    demand of nurses and healthcare professionals in Iowa. And
    after 2 years, that partnership has expanded into--
        Chairwoman Waters. Thank you very much.
        Mr. Palmer, what do you think?
        Mr. Palmer. I don't know anything about owning hospitals.
    That is not what our guys do. They are too big. But I will tell
    you that there are parts of the country that have healthcare
    now that did not have it until private equity bought small
    businesses that were healthcare providers and expanded them
    into communities that didn't have any. We gave an award to one
    of those companies, I think last year or the year before,
    because they provided the first primary care and emergency care
    services in Appalachia.
        Chairwoman Waters. Thank you. My time has expired,
    unfortunately. Thank you.
        The gentleman from North Carolina, Ranking Member McHenry,
    is recognized for 5 minutes.
        Mr. McHenry. Thank you.
        According to Moody's, private equity-backed firms have no
    greater bankruptcy rate than nonprivate equity firms in this
    country. There is a big misunderstanding of what private equity
    is, though. So let's start with the business model, Mr.
    Maloney. If you are here on behalf of the industry, let's
    describe what a buyout fund does, since that is the largest
    piece of what private equity does, although not all of what
    private equity does. But how does a buyout fund work?
        Mr. Maloney. A buyout fund will pull resources from pension
    funds, and college endowments, and it will go invest with
    companies that are either in need of growth or large companies
    that are underperforming and work side by side with those
    companies.
        And I would say that, as you suggested, the overwhelming
    majority of our investments are successful. That is the only
    way that we make a return for our pension holders. And if you
    look at what you said, the 6 percent bankruptcy rate, that
    means 94 percent of our deals are successful, so that the
    transactions like Hilton Hotels, Dunkin' Donuts--
        Mr. McHenry. So the idea is you take capital and you bring
    some expertise with the capital to improve a firm. Is that how
    you would explain it, Mr. Palmer?
        Mr. Palmer. That is right. And for a buyout, you are
    changing ownership. And when you are changing ownership,
    oftentimes it is a founder, someone who is retiring. There are
    a lot of baby boomers who started businesses, or post-baby
    boomers who are retiring, and you are taking the next
    generation. Oftentimes, of the people who work at that business
    management, you are buying out the owner. They go away. They
    stay on for a little bit. They retain some of the ownership of
    that business, but you apply new technologies. You buy new
    equipment. You grow it.
        And that is how buyouts work in the lower and middle
    market, and they are a really powerful force for job creation
    and business growth and sustainability. Without that buyout,
    many of these businesses that are owned by baby boomers would
    literally shutter, even though they are profitable, good
    businesses that are employing people today, not because of
    bankruptcy, just because there is no one there to take it and
    run it.
        Mr. McHenry. Okay. So if you have an investment, then you
    would get debt alongside that investment in order to purchase,
    right?
        Mr. Palmer. That is right.
        Mr. McHenry. As an individual, if I want to buy a small
    business, that is what I would do, I would go to a bank and get
    lending.
        So how do you get lending if your business model is
    bankruptcy? A great shrug from everyone. It is very difficult
    to get lending if you are going to put the screws to your
    lender, right? And then, there is the question of liability.
        So, Mr. Moore, you are an important member of the board for
    the investors, right? Do you have individual liability for the
    decisions that you as a board member make on behalf of your
    investment fund?
        Mr. Moore. No.
        Mr. McHenry. Okay. Does any individual here on behalf of
    their association or their employer have individual liability
    if their employer makes a bad decision?
        I will take that as a ``no'' across the panel.
        As Members of Congress, for the decisions we make on behalf
    of our constituents, do we have individual liability? No.
        The Warren bill here today would apply liability to the
    employees of the private equity firm and the investors of the
    private equity firm. That would be a new form of investing,
    which would be a real regression for investment capital and
    business structures. Along those same lines, the business model
    of bankruptcy doesn't get lending. So, therefore, the
    bankruptcy rate question, I think, is a material one here.
        Now, the decision for your pension fund, Mr. Moore. I read
    that, recently, the board made a unanimous decision to deploy
    150--was it million or billion?
        Mr. Moore. Million.
        Mr. McHenry. Million--$150 million--it is Washington; I
    have to ask those questions, sorry--in a buyout fund. Is that
    correct?
        Mr. Moore. Yes.
        Mr. McHenry. And did you support that decision?
        Mr. Moore. Yes, I did.
        Mr. McHenry. Okay. So in terms of private equity, even with
    the high fees that you pay, as you testified, is private equity
    still your top performing investment for your fund?
        Mr. Moore. It has been for about the last 10 years.
        Mr. McHenry. Okay.
        Mr. Moore. So we are active in the industry.
        Mr. McHenry. Even after fees?
        Mr. Moore. Even after fees.
        Mr. McHenry. Okay.
        Mr. Moore. It could be even more if the fees were lower.
        Mr. McHenry. Of course. And I think in California, CalPERS
    and your fund have significant power in that. So with that, it
    looks like the business model is--we have a better
    understanding of that, the understanding of bankruptcies no
    higher than nonprivate equity firms, and the idea of new strict
    liability for individuals employed by private equity is not
    commensurate with who we are in our American capitalist
    structure.
        I yield back.
        Chairwoman Waters. Thank you.
        The gentleman from New York, Mr. Meeks, who is also the
    Chair of our Subcommittee on Consumer Protection and Financial
    Institutions, is recognized for 5 minutes.
        Mr. Meeks. Thank you, Madam Chairwoman, and thank you for
    having this hearing today where I think that we need to have an
    important conversation and discussion, because I think we do
    get confused at times with where to go, and sometimes you want
    to knock the whole industry out as opposed to looking to see
    who may be on the bottom. What we can do, what is our
    responsibility as Members of Congress to make sure that
    individuals like Ms. De La Rosa and her family have a softer
    blow. But at the same time, we know, as I have heard from Mr.
    Moore, that we have individuals who are pensioners and others
    who are dependent upon a return on investment from private
    equity so that they can retire and live in a decent space. We
    want to make sure that they get that return on investment also.
        We are still trying to figure out how we work it out so
    that the average, hardworking American gets the benefits that
    they deserve. And what do we do when we have a company that
    is--and going by what Mr. Maloney was saying, that is
    distressed, about to go bankrupt, about to go out of business?
        I have right now a scenario where there is a company, it
    happens to be a minority-owned company in full disclosure, that
    I am trying to get some private equity dollars in, because if I
    don't, they are out of business. They are out of business. They
    have no--they are coming to me to say, ``Help me. Can you help
    find somebody that would invest?'' And part of my struggle is
    to make sure that some private equity firms are investing more
    in minority-owned firms so that they can continue to exist and
    grow and be part of the road capital. Because oftentimes,
    minority-owned firms don't get the road capital so they can
    expand their existing businesses and move forward, and I find
    the discrepancy therein.
        And so part of what I want to do is to make sure that we
    are able to make sure that there is diversity in regards to my
    community, for example, JFK Airport. I demanded, working with
    my governor, 30 percent equity for minority firms in that
    airport, and we are getting it. And they need some investment.
    And oftentimes, some of those minority firms that are those 30
    percent partners are getting that investment so that they can
    then do and they work in cooperation with the community, and in
    my case, in cooperation with SEIU and the Teamsters and other
    labor unions so that we are working collectively together,
    because the labor unions are also concerned about their
    pensioners. So we are all working together, and that is why
    this conversation is important.
        I think, furthermore, what we need to explore, and I raised
    it previously in this committee, that I do have concern about,
    because when you talk about the overall economy, and I go back
    and forth and here is what effects--and I think this happened
    with Toys R Us and others--does leveraged lending have, and can
    that overburden us so that we can get into a financial crises
    in the manner that we did in 2008? And so, I want to continue
    to have dialogue and conversation. I don't fully understand it
    to be--you have made a decision, but I want to make sure that
    we look at it. I think we have a responsibility as a committee.
    That is why this hearing and others are tremendously important
    as a committee to look at what effects does leveraged lending
    have on our overall economy and what effects do take place.
        I think what Chairwoman Waters was talking about, which I
    think is tremendously important, when you talk about public
    institutions, whether or not there are sacrifices that maybe we
    have to go overboard. For example, I know we had this big
    crisis in regard to the VA hospitals and timing and what
    happened. So do you put in measures that may increase the time
    that a medical person or a patient gets to see a doctor because
    of trying to manage it? What are the pros and the cons? I think
    that is a good discussion to have. And I think that is what she
    was talking about with reference to some of the evidence, and
    that is a good, healthy discussion to have.
        I am about to be out of time, and I wanted to ask Mr.
    Maloney, specifically, though, because I see on the minority
    private investment companies, and you represent a lot of them,
    that they have outperformed a lot of the best market of all
    U.S. private equity firms. But despite that evidence, the
    number of diverse private equity firms remains very low.
        So I was wondering what, if anything, that we can do to
    address the biases against diverse private equity firms that I
    see that is taking place in our country today.
        Mr. Maloney. Congressman, thank you for that question, and
    thank you for your leadership on this issue and your support of
    the JFK project. And I think the JFK project is one that
    highlights what we are continuing to do and can do on a
    national basis, which is not only do we partner with labor, but
    we also partner with minority-owned firms like we are in New
    York. And we all understand that diversity makes us stronger,
    and we are committed to working with you on projects like that
    and expanding this project.
        Thank you.
        Chairwoman Waters. Thank you.
        The gentlewoman from Missouri, Mrs. Wagner, is recognized
    for 5 minutes.
        Mrs. Wagner. Thank you, Madam Chairwoman. And I want to
    start by thanking the witnesses for being here to testify today
    to examine the private equity industry.
        Private equity helps grow American jobs and gives everyday
    Americans more comfortable retirements by providing returns to
    pension investments. The private equity industry supports
    American companies and jobs throughout the country.
        And a recent study found that in 2018, the U.S. private
    equity sector directly employed 8.8 million workers who earned
    approximately $600 billion in wages and benefits. The average
    worker in a private equity-backed company earns approximately
    $71,000 in wages and benefits, and that translates to around
    $36 per hour.
        In my congressional district alone, there are over 47,000
    constituents working at private equity-backed companies. And
    over the past 5 years, Missouri's Second Congressional District
    has received $17 billion in private equity investment.
        Without access to private equity, many American businesses
    would not be able to expand, hire workers, and provide the
    crucial services for their local communities.
        Mr. Palmer, there have been claims that private equity
    funds are underregulated. What sort of regulations are private
    equity firms subject to?
        Mr. Palmer. It depends a little bit on the type of private
    equity fund. You actually have a buyout fund in your district.
    Holly Huels, whom I think you have met in the past--
        Mrs. Wagner. Correct.
        Mr. Palmer. --with Deloitte Capital. It specializes in
    investing in small manufacturers and taking them to the next
    level as they have generational transfers. But private equity
    funds are regulated as far as who is allowed to invest into
    them. If they are small business investment companies, they are
    regulated by the SBA. If they are conventional private equity
    funds, they are regulated by the SEC. There have to be all
    sorts of disclosures. There have to be controls on what they do
    and how they do it.
        There are all sorts of protections that are in regulations
    that actually aren't formal government regulations that
    institutional partners like Mr. Moore put on private equity
    funds in a limited partner agreement. They require transparency
    and require good practices and prohibit bad actors and
    investing in businesses that institutionals would not be proud
    of. There are a lot of restrictions that are out there, but the
    funds themselves need to be able to move at the speed of
    business.
        Mrs. Wagner. How would the additional regulations being
    proposed today impact not only the private equity industry, but
    the companies backed by private equity, the employees of those
    companies, and the smaller pension funds seeking to maximize
    returns for pensions?
        Mr. Palmer. The Stop Wall Street Looting Act, though well-
    intentioned, actually harms Main Street far more than it limits
    Wall Street.
        Mrs. Wagner. Absolutely.
        Mr. Palmer. And it would cut off capital and create a
    significant disincentive to be investing in businesses because
    of the liability of being transferred up even for founders,
    because if you maintain 20 percent ownership in the business,
    which is in the bill, you are a control person. So if you have
    a founder who is retiring, buying out, but that he or she still
    owns a piece of the business for 3 or 4 years while they are
    helping the next generation take that business on, if that
    business were to fail because of some technological change or
    some market shock, that person not just loses their share, they
    have all this liability transfer. They lose everything. That is
    not the way this is supposed to work.
        Mrs. Wagner. The Stop Wall Street Looting Act, which is
    Senator Elizabeth Warren's bill, would establish vast
    liabilities on private equity investors and impose controls on
    when and how investors can receive their money back.
        Mr. Palmer, in your view, what would the impact of this
    bill be on the private equity industry and on the middle market
    economy?
        Mr. Palmer. I think there would be a lot less investing in
    businesses. There would be a lot less lending to businesses.
    Most lending works. And bankruptcy exists for a reason, but
    most lending works. Most of it is constructive, most of it is
    positive, most of it is growth-oriented, particularly for
    smaller businesses that aren't liquid. They can't just sell
    their stocks on the NASDAQ or the New York Stock Exchange. They
    have to go to private equity in the private markets. If they
    don't have access to capital, they don't grow. They get stale.
    They lose in the global competitive market.
        Mrs. Wagner. How many jobs would be jeopardized if the
    private equity industry was unable to provide capital to small
    and middle market businesses?
        Mr. Palmer. You would have the ceasing of--for one, you
    would have some jobs that are lost immediately, but also on a
    going-forward basis, you would have millions of jobs that just
    wouldn't be created. And a lot of those jobs that wouldn't be
    created are in manufacturing and businesses that need to
    constantly be changing and that aren't in necessarily Silicon
    Valley or Wall Street--
        Mrs. Wagner. I don't have much time. Plainly, would there
    be more jobs or fewer jobs in America if H.R. 3848 became law?
        Mr. Palmer. A lot fewer.
        Mrs. Wagner. Would there be more investment or less
    investment?
        Mr. Palmer. Less investment.
        Mrs. Wagner. Would the university endowments be better off
    or worse off?
        Mr. Palmer. Worse off.
        Mrs. Wagner. Thank you, sir.
        I yield back.
        Chairwoman Waters. Thank you.
        The gentleman from Colorado, Mr. Perlmutter, is recognized
    for 5 minutes.
        Mr. Perlmutter. I am just going to take a minute.
        I guess on this subject, I am more where Mr. Moore is.
    There is a continuum of private equity folks, from good actors
    to bad actors, from those who are going to put in primarily
    equity and capital to those who are--it is mostly going to be
    debt driven, those who want to bring good management skills and
    grow the organizations and stabilize the organizations to those
    who want to strip out whatever golden nuggets might be, you
    know, find gold under some retail operation. And so, this is
    definitely a one size-doesn't-fit-all.
        And I practiced bankruptcy law for a long time before I was
    elected to Congress and business bankruptcy, and we saw
    leveraged buyouts where there were some real bad actors,
    primarily in the mining business and in the extractive
    industries. But a lot of this has to do with the chicken and
    the egg. Is there a problem? And I would say to Ms. De La Rosa,
    is there a problem with the organization going in? Are they
    struggling financially? Is retail sort of on the ropes because
    of an Amazon? Or is it because a group comes in that is
    predatory in nature and is just going to strip out the good
    things and leave nothing but the bones, those we call the
    vulture funds or the vulture capitalists?
        So, Mr. Moore, I would like you to expand on your
    testimony. I would like to see the pension funds and the others
    have more information available to them. I certainly would like
    to see that.
        And then, Ms. De La Rosa, I want to talk to you a little
    bit about the retail business and the future of it.
        Mr. Moore. Mr. Perlmutter, first off, I think it is a false
    narrative to say that money will not flow into companies that
    needed it to grow and expand just because they can't receive it
    through a private equity construct. The money will flow to
    where it is needed without regard to whether it comes through
    private equity, a bank, individuals, and multiple other
    sources.
        Secondly, you were saying that there is a whole continuum
    of private equity investment strategies, and we have been
    successful at LACERA, at our pension fund, in identifying
    strategies in industries that looked promising, that didn't
    have negative impacts on our workers, and that looked like they
    were going to be in the future. For example, we were early
    investors in Silver Lake and Vista, and those companies focused
    in technology and family-owned businesses and helping them
    grow.
        And no one can deny that some of the buyout firms' specific
    strategy was to go into companies that had value and extract
    that value and leave the company, because their timeframe is 5
    to 7 years. They are not in it for the long term, many of them.
        So in conclusion, I would just say that the strategies that
    are being employed by the companies are very important, and
    that is why we need to have transparency, and the regulations
    or the rules that are promulgated through H.R. 3848 would help
    us get the information we need, and all the other pension funds
    need, to make good, reasonable decisions on who to invest in,
    so that we don't have the type of problems that we had with
    Toys R Us.
        And the last thing about Toys R Us is, if Toys R Us had not
    been layered with all of this debt, without the ability to
    invest in the infrastructure they needed to be an online
    retailer, they might still be here today, and all of those
    people would still have their jobs. But the buyout firms went
    in, took all the value and all the money they could get out of
    the firm, and then left it high and dry.
        Mr. Perlmutter. Okay, thank you.
        And I would just say, for you and the other pension funds
    and those that really bring the money, ordinarily, I am not
    sure we have to have legislation, but I am happy to deal with
    that, but usually those with the gold make the rules. And I
    want to make sure our pension funds do get to develop the
    contracts.
        Ms. De La Rosa, when you were working at Toys R Us, when
    they came in and made the buyout, did you see them strip out
    the value right away, or how did that work?
        Ms. De La Rosa. Yes, sir, it was right away. cutting of
    jobs, positions, changing of operating companies that we used,
    contracts.
        Mr. Perlmutter. Okay. Thank you for your time.
        Chairwoman Waters. The gentleman from Florida, Mr. Posey,
    is recognized for 5 minutes.
        Mr. Posey. Thank you, Madam Chairwoman, for holding this
    hearing, and I thank the ranking member, as well.
        Today, we have before us a piece of legislation that could
    restrict one of the longstanding features of our market-based
    system of finance. The feature is a concept of limited
    liability or a limited liability corporation.
        The history of our financial system is marked by
    innovations that have helped us manage risks that might have
    otherwise discouraged investment and growth in our remarkable
    economy.
        One of those innovations was the limited liability
    corporation. New York law created the limited liability stock
    company. Robert Shiller, Nobel economist, says the law further
    democratized finance by clarifying that shareholders would
    never be held liable for the debts of corporations.
        The law made it possible, for the first time, for a small
    investor to hold a diversified portfolio consisting of stocks
    in many companies. Prior to the advent of limited liability,
    one could not have done such a thing, for fear of a lawsuit
    from any of the companies that he held stock with. This
    development created a ready pool of investors with whom
    investment bankers could place newly issued shares.
        After seeing the steady supply of capital for new
    businesses this innovation produced, countries all over the
    world copied it. We, of course, need to be cautious about
    restricting such an invention that has served us so well over
    the years.
        I say this while also understanding the pain of business
    failures and the loss of jobs, tax revenues, and other economic
    contributions to our communities. I believe we have to realize
    that a private equity firm doesn't acquire a company to have it
    fail. They intend to make money from a stronger firm.
        Unfortunately, their aims are sometimes frustrated by the
    market for goods or services of the underlying firm. But we
    must understand that success means stronger firms, job growth,
    and overall great contributions to our community and our
    countries.
        Mr. Maloney, can you share with us your assessment of the
    economic impacts of the Stop Wall Street Looting Act of 2019,
    specifically which sectors of the economy are most likely to be
    affected if this bill becomes law?
        Mr. Maloney. Thank you for that question and your concerns,
    Congressman, about eliminating sort of the traditional limited
    liability protections that allow for investment in the current
    marketplace.
        In a recent study by Professor Swenson from the University
    of Southern California, he suggests that the loss of jobs would
    be between 6.2 million and 26.3 million jobs in the U.S., and
    that the loss of tax revenue could be between $109 billion and
    $475 billion, and that public pensions would lose up to $329
    million.
        So what would happen is, if the public pensions don't have
    this top asset class to go to--and as Mr. Moore said, at his
    fund last year they returned, I believe, 21 percent--
        Mr. Moore. No, no, that is wrong. Sorry.
        Mr. Maloney. That's okay. But my point is, it is a high
    performer and you would have to switch asset classes to a class
    that doesn't perform as well.
        Mr. Posey. Okay.
        Mr. Palmer, do you agree?
        Mr. Palmer. I do. And you asked the question of which
    businesses would get less capital and what would come out. The
    businesses that are asset-light--and a lot of businesses in the
    new economy are asset-light--would not be able to get loans,
    they would not be able to get access to capital, and so you
    would really have a shrinkage in the access to capital.
        Would capital be available? Yes, potentially, but it might
    be more expensive, and in many cases, it might not be available
    at all.
        Mr. Posey. Okay. The critics of private equity (PE) funds
    promote the perception that PE firms makes lots of money, even
    when one of its acquisitions goes bankrupt. Can you clarify the
    impacts of a typical case of such bankruptcy for a PE firm? Mr.
    Maloney, and then Mr. Palmer?
        Mr. Maloney. As we have discussed, bankruptcies in private
    equity are very rare, and nobody succeeds in a bankruptcy. We
    try to grow businesses and increase jobs.
        Mr. Posey. Thank you.
        Mr. Palmer?
        Mr. Palmer. With bankruptcies, you lose money. It is just
    that simple. There is no good way. You might be able to save a
    business in buying a business out of bankruptcy and try to
    reinvigorate it. That is possible. But in bankruptcies, there
    is no winning strategy.
        Mr. Posey. My time has expired. Thank you, Madam
    Chairwoman.
        Chairwoman Waters. The gentleman from Illinois, Mr. Foster,
    is recognized for 5 minutes.
        Mr. Foster. Thank you, Madam Chairwoman, and thank you to
    our witnesses.
        As a scientist, and a businessman, I find myself a little
    bit frustrated. We seem to be having this argument by anecdote
    rather than statistics.
        And the difficulty is--I guess I put myself to sleep last
    night reading one of the papers that was mentioned in the memo
    distributed by the committee from the University of Chicago
    called, ``The Economic Effects of Private Equity Buyouts.''
        And there were some interesting numbers in there. For
    example, the employment at targets of private equity buyouts
    rises 13 percent in firms that were previously under private
    ownership and 10 percent on what are called secondary buyouts,
    where it is sales from one PE to another. However, the
    employment falls by 13 percent in buyouts of publicly listed
    firms and falls by 16 percent in divisional buyouts.
        And so, trying to understand the multiple faces of private
    equity that we have been talking about is, at least to me, sort
    of frustrating. And there are many variables in that. We have
    what sector the firms are operating in, what the holding period
    is, the target holding period is, whether they are public
    versus private firms, whether they are generational transfers
    or ongoing businesses, and, of course, just the size and degree
    of leverage.
        Can any of you or all of you maybe come to an agreement on
    what the red flags are that signal a troublesome aspect of this
    versus things that tend to result in good results? What
    variables should we be looking at to try to separate the wheat
    from the chaff here?
        Ms. Appelbaum. I think that one thing that we have to say
    about the private equity business model that has not been said
    is that the debt is put on the company that is acquired. It has
    to repay it. But the decision to put the debt on it is made by
    the private equity firm.
        So the private equity firm goes out, decides how much
    leverage to use, and then it is the company that has to pay it
    back. And the private equity firm and the general partner have
    no responsibility for this whatsoever.
        This is the crux of the problem. In the small and medium-
    sized companies that we have been talking about, they have very
    little in the way of assets that can be mortgaged, and so the
    level of debt is quite reasonable. Those companies are not
    going to be affected by the Stop Wall Street Looting Act
    because the level of that is so low.
        In the case of those publicly traded companies that you
    mentioned where all the jobs are lost, these are big companies.
    They are publicly traded. They already have good operations in
    place. They already have good business strategy in place.
        Mr. Foster. Is that necessarily true? It is not clear to
    me. I don't know the history of Toys R Us, but a lot of big box
    companies, public and private, have had rough times in the last
    decades.
        Ms. Appelbaum. I did an analysis, looking at Albertson's,
    which is a private equity-owned supermarket, compared to
    Kroger's, which is not. They both faced the same kinds of
    problems: e-commerce, Amazon, Walmart, whatever you want to
    call it.
        Kroger, because it controls its own resources, is not
    paying out to any private equity firm, it does not have high
    leverage, it is not paying interest on debts, so it has been
    able to modernize. It can do anything that Amazon can do. Its
    Moody's rating has gone up, its contributions to its workers'
    pension fund to make up for the financial crisis has gone up.
        And Albertson's is on the ropes. It can't go back to the
    public markets. Nobody wants to buy it. It tried to do a
    reverse merger with Rite Aid, and those shareholders rejected
    it. It is on the ropes because it has not made the necessary
    investment.
        Mr. Foster. You mentioned that by and large, you thought
    the smaller buyouts were not problematic and that--
        Ms. Appelbaum. That is correct.
        Mr. Foster. --private equity was a plus--
        Ms. Appelbaum. That is correct.
        Mr. Foster. --in sort of limited size buyout.
        Is that something that the entire panel would agree with,
    at least that sector is probably an area where private equity
    is a net plus across the economy?
        Mr. Palmer. That is where a lot of my folks are, and they
    certainly see it that way. There is certainly the greatest
    opportunity for growth because you are small. You can't shrink
    it and cut costs because if you shrink small, it goes to
    nothing.
        So really, it is more growth-oriented in a buyout, but
    there is also much greater access to capital at the higher ends
    and much lower access to capital, both debt and equity, at the
    lower ends. In my written testimony, on page 5, I sort of have
    a visual of that. The small buyouts are good, but middle
    buyouts are also very good.
        Mr. Foster. I am trying to understand, if there is a
    consensus that small or, say, middle, however you define,
    ``middle,'' is also probably an area where private equity is a
    net positive and the existing regulation is perhaps adequate?
    Is that sort of the consensus here? And the problem, if it
    exists at all, is in the largest?
        If any of you could follow up with me on whether we can
    actually segregate off one segment for higher supervision, I
    would appreciate it.
        Chairwoman Waters. The gentleman from Missouri, Mr.
    Luetkemeyer, is recognized for 5 minutes.
        Mr. Luetkemeyer. Thank you, Madam Chairwoman, and I thank
    the panel for being here this morning.
        I was kind of curious, I think Mr. Maloney, you said
    something about 780 private equity investments last year. Is
    that what you said in your testimony a while ago?
        Mr. Maloney. 4,700.
        Mr. Luetkemeyer. 4,700, okay. I missed the ``4'' in front
    of it. Wow. Okay. Fantastic. And one of the charts up on the
    board hints that 35 businesses filed for bankruptcy since 2003.
    I guess that is major companies. But those seem to me to be an
    awfully small percentage of businesses filing bankruptcy versus
    businesses getting into business. Is that your take on that?
        Mr. Maloney. Yes. The bankruptcy rate in private equity and
    nonprivate equity is 6 percent. It is a low rate.
        Mr. Luetkemeyer. Very good.
        I was kind of curious, Mr. Moore, what is the breakdown on
    returns with your investments on private equity versus other
    stocks and bonds--other bonds and CDs and other types of
    investments? What is the difference in rate of return?
        Mr. Moore. I can't give you the exact numbers, but I will--
        Mr. Luetkemeyer. Just ballpark is fine.
        Mr. Moore. Okay. Ten-year average, private equity for us is
    about 13 percent; public equity is in the range of 10; real
    estate, 8; and then the fixed income is less--
        Mr. Luetkemeyer. Okay. Would it be a fair statement to say
    that the more return you get, the more risk there is with the
    investment that you are making?
        Mr. Moore. You could say that.
        Mr. Luetkemeyer. So to me, as somebody who has been in this
    financial services world for years, return, interest rate,
    dividends, whatever it is, is reflective of the risk you take.
    So, when you have private equity and you are getting much, much
    better return on that versus on less risky investments, you
    want a mix in your portfolio. So, it is important that you have
    a mix.
        But you have to understand that when you make that
    investment in equities, there is more risk there. As we have
    just seen, there is the risk--6 percent of businesses are going
    to go under.
        You indicate, Mr. Moore, you need more transparency in
    being able to, as a board member, be able to see how you want
    to invest in these equities. Can you give me some examples of
    things that you would like to see more transparency in, as an
    investor in equities?
        Mr. Moore. First of all, this bill talks about issues, at
    least from my perspective, that I am concerned about in just
    collecting information on how much it costs and what
    performance metrics are being used, and have that apply
    industry-wide and be available to everybody, so we can do
    comparisons.
        But going beyond that, which is not in this legislation, we
    would probably want to be more engaged in seeing what kind of
    companies are in the pipeline, getting more financial
    information from portfolio companies, so we could have a better
    assessment of the risks that the companies are taking.
        You mentioned risks. We want to try to control risk as much
    as possible. So, if we are noticing that there is a private
    equity company that wants us to give them an allocation, and
    they have been heavily engaged in these extractive financial
    engineering type of activities to generate returns, that might
    be something we would want to stay away from and look for less
    risky, more long-term beneficial investments.
        Mr. Luetkemeyer. It almost seems as if you have to have a
    crystal ball sometimes to see the trends in industries. For
    instance, if I was somebody 30 years ago and I was going to
    make an investment in somebody who builds rotary phones, lo and
    behold, I wouldn't have anything left today, would I?
        Mr. Moore. Not a dime.
        Mr. Luetkemeyer. So, you almost have to have a crystal ball
    to see what the trends will be, where technology will take you.
    Nobody who invested in a blacksmith shop 125 years ago is in
    business today either. So what could be a good investment
    today, tomorrow's technology or the fad or the general public's
    twist on things or preferences could change and suddenly what
    would seem in your situation to be a really solid investment to
    make could suddenly go south on you, couldn't it?
        Mr. Moore. Yes, but the better information and the more
    information you have, the better informed decisions--
        Mr. Luetkemeyer. Right.
        Mr. Moore. --you are going to be able to make, and over the
    long run, you are going to perform better.
        Mr. Luetkemeyer. Mr. Maloney and Mr. Palmer, I only have 15
    seconds left. What about transparency, do you guys have some
    ideas on that as well?
        Mr. Palmer. For low or middle market and middle market
    private equity funds, they get every bit of information that
    any LP asks for, and LPs can ask for anything and they will
    pretty much get it. So if they want it, they get it, and they
    do their diligence.
        Mr. Luetkemeyer. Mr. Maloney, very quickly.
        Mr. Maloney. I agree. And we value the partnership we have
    with Mr. Moore and his pension funds.
        Mr. Luetkemeyer. Thank you.
        Chairwoman Waters. The gentlewoman from New York, Ms.
    Velazquez, is recognized for 5 minutes.
        Ms. Velazquez. Thank you, Chairwoman Waters.
        Dr. Appelbaum, I am looking at an op-ed that you wrote in
    2015 in The Hill paper, entitled, ``Investors will benefit from
    greater transparency on performance.'' Can you summarize your
    position? And do you believe that limited partners should have
    more access to the fees and expenses and even disciplinary
    actions by the SEC of the general managers?
        Ms. Appelbaum. Yes, absolutely, for all the reasons that
    Mr. Moore has said. At the moment, all of the decisions in a
    private equity fund are made by the general partner. The
    limited partners, which are the pension funds, do not get to
    make those decisions.
        So, Mr. Moore has to figure it out before he makes the
    investment. He has no control once he has given them the money.
        Having transparency, understanding, for example, the
    monitoring fees that were taken out of Toys R Us, or taken out
    of many other companies, the limited partners generally have no
    knowledge of that. They have no idea of what the side contract
    is between the private equity firm and the company, and the
    limited partners in general do not have access to that
    information.
        And so they have no idea how much is being taken out, which
    of course will affect the price that the private equity fund
    gets when it resells the company back to the public markets or
    to another private equity fund.
        So, absolutely, they need that transparency in order to be
    able to do their own due diligence on behalf of their
    beneficiaries.
        It is very difficult for most limited partners to get
    information, and those that ask for it or say, ``I need to make
    public the contract that I have with you,'' they have been
    disciplined by the private equity firms.
        You would think, because this is the source of the money,
    that they would have control. Somebody has already said that.
    My view is, the limited partners need a union, because if they
    acted together, they could demand information. But at the
    moment, the private equity firms have the power.
        Ms. Velazquez. Thank you.
        Mr. Moore, would you care to comment?
        Mr. Moore. I agree with Ms. Appelbaum.
        I am a policymaker, so I don't have the depth of
    information and knowledge about the contracts. I set policy, I
    review processes and procedures, and I allocate resources to
    our staff to implement the policies that we establish, the
    asset allocations that we want to engage in.
        And as I stated earlier, information is critical.
        Ms. Velazquez. Right.
        Mr. Moore. And we lack everything that we need. We do a
    good job in our firm, our pension fund, because we allocate the
    resources and staff to do due diligence and travel around the
    world and pound on our private equity firms that we have money
    invested in. But before we make those investments, we still
    have to engage in significant resources in order to dig up
    information that should just be available, not only to us who
    are actively engaged in it and allocate resources, but smaller
    pension funds that may not have the same level of resources.
        Ms. Velazquez. Thank you.
        And the fact that we, as legislators, care about that, more
    transparency, access to information, to look at the strategy in
    terms of making financial decisions, that doesn't make me a
    socialist, does it?
        Mr. Moore. No.
        Ms. Velazquez. Okay. Good.
        Mr. Moore. It just means you are establishing the
    guidelines for capitalism that works for everybody.
        Ms. Velazquez. Wonderful. Thank you.
        Mr. Maloney, in March, New York City Comptroller Scott
    Stringer announced a $600 million expansion of the New York
    City retirement system in-house emerging managers program in
    private equity, which is intended to amplify opportunities for
    smaller managers, including minority and women-owned managers.
        Are you supportive of programs like the one that
    Comptroller Stringer announced? And what steps are your
    organization and your members taking to expand opportunity for
    smaller managers, particularly minority and women-owned
    managers?
        Mr. Moore. I had a meeting last month with all of our asset
    class managers--
        Ms. Velazquez. I'm sorry, I would like to hear from Mr.
    Maloney.
        Mr. Moore. Oh, okay.
        Ms. Velazquez. Mr. Maloney. Thank you.
        Mr. Maloney. Thank you, Congresswoman, for that question
    and for your leadership on the diversity issues.
        As I stated with Congressman Meeks, diversity makes us
    stronger. We are very supportive of the comptroller's plan. A
    lot of our firms take this very seriously.
        Ms. Velazquez. What does ``seriously'' mean?
        Mr. Maloney. We are actively engaged with organizations
    like SEO, we partner with Harlem Capital Partners in New York,
    and the JFK project is another good one. But we are committed
    to working with you going forward on this.
        Ms. Velazquez. Thank you.
        Chairwoman Waters. The gentleman from Michigan, Mr.
    Huizenga, is recognized for 5 minutes.
        Mr. Huizenga. Thank you, Madam Chairwoman.
        And I do need to correct myself from my opening statement,
    briefly. I misstated a number. The State of Michigan retirement
    system, which has a pension system for 515,000 members, has $71
    billion in total assets, of which $11 billion of that is
    directly invested in private equity.
        I have a number of things I want to go through quickly.
    But, Mr. Moore, I do have a quick question for you. CalPERS has
    invested $150 million in a PE buyout fund, correct? I think
    that is what you had told the ranking member?
        Mr. Moore. Yes.
        Mr. Huizenga. Okay. So, H.R. 3848, which is the House
    version of the Warren bill, would impose joint and several
    liability on PE funds, including their partners, their limited
    partners (LPs). How does your board feel about being on the
    hook with liability?
        Mr. Moore. Well, I can't speak for the board because I am
    just one member.
        Mr. Huizenga. Okay, then, are you comfortable with that?
        Mr. Moore. I am where our board is, which is we have a
    staff--
        Mr. Huizenga. Wait a minute, are you speaking for the board
    or not speaking for the board?
        Mr. Moore. No. What I am saying is, I can't speak for the
    board. I am just one member of the board.
        Mr. Huizenga. Yes.
        Mr. Moore. So as a member of the board, I am going to defer
    to my staff and my counsel to review this issue, to work with
    the--
        Mr. Huizenga. Wait a minute. So, you are supportive. Okay.
    I thought I heard you say you were supportive of the Warren
    bill.
        Mr. Moore. I didn't say that.
        Mr. Huizenga. Okay. My misunderstanding.
        Mr. Moore. I said the provisions that I would like to see
    implemented. I never said I support the Warren bill.
        Mr. Huizenga. Got it, okay. I want to move on here. The
    Popeye's versus Chick-fil-A debate, Taylor Swift not being real
    happy with her private equity situation, notwithstanding, we
    have heard a lot about PE and about private equity being
    raiders and parasites and how they have basically failed
    businesses on purpose and a number of those types of things.
        What I am really concerned about is, one, I think that
    those anecdotes that are out there really are not very
    insightful. But I do want to know why the private sector is
    turning to private equity versus IPOs. I mean, 20 years ago, we
    had 7,000 publicly traded companies. We are at about half of
    that right now.
        And, Mr. Maloney, Mr. Palmer, feel free to jump in here.
    Why do companies turn to private equity instead of raising
    capital through IPOs or other more traditional methods?
        Mr. Maloney. Congressman, that is a great question, and it
    is one that I think you see much more often of a lot of
    companies staying in the private markets longer. It allows them
    to grow and sometimes not--as I said in my original testimony,
    that they don't have to meet a quarterly earnings statement
    where they can, if they have a growth stream ahead of them, it
    is much easier to do that in the private markets than it is in
    the public markets.
        Mr. Huizenga. Mr. Palmer?
        Mr. Palmer. A lot of these businesses are just too small,
    and they are companies that are never going to go public.
    Certainly, it is too expensive and too problematic to be public
    in many cases. There are too many burdens.
        But in many of these cases, they are small businesses going
    to medium, and in many cases, they don't want to be publicly
    owned. They want to stay inside of a family, they want to stay
    closely held. And so, it is a longer-term patient form of
    capital where they have greater control over their businesses.
        Mr. Huizenga. In fact, I have a number of those in my own
    district--Challenge Manufacturing, JR Automation, Custom
    Profile, Hadley Products, Brillcast, just a couple of examples
    from west Michigan.
        And I might add, I have about 5,700 jobs in my district
    attached to this. Sixteen Members on the other side of the
    aisle have 2 to 3 times those numbers of jobs, yet we are
    seeing the other side vilify an entire industry which is
    providing tens of thousands of jobs in their districts. I am a
    little confused by that.
        But ultimately, it gets down to risk is a part of it. And
    Mr. Moore, I wrote this quote down from you. You want to
    control risk, yet it seems to me you want a full return on your
    money.
        Well, less risk typically means lower returns. And these
    companies, for various reasons, sometimes can be riskier
    investments. Is that not true, Mr. Palmer?
        Mr. Palmer. They can be riskier investments, and in many
    cases they require a whole lot more hands-on activities than
    institutional LPs, like large pension funds, can do. They just
    don't have the time to get in every business, and, frankly,
    they shouldn't be in every business.
        Mr. Huizenga. In my remaining 2 seconds, I am going to let
    you know that I am going to be writing some letters, because I
    would like to hear how instead of demonizing your industry,
    what we can do to increase capital markets and make them more
    attractive.
        Thank you.
        Chairwoman Waters. The gentleman from New Jersey, Mr.
    Gottheimer, is recognized for 5 minutes.
        Mr. Gottheimer. Thank you, Madam Chairwoman.
        If I can start, please, with Mr. Moore.
        You serve on the board of the L.A. County Employees
    Retirement Association. Does your agency invest in private
    equity funds?
        Mr. Moore. Yes.
        Mr. Gottheimer. Do you know how much? Your 2018 annual
    report talked about a percentage. Do you know what percentage
    of all your assets that is?
        Mr. Moore. It is pretty close to 10 percent.
        Mr. Gottheimer. About 10 percent. Thanks. And is that
    consistent today?
        Mr. Moore. That is what our allocation policy states, is
    that is the range we want to be in.
        Mr. Gottheimer. And why does your agency invest in these
    funds, sir?
        Mr. Moore. Because it is our best performing asset
    historically, and going forward, I think there was a question
    just now about the private markets.
        Mr. Gottheimer. Yes, sir.
        Mr. Moore. That is where a lot of activity and a lot of
    growth activity takes place. And we want to be part of the
    growth in our country and the world, so that is where you have
    to be at some level.
        Mr. Gottheimer. Would you please speak to the returns and
    other fees your agency receives from these investments? Like
    maybe the last 10 years, if you could, a number on that.
        Mr. Moore. We have done extensive analysis in our fund, and
    I can tell you that our private equity fees and expenses have
    run about 4.5 percent.
        Mr. Gottheimer. And overall return, do you know the last
    10-year returns?
        Mr. Moore. The returns, the 10-year returns have been about
    13.1 percent.
        Mr. Gottheimer. 13.1 percent. And I think the stock market
    during that time--do you know what the--
        Mr. Moore. I can't tell you that.
        Mr. Gottheimer. We did a little research on that. I believe
    it was 7 percent. So, 7 percent versus 13 percent. And I know
    if you look at some of the other States, like Massachusetts,
    over that period of time, at a 13.6 percent return; Ohio, 13
    percent; Minnesota, 11.7 percent.
        Can you speak to the impact that some of the laws in front
    of us might have on the assets your association has under
    management, sir?
        Mr. Moore. I am particularly focused on disclosure and more
    information on fees and expenses.
        Mr. Gottheimer. Fees and expenses.
        Mr. Moore. Because that is like low-hanging fruit. If you
    reduce your costs, you have more money in the corpus of your
    fund. You can grow your fund a little bit more. You can fund a
    few more pensions. And in the long run, that is what we are
    looking for, to be able to deliver the benefits that we
    promise.
        So, controlling costs is very critical to me, and those
    provisions in H.R. 3848 that deal with fees and returns get to
    that.
        Mr. Gottheimer. It is interesting, I represent the Fifth
    Congressional District in New Jersey, and pensions in my State
    support many of the hardest working members of our communities,
    our law enforcement officers and teachers and firefighters, who
    rely on their pensions to provide financial stability in their
    retirement.
        Unfortunately, pensions in New Jersey and across the
    country, as you know, are struggling from years of
    underfunding, and that is why these returns are so important,
    and lower performance from low performance in the public
    markets.
        The Wall Street Journal recently reported that New Jersey's
    teacher and public workers pension funds have an average of 43
    cents for every dollar in benefits promised; a retirement
    crisis is happening before our eyes.
        So you talk about these numbers, and the rates of return
    are incredibly important to make sure that we can shore these
    up and have the best rate of returns for our teachers and our
    firefighters and, of course, law enforcement.
        The New Jersey Division of Investment, a public pension
    fund, has nearly 800,000 members and $78 billion of assets
    under management, $8.7 billion of those invested in private
    equity. The pension's private equity portfolio produced an
    annualized return of more than 10 percent over the past decade
    after expenses. Compare this to the long-term Treasury bond
    yield of below 2.5 percent or the historic 7 percent return in
    the stock market.
        It is clear why we are hearing from you, and why we are
    hearing from institutional investors looking to invest in
    private equity as part of their asset allocation strategy. And
    I think our job in the committee is to, of course, make sure
    that we are punishing bad actors while not interfering with
    those that produce good returns.
        I don't know if you want to comment on that?
        Mr. Moore. No, that is exactly the way I see this bill. The
    bill doesn't attack the private equity industry as it is being
    portrayed. The objective that I see, and I can't vouch for the
    validity and the outcome of every single provision, but the
    trajectory is to try to rein in and put some guidelines around
    how we operate to keep the bad actors under control.
        Mr. Gottheimer. Because you don't want to walk away from
    this investment tool?
        Mr. Moore. No. We want the good actors to continue to
    receive our money and continue to grow our portfolios. And we
    want to do just like Walmart. Every year, we want to negotiate
    the costs, so we can get them down.
        Mr. Gottheimer. Thank you. Thank you, sir.
        I yield back. Thank you, Madam Chairwoman.
        Chairwoman Waters. Thank you.
        This side of the aisle has not vilified an entire industry,
    as was indicated by the previous speaker.
        The gentleman from Ohio, Mr. Stivers, is recognized for 5
    minutes.
        Mr. Stivers. Thank you, Madam Chairwoman. I appreciate you
    holding this hearing to illuminate a lot of issues in and
    around private equity.
        My first question is for Mr. Moore. Following up on the
    gentleman from New Jersey, I understand you are concerned about
    fees. Can you tell me, first of all, what your best performing
    class of investment was at your pension over the last 10 years?
        Mr. Moore. I have said this 4 or 5 times. It has been
    private equity.
        Mr. Stivers. Oh, okay, thank you. I appreciate you
    restating that.
        So does your pension fund calculate returns net of fees?
        Mr. Moore. Yes.
        Mr. Stivers. Always the best performing class, net of fees?
        Mr. Moore. Yes, that is what the performance measures--
        Mr. Stivers. Could you repeat it again, what is the best
    performing class net of fees?
        Mr. Moore. Yes, it is net of fees. That is the--
        Mr. Stivers. What is the best performing class?
        Mr. Moore. Private equity.
        Mr. Stivers. Thank you.
        Mr. Moore. Private equity is the best performing class, net
    of fees.
        Mr. Stivers. Thank you. So, that is really my first point.
        I have a million pensioners in Ohio who are part of the
    public retirement system, either OPERS or the school employees
    system or the police and fire system. That is teachers,
    policemen, firemen, public servants. They are getting, in Ohio,
    an annualized return over the last 10 years of about 13.3
    percent from private equity, compared to about 7 percent from
    the stock market over the same 10-year period. Just to put it
    in perspective, that is almost twice the return from the stock
    market.
        I understand you are concerned. That is why I asked about
    the return net of fees, that is really the point here, is even
    after the fees, the return is much, much greater.
        My next question is for Mr. Palmer. In your testimony, you
    talked about how small businesses are seen as too risky for a
    lot of financial institutions now. Have the post-crisis capital
    and liquidity rules made it more or less difficult for middle
    market companies, Main Street companies, to obtain the funding
    they need through banks?
        Mr. Palmer. In many cases, yes. The banks--
        Mr. Stivers. More difficult or less difficult to get?
        Mr. Palmer. More difficult, yes.
        Mr. Stivers. More difficult to get financing. So, who
    typically fills that void today for middle market companies?
        Mr. Palmer. Private equity does. Private equity comes in,
    and then sometimes enables the banks, but private equity is
    filling the gap.
        Mr. Stivers. I would like to ask the whole panel if they
    have heard of any of these companies in my district. CCPI,
    Blanchester? Probably not. Plaskolite in Columbus? Probably
    not. You might have heard of this one, The Oneida Group in
    Lancaster, Ohio. Nope. And Rolling Hills Generating in
    Columbus, Ohio.
        These are mostly middle market companies. Oneida is the
    biggest one. It used to be called Anchor Hocking. Anybody heard
    of Anchor Hocking Glass? Still no? Okay.
        They compete against China to make glassware all around
    this country. It is a tough market to compete in, and if it
    wasn't for private equity, thousands of employees at Anchor
    Hocking Glass would be out of a job, unemployed. They come in,
    and they keep the company going. Thousands of employees every
    day report to work, a lot of them union employees. And I am
    glad private equity was there to do that.
        One last question, this one for Mr. Maloney. Do you think
    it is to the benefit of a private equity firm to drive one of
    its portfolio companies out of business?
        Mr. Maloney. No. That is never the goal, and that is not a
    successful form of business.
        Mr. Stivers. And we did talk about, in the past, there have
    been a few business models, very bad examples--and by the way,
    there is good and bad in everything--of people who essentially
    raid and split up companies. Everybody thinks of the corporate
    raiders of the 1980s. That was a long, long time ago.
        Is that a frequent business model today, Mr. Maloney?
        Mr. Maloney. No, sir, it is not.
        Mr. Stivers. I have not seen that to be the case. And the
    small and medium-sized companies in my district have grown as a
    result of private equity.
        I will tell you a story about a company called HFI, that
    the owner was ready to do something else, but he had a growth
    opportunity and he wanted to continue to grow his company. He
    brought in private equity. They now employ 200 more people in
    Canal Winchester, Ohio, than they did before. The company is
    thriving and doing well. It is an example of private equity at
    its best.
        I know there are people who could point to bad examples,
    but there are a ton of great examples. And 26 million Americans
    are employed as a result of private equity investments, and I
    think we need to basically acknowledge that.
        I am the co-Chair of the Middle Market Caucus, these middle
    market companies that dot this country and are in every
    congressional district in America, and private equity helps
    them. So I want to say, while there may be some more things
    that we can do, it is the best performing class, net of fees,
    and it is helping to grow jobs.
        I yield back.
        Chairwoman Waters. The gentlewoman from Iowa, Mrs. Axne, is
    recognized for 5 minutes.
        Mrs. Axne. Thank you, Madam Chairwoman, and thank you to
    the witnesses for being here. I appreciate it.
        We have spent a lot of time in this committee talking about
    affordable housing and the crisis that is hurting so many of
    our constituents across the country.
        One possible solution to the crunch in my district is
    manufactured housing, which can be more than 30 percent cheaper
    than traditional housing. Nationwide, almost 3 million
    manufactured homes are anchored in land-leased communities,
    which means that residents own the homes, but lease the land
    underneath them, and many of these communities are being
    purchased by big outside investors, and increasingly, private
    equity firms.
        So I would like to talk about how tenants are affected by
    increased private equity investment in land-leased communities.
        Dr. Appelbaum, I would like to start with you. Why are
    these attractive investments for private equity firms?
        Ms. Appelbaum. Private equity is always looking for
    someplace where it can jack up prices, usually to pay off debt
    that it has put in place, not necessarily if these are smaller
    loans. But they are looking for a situation where people don't
    have a choice.
        It is the same story as it was with the emergency room
    doctors. You have already bought the manufactured house. You
    have already put it on this spot. You are a low-income person
    or you would not be living in this situation, generally
    speaking. The rent has been very affordable. This has been a
    good opportunity for people who are low income to have a decent
    standard of living.
        And then somebody comes along, a company, often private
    equity, not only private equity, buys up the company that
    controls the land, and then jacks up the rent. Why they do it,
    besides the fact that they make more money when they jack up
    the rent--there may be many different reasons for it. It may be
    that the actual physical real estate is valuable in the sense
    that if it had other kinds of businesses on it, for example,
    there would be a huge return.
        We have seen this, for example, with Hahnemann Hospital in
    Philadelphia. Private equity buys the hospital. It was already
    failing. It did nothing to turn it around. But the minute it
    bought it, it separated the real estate, because it realized
    that real estate, which was previously in a poor neighborhood
    but is now a gentrifying area, could be sold for other uses at
    much higher rates.
        So, there are many motivations for these companies coming
    in and doing it. The jacking up of prices is usually to evict
    the tenants, to make them move someplace else, and do something
    else with the land.
        Mrs. Axne. Thank you for that.
        So essentially, for these investors, it is a recession-
    proof revenue. They have a captive investment, and they are
    going to capitalize on it at the expense of hardworking people.
        One trend we have seen in the market is when these
    communities are sold, rents can skyrocket. I saw how this
    happened firsthand to my constituents at Midwest Country
    Estates in Waukee. It is one of five manufactured housing
    communities that Havenpark Capital recently bought, and they
    are raising rents between 20 and 70 percent.
        I want to reiterate that. Many of these people are on fixed
    incomes, and they are now being asked to pay 70 percent more in
    rent, on a fixed income.
        If they can't afford it, they have very few options, as you
    implied. They can try to find a buyer, they can abandon all the
    equity that they have put into their home, or they can somehow
    come up with thousands of dollars, miraculously, that they
    couldn't find before.
        Rent increases like this not only hurt the tenants by
    raising costs, but they also decrease the value of the homes
    that they live in.
        Does this practice surprise you at all?
        Ms. Appelbaum. I just want to be clear, we do have many
    companies that are not behaving like this. But this is
    certainly one part of the business model, is to see about not
    how to make a business operate better, but how to maximize the
    returns that the private equity firm can get out of it.
        So here you have a situation that you have described where
    the private equity firm owners are interested in their returns.
    They are not interested in whether this property can continue
    as a manufactured home property.
        Mrs. Axne. I appreciate that.
        We all know that the homes in mobile home parks are truly
    not mobile and that the residents are effectively a captive
    audience.
        What I would like to reiterate here is that manufactured
    homes can be a solution for affordable housing, a great
    solution, but only if we can address the problem of outside
    investors buying up MHCs and raising rents to extract as much
    profit as they can from the people who live there. So, we
    absolutely need to address that. We want to make sure that
    every person in this country has access to a nice roof over
    their head, and that their children can grow up in a safe
    environment.
        Thank you so much for your testimony.
        And I yield back.
        Chairwoman Waters. The gentleman from Kentucky, Mr. Barr,
    is recognized for 5 minutes.
        Mr. Barr. Thank you, Madam Chairwoman.
        Many of my Democrat colleagues today have highlighted
    instances where private equity-backed companies have
    restructured the business model or cut jobs or filed for
    bankruptcy. And while it is true that successful buyouts may
    include cost-cutting, there are plenty of success stories that
    demonstrate how small businesses prosper through private
    investment and benefit from strategic insight that private
    funds can offer.
        Mr. Maloney, I was impressed with your testimony that
    private equity invested $685 billion in more than 4,700
    businesses across the United States in 2018, and that 94
    percent of PE investments are successful.
        One example of this success is Big Ass Fans, headquartered
    in my district in Lexington, Kentucky. As the colorful name
    suggests, this company makes, among other things, very large
    fans for commercial and residential facilities.
        This private equity-backed business has grown at an
    astounding annual rate of 30 percent. Since their private
    equity investment, Big Ass Fans has added nearly 200 jobs,
    developed and introduced new products, and increased their
    distribution channels. They have international offices in
    Australia, Canada, Malaysia, and Singapore, sell products in
    more than 170 countries, and employ over 700 people, 550 of
    whom work in my district in Kentucky.
        Their CEO, Lennie Rhoades, has told me that the stability
    provided by their private equity backers allows them to
    confidently make investments in their workforce, facilities,
    and technology because they have a partner with a shared goal
    of success. Big Ass Fans is innovating and pioneering the
    industry happily in the heart of central Kentucky and thriving
    no longer just as a fast-growing small company, but as the
    trusted producer on a global scale.
        This is a shining example right in my backyard of the
    direct impact private investment can have on job creation,
    technological innovation, and community development.
        Now, everyone here is sympathetic to Ms. De La Rosa's story
    and what happened to her. Everyone here is sympathetic to the
    other Toys R Us employees. And bankruptcies are unfortunate.
    And PE-backed companies are susceptible to market conditions
    just like other companies.
        But, Mr. Maloney, the question is, what was a larger impact
    on the Toys R Us bankruptcy, was it the private equity firms,
    or was it the competitive pressures of Amazon?
        Mr. Maloney. Congressman, thank you for that question. And
    while I don't know the particulars, what I can tell you is that
    at the time, you saw much different market forces. People were
    buying a lot more online and, as you know, there were other toy
    manufacturers and toy stores that went out of business. Some of
    them were backed by private equity, and some of them weren't
    backed by private equity.
        Mr. Barr. Let me ask you the question this way. Did private
    equity forestall bankruptcy of Toys R Us or did it cause it?
        Mr. Maloney. During the time of private equity's ownership
    of Toys R Us, they actually expanded the number of stores. It
    is just unfortunate that it ended up this way, and that is
    largely because of market forces, as you say.
        Mr. Barr. Again, kind of a follow-up on Mr. Stivers'
    question, do private equity firms generally make more money
    investing in companies that go bankrupt or in companies that
    are successful?
        Mr. Maloney. We make more money for our investors when we
    are successful and we can exit.
        Mr. Barr. That makes a lot of sense, because we see that at
    Big Ass Fans in Lexington, Kentucky.
        And I want to add that the private equity backers of Big
    Ass Fans is a firm that touts, as one of its managers, former
    Obama Treasury Secretary Jack Lew. And I am just glad to see
    Democrats so actively involved in the provision of equity
    capital, like Mr. Lew, that has created a very positive
    difference in Lexington, Kentucky. I'm glad to see that this is
    a bipartisan issue.
        Quickly, on leveraged lending, this hearing is obviously
    about private funds, and private credit deserves attention as
    well. Some of my Democrat colleagues have suggested that
    leveraged lending is systemically risky. I have noted this
    before. It is important to make the distinction between credit
    risk, which is simply the cost of doing business in the credit
    economy, and systemic risk.
        In September, before this committee, SEC Chairman Clayton
    testified that he does not believe that leveraged lending poses
    a systemic threat. Mr. Maloney, do you agree with the SEC
    Chairman that leveraged lending does not pose a systemic risk
    to our economy?
        Mr. Maloney. Yes, Congressman, we agree with the regulators
    on that approach.
        Mr. Barr. And final question, Mr. Palmer, can you elaborate
    on the stability that private funds can provide to the economy,
    especially in periods of distress?
        Mr. Palmer. Sure. I will give you a real-world example.
    When the financial crisis happened, banks had to pull their
    loans on small businesses. Private equity funds stayed in them
    and kept those businesses alive. If you were backed by private
    equity, you were more likely to survive that downturn than if
    you just had a normal bank loan.
        Mr. Barr. Thanks. I yield back.
        Chairwoman Waters. The gentleman from California, Mr.
    Sherman, is recognized for 5 minutes.
        Mr. Sherman. I am not hostile to private equity. We have
    seen private equity attacked for doing things that are done
    elsewhere in our economy.
        I think the gentlelady from Iowa is right, it is
    unconscionable to see these massive rent increases at mobile
    home parks. But I have seen that done by private owners, where
    you just have one owner. I have seen it done by traditional
    publicly owned corporations.
        We see private equity companies acting like capitalists,
    raising rents when they can, making money, not caring, and
    responsible to investors who are demanding an extra tenth of a
    percent rate of return, otherwise the money will shift
    elsewhere. So if they do care too much, they don't get any
    equity investments.
        We have seen a lot of stores close. We have seen stores
    close for a lot of reasons. I am not sure it is the private
    equity model.
        But if private equity is no different from or should be
    treated similarly as other major economic institutions, this
    raises the issue of whether we should get disclosures from
    private equity consistent to what we get from other ownership
    models. When we passed the Dodd-Frank Act, we didn't demand
    that every public company give us a complete report on all
    their societal impacts, but we did require reports on conflict
    minerals, mine safety, and resource extraction, three areas
    that this committee decided were so important that corporate
    America should give us a report on it.
        A report released by the Trump Administration critiqued
    these requirements, saying if the intent is to use the law to
    influence business conduct, then this effort will be undermined
    by imposing such requirements only on public companies and not
    on private companies.
        Dr. Appelbaum, should we require large companies owned
    through private equity to make the same kind of disclosures
    that we require of publicly held companies?
        Ms. Appelbaum. I think we should require them to make the
    same kinds of disclosures, and I think that they should be
    subject to the same kinds of regulation that other financial
    firms are subject to.
        We do not have this kind of risky behavior from mutual
    funds, for example, because they are subject to other kinds of
    regulation.
        The problem with leverage is not the use of leverage. It is
    the excessive use of leverage.
        Mr. Sherman. Yes, I am not even talking about leverage. You
    could make a completely non-leveraged purchase of a company
    that does terrible mine safety and has resource extraction
    agreements with Third World countries that are rife with
    corruption, and there could be no leverage involved.
        The focus here is on these disclosures. And I will say as a
    shareholder, because all of us are in the pension plans, and I
    see Mr. Moore here representing so many of my constituents in
    the L.A. County plan, they know, when you invest in a public
    company, their resource extraction rules. But when you invest
    in private equity, the ultimate owners, your pensioners, don't
    know, and they should.
        I look forward to working with people here on legislation
    to require companies big enough to be public companies,
    companies with $50 million that happen to be private equity or
    privately owned, to make these disclosures that the Trump
    Administration says are unfair to require only of public
    companies.
        Mr. Moore, we have the private equity companies not making
    some of the same disclosures to investors--that means you--that
    some would like. Would it make sense to form a union or
    association of pension plans and others to demand that the
    private equity firms provide you with information, particularly
    about fee and cost transparency?
        Mr. Moore. We do have the International Limited Partners
    Association that has been very vocal directly to the SEC and in
    support of this legislation on that very issue of disclosures.
    And the best disinfectant is always sunlight.
        Mr. Sherman. I would hope that in addition to lobbying us,
    that association would lobby you and say, don't invest in a
    public equity firm that doesn't give you the disclosures.
        I yield back.
        Chairwoman Waters. The gentleman from Colorado, Mr. Tipton,
    is recognized for 5 minutes.
        Mr. Tipton. Thank you, Madam Chairwoman.
        I appreciate the panel taking the time to be here today.
        Mr. Palmer, I wanted to go back to a comment that you had
    just made a little bit earlier in regards to PE being riskier
    investments. And ultimately, I would like to know, is the goal
    to be able to lose money or is it to be able to make money?
        Mr. Palmer. The goal is to make money.
        Mr. Tipton. The goal is to make money. So, you don't want
    to be able to force anybody into bankruptcy?
        Mr. Palmer. No.
        Mr. Tipton. The goal is to be able to provide an actual
    return, to be able to get the businesses going, and to be able
    to create some real job security for those businesses?
        Mr. Palmer. Yes.
        Mr. Tipton. What is the best job security, really?
        Mr. Palmer. The best job security is a good business, and
    for an employee to have options. If you have a strong economy,
    you can have a business that you are staying in forever or you
    can go some place else because you have other choices. Right
    now, we have an incredibly low unemployment rate, and private
    equity funds have a real vested interest in keeping and
    maintaining and supporting their employees, because getting new
    ones is hard.
        Mr. Tipton. Right. And I think that is an important point.
    We are at record lows when it comes to unemployment in this
    country. We have more jobs available than there are people to
    fill them. But the role that private equity can play is
    something that is of concern, actually, to me. I come from
    rural America, and we haven't really talked an awful lot about
    the makeup of the private equity industry. We know about the
    big private equity firms. The Carlyle Group has been mentioned.
    What is the real composition of that market right now?
        Mr. Palmer. The composition of the market is--for the
    venture world, the early stage is overwhelmingly concentrated
    in northern California, in New York to Boston. Most of the
    smaller private equity is the inverse of that. Rural areas face
    unique challenges with that.
        I was actually just with Congressman Hill last week in
    Arkansas talking about that, and we have a type of private
    equity fund called a rural business investment company that is
    fairly new, that we are trying to work with to help grow that
    part of the market, because rural areas have far more
    challenging access to capital than pretty much anybody else.
        Mr. Tipton. For me, that is an important point. A lot of
    the focus in this committee is, we get into the metropolitan
    areas, and I do not dispute the importance of that. But for
    rural America, when we are talking on a per capita basis, the
    impact of being able to have those businesses, we actually have
    one that is in my district, a polymer company that produces a
    very unique product. They have to be able to be innovative in
    terms of design, in terms of being able to market, ship
    worldwide, and rely on some private equity dollars to be able
    to have that. But the access to those dollars in rural America
    out of the traditional financing sources is actually difficult.
    So that does play a real role in trying to be able to maintain
    those jobs in those economies in areas that are underserved.
        I would like to maybe follow up, and, Mr. Maloney, you may
    want to speak to this as well. Is it reasonable for companies
    like the polymer company that I just described, for them to be
    able to look to private equity to be able to meet their
    financial needs?
        Mr. Maloney. Absolutely, and that is what role we play,
    Congressman, in the marketplace, is providing growth capital
    for companies like that to expand and grow their companies.
        Mr. Tipton. I do want to follow up because some of the
    conversation today is obviously on H.R. 3848. When we are going
    to be adding new regulations coming into place, all of a
    sudden, we have personal liability that you may actually be on
    the line. Is there going to--everyone understands. We are
    capitalists. We live in a free market. There are going to be
    good players, and bad players. I think many of us would argue
    that the majority, overwhelmingly, are people who are trying to
    do the right thing, but if we add those new regulations, is
    there actually some potential that we could be drying up some
    of that access to capital dollars, particularly when we are
    talking about rural America?
        Mr. Palmer. Yes.
        Mr. Tipton. Mr. Maloney?
        Mr. Maloney. Absolutely, Congressman. And it is a real
    concern because there are a lot of businesses out there, as we
    talked about, in the mature space that need growth capital and
    need to be able to turn around. And if you impose liability,
    joint and several liability on the fund managers, no fund
    manager will ever take a risk and invest in any company. Again,
    they just won't do that, and that will leave a lot of
    businesses to fail much quicker than they will today.
        Mr. Tipton. Let's maybe explore, just kind of wrap up a bit
    here, in terms of some of the bankruptcies. Would you maybe
    determine these were caused by mismanagement within the
    company? Was it because private equity had stepped in? Or is it
    just market forces, primarily?
        Mr. Palmer. I think it is a case-by-case basis. Generally,
    it is market forces, but sometimes, it is international issues.
    It can be--a flood could happen. There are innumerable reasons
    why things can go wrong, but it happens rarely.
        Mr. Tipton. Thank you, sir. I yield back.
        Chairwoman Waters. The gentlewoman from California, Ms.
    Porter, is recognized for 5 minutes.
        Ms. Porter. Thank you, Madam Chairwoman.
        Dr. Appelbaum, you noted in your September 4, 2019, study
    on private equity and surprise medical billing that we the
    American people and those that we are elected to serve need to
    decide if the goal of healthcare is to increase profits or to
    improve patient outcomes. And hospital outsourcing of various
    departments has allowed physician practices to grow
    exponentially and operate those services independently. Once,
    there used to be solo practitioner doctors and very small
    partnerships. But today, private equity firms have become major
    players, as you said, buying out doctors' practices and rolling
    them up into large corporate physician staffing firms. We see
    it in a lot of different ways and creating a lot of different
    harms, including surprise billing. I have personally been a
    victim of surprise billing and I know how devastating it can be
    to receive one of those bills when you are trying to recover
    from an illness.
        Families today are also buried in medical debt. The new
    report from the Consumer Financial Protection Bureau shows that
    debt collectors pursuing medical debt is making a sharp
    increase. We know that about half of all bankruptcy reasons
    have a component of illness or injury in medical debt to them.
    One Stanford study found that the likelihood of receiving a
    surprise bill rose from 32 percent in 2010 to 43 percent in
    2016.
        Do you think the involvement of private equity in physician
    contracts has increased the incidence of surprise billing?
        Ms. Appelbaum. Yes, absolutely, because what we have seen
    is that there are two really large doctor staffing firms. It is
    not unusual for a hospital to say to a local doctor's practice,
    we would like you to staff our emergency room. Those doctors
    come in. They are in network, the same network that the
    hospital is in. You go to the emergency room, you are treated
    by a doctor, and it's taken care of by your insurance.
        In this situation, you have a very large company owned by
    private equity staffing the emergency room. Those doctors are
    not responsible for the billing, it is the overall company, and
    what they do is they take their doctors--either they take the
    doctors out of network, that is one company, and then they can
    charge you anything they want. If the doctor you see is out of
    network, you can be charged anything. You have done your due
    diligence. You are in a hospital that is in your network. You
    think the doctors will be covered, and then you get that big
    bill.
        The other company uses the threat of surprise billing when
    it negotiates for in-network returns. And in both cases, what
    you see is that the doctors employed by these private equity-
    owned companies get payments that are way, way higher than the
    doctors who previously did the job or doctors in other
    hospitals not owned by private equity. So, this is a major
    driver of healthcare costs. We have healthcare costs rising.
        Ms. Porter. Yes. And the same Stanford study found that the
    amount of surprise bills went up from $220 in 2010 to $628 in
    2018. So it is both the incidence and the harm.
        Mr. Palmer. Yes.
        Ms. Porter. I received an ad at my own home from a shadow
    group known as Physicians for Fair Coverage, and that group,
    backed by private equity firms, including KKR; Blackstone; and
    Welsh, Carson, Anderson & Stowe spent more than $4.1 million
    lobbying against solutions to the problem of surprise billing.
    What would be the primary goal of those firms in trying to stop
    Congress from addressing surprise billing?
        Ms. Appelbaum. Of course, it is to protect their profits.
        Ms. Porter. Thank you. I have one last question.
        Ms. Appelbaum. Yes.
        Ms. Porter. Does the involvement of private equity in
    healthcare improve patient outcomes in any apparent way?
        Ms. Porter. There is no evidence that it does, and there is
    some evidence that the quality of care goes down. The price
    evidence is very strong. The failure of quality is not quite as
    strong, but definitely, we don't see improvement for the extra
    money we are paying.
        Ms. Porter. Thank you so much.
        Mr. Maloney, if a private equity fund owns the equity, the
    debt, and credit default swaps, might that private equity firm
    in some cases have an incentive to force a company into
    bankruptcy?
        Mr. Maloney. I don't see a scenario, Congresswoman, where
    that would be beneficial to the--
        Ms. Porter. Do you understand the concept of a credit
    default swap?
        Mr. Maloney. Most of our transactions don't involve the
    same private equity firm owning the debt and the equity.
        Ms. Porter. How would we know, since credit default swaps
    are not--they could own the debt, and they would have to
    disclose that in the bankruptcy petition. But if they bet the
    other way, that the company would go under by taking on a
    credit default swap, that very problem would be hidden from the
    bankruptcy court and the public, the employees, and all of
    those who are harmed by the bankruptcy.
        Mr. Maloney. I think that is a very unusual case, but thank
    you.
        Chairwoman Waters. The gentleman from Texas, Mr. Williams,
    is recognized for 5 minutes.
        Mr. Williams. Thank you, Madam Chairwoman.
        I am a small business owner, and have been for 50 years. I
    am a Main Street guy, and I believe that the private equity
    industry is the epitome of capitalism. Large groups of
    investors pool their money together to look for businesses that
    can be restructured or infused with capital to expand product
    lines, hire more workers, and make a greater impact on
    communities in which they serve. Hundreds of thousands of jobs
    are being created throughout this country, and our schools'
    endowments are seeing huge returns, and innovative products are
    being brought to market because of this industry.
        For those people who fundamentally think capitalism is
    broken, private equity is an easy bogeyman to place blame on
    when something goes wrong. The bottom line is if you take a
    risk, you should get a reward.
        So before I go on to my next question, I would say, Mr.
    Maloney, you represent a sizable amount of people, and would
    you say that those folks are capitalists or socialists in your
    group? A quick answer.
        Mr. Maloney. Congressman, I would say that they are
    capitalists.
        Mr. Williams. Are you a capitalist or a socialist?
        Mr. Maloney. Congressman, I am a capitalist.
        Mr. Williams. Good. And, Mr. Palmer, would you agree, the
    same situation are the people you represent yourself?
        Mr. Palmer. Unapologetic capitalist.
        Mr. Williams. Okay. Well, you are a capitalist.
        Mr. Palmer. Heck, yes.
        Mr. Williams. Okay. I would just say this: Where I come
    from in Texas, private equity has invested almost $10 billion
    since 2013 and supports over 700,000 jobs. Not only have these
    investments pumped money into the Texas economy, they are
    necessary for the health of the pension system within the
    State. The Teachers' Retirement System in Texas, which has $154
    billion in assets under their management, has $21 billion
    invested in private equity. Over the past decade, the
    annualized returns have been over 10 percent. We have heard
    that from many of you today on these investments to help
    support teachers' retirement throughout the State.
        Before we consider any drastic changes to such a large
    contributor to our economy, we need to take an extremely close
    look at the consequences that this would have across a variety
    of industries.
        Mr. Palmer, I know you have talked about this already, but
    I think it bears repeating again. Can you talk about the
    effects that the Stop Wall Street Looting Act would have on
    various sectors of the economy should it become law?
        Mr. Palmer. It would be particularly damaging to the small
    private equity and medium-sized private equity economy. I
    showed a video, not a politicized video, but an actual video of
    the Senate sponsor of this bill explaining how private equity
    works and what this bill would do to a room of 500 small
    business investors, and the air left the room. It would really
    be profoundly damaging. And the intent of the bill on the
    Senate side--I am not saying the House side--the intent on the
    Senate side seems awfully hostile. We want this industry to
    work. We want to create jobs, but it would be bad.
        Mr. Williams. Okay. It seems like my friends on the other
    side of the aisle believe that there is a perverse incentive as
    a result of the structure of private equity investments. I
    would like to read a quote from the Houston Firefighters'
    Relief and Retirement Fund chairman, Brett Besselman. He said,
    ``We are very confident in the prospects for private equity
    investments in our long-term investment mix. Private equity
    opportunities far exceed those available in the stock market
    investing for the foreseeable future and are a welcome addition
    to our portfolio diversification effort.''
        If the incentives were off, I do not assume they would be
    receiving such high praise from the firefighters in Houston.
    So, Mr. Maloney, can you explain how private equity funds are
    set up in regard to the general and limited partnerships? And
    give your thoughts on if you think the incentives of the two
    parties are properly aligned?
        Mr. Maloney. Yes. Thank you for that question, Congressman.
    These investors are very aligned because the pension fund
    succeeds and gets a return when the private equity fund
    succeeds. And when that happens, everybody's a winner at the
    end of the day.
        And I would say that both of these contracts between the GP
    and the LP are carefully negotiated. The LPs get full
    transparency from the fund and can ask any questions from the
    GP that they want to. And we are very committed. They are very
    important partners for us, and we share as much information as
    possible with the LP.
        Thank you.
        Mr. Williams. Okay. Thank you. I yield back.
        Chairwoman Waters. Thank you.
        The gentleman from Illinois, Mr. Casten, is recognized for
    5 minutes.
        Mr. Casten. Thank you, Madam Chairwoman. And thank you all
    for being here today.
        I am here in no small part because of private equity. I am
    a freshman Member of Congress. I spent 16 years as the CEO of a
    couple of different companies. We put several hundred million
    dollars of private equity to work. We built projects inside
    industrials that recovered energy they were wasting, recovered
    it, and sold it back to them. They were really complicated
    projects. And I can say with complete confidence that there is
    no pocket of capital in the country that really maps to the
    investment size and the deal complexity of what we were doing.
        And I think I can expand that more broadly to the broader
    challenge we have to invest in our infrastructure, clean or
    otherwise, that there is just a deal size and a complexity that
    public markets aren't very well-structured to do so. Venture is
    too small. And that is a positive thing.
        I am also no longer in that company because of private
    equity, because the incentive structures within that private
    equity model, the 2 and 20 structure, the mid-teens return
    targets create this massive pressure for a steady stream of
    liquidity events. And so, having built a company and built a
    team who knew how to do something really important, I couldn't
    sustain it. Because once you have people with single digit
    money out there, you sell down. And when you sell down to
    cheaper money, you sell down to money that is less risk-
    tolerant. They don't build things.
        I mention all that because one of my favorite
    descriptions--we had a limited partner whom we were pitching a
    deal to once, and he said, the central challenge we have with
    building infrastructure in this country is we that have a
    glacier of investment opportunities in the infrastructure--an
    ocean of investment opportunities in the infrastructure space
    that deliver really attractive dividend returns that is
    beautiful to this ocean, this glacier of money we have
    upstream, and we all hate the rivers. And I put that to you as
    a challenge.
        Mr. Maloney, these are not ``gotcha'' questions, but I want
    to just run through a couple of quick yes/noes to get to the
    meat of this. One of my investors described his industry,
    private equity, as custodians of wealth. Would you acknowledge
    that there is a tension between the financial goals of the
    owners of wealth and the financial incentives, sometimes, of
    the custodians of wealth?
        Mr. Maloney. Congressman, it is a very good point, but I
    would say most of the time, the interests are aligned.
        Mr. Casten. Okay. Do you agree that the mid-teens return
    targeted by private equity creates a very real incentive to
    take on debt and lever up equity returns?
        Mr. Maloney. I think that they invest in these companies
    and try to deliver the mid-teen target for the pension funds
    and the retirees, as we have talked about. And I think you have
    to have a careful balance between how much debt you load on to
    grow the companies, and I think that they make those
    determinations on a case-by-case basis.
        Mr. Casten. Would you agree that having mid-teens return
    targets creates a very real incentive to sell to people with
    cheaper money if the opportunity presents itself?
        Mr. Maloney. I think it just depends on how you try to grow
    the company, and each case is separate.
        Mr. Casten. Would you acknowledge that sort of the
    traditional 2 and 20 structure or the variants thereof
    incentivize private equity managers to create liquidity events
    either through debt raises or through sales?
        Mr. Maloney. I think the liquidity event is meant for the
    investors, which are the pension funds and the college
    endowments. So at some point, you need to give your investors
    and the retirees the return, and I think that is what the
    motivation factor is.
        Mr. Casten. I guess I would put that back to what my LP
    said--we are a wealthy family office, and he once said to me,
    ``I know I am smart, I know I am really good. The last thing I
    want to do is to give my grandchildren an obligation to make an
    investment decision. They want yield. They don't necessarily
    want to have to reinvest.''
        Would you agree that the carried interest deduction
    turbocharges the incentive to create liquidity events to the
    extent you can structure those liquidity events as capital
    gains?
        Mr. Maloney. Look, I think the carried interest provision
    encourages the building of long-term capital and rewards and
    aligns the incentives between the LP and the GP.
        Mr. Casten. The reason I asked all those questions--and I
    get it, it is hard in a public forum like this to be totally
    forthcoming, but we have a massive need for investment and
    infrastructure in this country. And we can acknowledge that
    private equity is much better at that than a lot of other
    pockets of capital, but we have to acknowledge that it is still
    deeply flawed. And I want to work with you to try to figure out
    how to take away those flaws, but we have to first acknowledge,
    because I think every question that you said it depends, I
    disagree. I think those were all hard yeses, but we don't want
    to fix this by mandate.
        I yield back.
        Chairwoman Waters. The gentleman from Arkansas, Mr. Hill,
    is recognized for 5 minutes.
        Mr. Hill. I thank the Chair. Thank you for holding this
    hearing today. I appreciate that you are showcasing Senator
    Warren's economic proposals. Perhaps after Thanksgiving, we can
    have a showcasing of Senator Sanders' economic proposals. I
    appreciate the opportunity to hear their impact on our economy.
        A couple of weeks ago in Arkansas, I had the pleasure of
    hosting a venture ecosystem summit. And, Mr. Palmer, we
    appreciate you coming to Arkansas and graciously attending our
    event and talking about the current private funding market. It
    was very well-received.
        Arkansas has a vibrant entrepreneurial community, and I
    wanted to bring together the stakeholders from across the State
    for a roundtable discussion to collaborate on ways we can
    foster the growth of our investing community, our
    entrepreneurial community, and craft better Federal legislation
    that will push and help growing businesses onto that next stage
    of success.
        Mr. Palmer discussed some of the challenges associated with
    securing funding in States like Arkansas, and potential ways to
    overcome those funding challenges. And much like his testimony
    today, he strongly advocated for the need for private equity
    and its investment in growing businesses all over the country,
    particularly off the East and West Coast. I agree completely.
        As an entrepreneur myself, and now Chair of the House
    Entrepreneurship Caucus, I want to emphasize how important it
    is to have a wide universe of funding options for new
    entrepreneurs to draw on of companies of all sizes. This is
    entrepreneurship week across the country, so whether you are an
    angel investor or a venture capital fund or a private equity
    fund, all of these forms of investment are important cogs in
    our nation's economy and they impact all of our citizens. Just
    in my district in Arkansas, private equity has created over
    1,600 jobs and invested more than $2 billion over the last 5
    years.
        Pension funds, which touch a large portion of the American
    public, are clear examples of private equity beneficiaries. Mr.
    Maloney, public pension funds are large, sophisticated
    investors. Is that right?
        Mr. Maloney. Yes, sir, they are.
        Mr. Hill. They are not mandated to invest in private
    equity, are they?
        Mr. Maloney. No, they are not.
        Mr. Hill. And they have a lot of high-paid lawyers who work
    for them?
        Mr. Maloney. They do, indeed.
        Mr. Hill. And they do insist on measuring performance
    before they make an investment as a pension fund?
        Mr. Maloney. Yes, sir.
        Mr. Hill. Would you say that pension funds are pushovers
    when it comes to negotiating with private equity funds?
        Mr. Maloney. I think they drive a hard bargain.
        Mr. Hill. Okay. We have talked a lot about performance. So,
    you would say pension funds are generally--they have
    benefited--and I appreciate Mr. Moore's repeated answers to
    those questions. I have a chart I put up which is public
    pension fund investment in private equity since 2000. And you
    can see it has grown from around 3 percent of assets under
    management up to about 8 percent of assets in that 20-year
    period. That is a pretty significant increase.
        So, generally, I think the panel would agree that pension
    fund investors are pleased with their participation in private
    equity investing.
        And pension funds are so important to the working people of
    this country. Whether you are a retired city councilman in
    Boston or a retired law professor in California, you earn
    pensions, and we have such an underfunding problem, anything
    that incrementally is better than the average return is so
    helpful to preserving those pension assets and retirement
    assets. And I think that is why CalPERS has argued we need
    private equity, we need more of it, and we need it now.
        All that to say that limiting private equity is not the
    answer. The Majority has claimed today that private equity is
    bankrupting American companies and laying off thousands of
    American workers, and that limiting private equity somehow can
    stop that. In my view, it will have the opposite effect.
    Limiting private equity will hinder business growth, constrain
    local employment, and hurt Main Street communities.
        We need to work to lower the cost to investment burdens,
    whether it is in the public forum or in a venture capital
    environment or an SBIC fund or private equity, and encourage
    more investment. And that is what I think we have done by
    lowering the corporate tax rate and bringing capital back to
    the country. We haven't talked about that today, that by
    encouraging capital to come back in the United States, some of
    those profits now not double taxed will flow into the investing
    community and in through both angel investing and through firm
    investing.
        Mr. Palmer, you have looked at rural States like Arkansas.
    What do you think is the best thing that we can do to enhance
    investing in a rural State?
        Mr. Palmer. I think Arkansas is working on it right now,
    bringing together the universities, bringing together the
    financial leaders, the banks, the private equity funds that are
    there, and really trying to coordinate and get to critical mass
    with the entrepreneur ecosystem and incubators and others.
        Mr. Hill. Thank you. I yield back.
        Chairwoman Waters. The gentleman from Utah, Mr. McAdams, is
    recognized for 5 minutes.
        Mr. McAdams. Thank you, Chairwoman Waters, for holding this
    hearing. And thank you to the witnesses for your testimony
    today.
        In a previous life, I was the mayor of Salt Lake County,
    and one of the areas where I was proud of our work was the
    ability to bring private sector resources to help address
    public sector problems. I often teamed up with many of the
    financial institutions in Utah to pursue innovative
    investments. For example, Salt Lake County pioneered many of
    the first pay-for-success or social impact bond programs in the
    nation. We expanded access to early childhood education, we
    targeted homelessness, and we reduced recidivism in our jails.
    And we couldn't have done these projects without financial
    partners.
        But I know that the desire to invest in projects that have
    more than a monetary return is not just limited to government
    problems. You see a range of investments in clean energy
    technologies and social welfare issues, for example. Our State,
    local, and Federal Governments and nonprofits don't always have
    the resources to solve problems by themselves, and I know that
    firsthand. Establishing a framework to use capital markets for
    problems isn't just harnessing capitalism for the greater good.
    I also believe it is smart public policy.
        Obviously, not every PE investment works out, and I don't
    agree with every decision or practice that PE funds make, and
    often employees of those companies that fail are,
    unfortunately, left behind. We should clearly do better by
    employees who are laid off to ensure that they can reenter the
    workforce, ensure that they have job training that they need to
    succeed, and also ensure a profit safety net.
        With that said, I am interested in the trend for private
    equity firms to look at impact investing or investments that
    incorporate environmental, social, and governance goals into
    the fund's investment strategy.
        So I guess my first question, Mr. Maloney is, for many of
    your member companies, are you seeing a growing desire from
    either the fund managers or the limited partners when they make
    investments to incorporate social impact projects or ESG
    targets into the fund's investment strategies? And could you
    give maybe a couple of examples or maybe general trends?
        Mr. Maloney. Yes. Congressman, thank you for that question,
    and thank you for your leadership on that issue in Salt Lake.
    Many of our members are very interested in this. We are
    committed as an industry to responsible investing. AIC, our
    organization, adopted a set of comprehensive, responsible
    investment guidelines that cover environmental, health, safety,
    labor, governance, and social issues, and we did that 10 years
    ago. And we have several of our funds that have specific social
    impact funds. And everyone sort of looks through a lens of ESG,
    and we are looking forward to working with you and coming in
    and speaking with you about how we can expand on that.
        Mr. McAdams. Great. Thank you. And do funds report ESG
    metrics on their investments to the limited partners?
        Mr. Maloney. Yes. And many limited partners are actually
    asking for that information.
        Mr. McAdams. I would be interested in exploring, maybe
    offline we can do this or later down the road, any legal or
    regulatory impediments to social impact investments or ESG
    investments that firms may see.
        In my State of Utah, several pension plans invest in
    private equity funds. As others have discussed, this comes in
    the form of a limited partner with a contractual agreement with
    the general partner who manages the fund. For instance, the
    Utah Retirement System (URS) provides retirement benefits for
    more than 200,000 members in Utah, representing public sector
    employees. And I think at the end of 2018, URS' investment
    portfolio was at roughly 12 percent in private equity, and the
    rate of return for 2018 in that private equity investment was
    at 18 percent, clearly higher than other asset classes that URS
    has investments in. And I know the board and officers of the
    retirement system take seriously their obligations to provide
    retirement security to all of its members.
        So, Mr. Maloney, in your members' conversations with
    limited partners, especially with retirement plans, why are
    they choosing investments in private equity versus other asset
    classes that they could be investing in? And has the share of
    private equity as a percentage of retirement system asset class
    changed over time, and any particular reason you could
    contribute to that?
        Mr. Maloney. Yes, Congressman. Great question. As we saw
    from the chart that was on the screen just a couple of minutes
    ago, the asset allocation for private equity has almost tripled
    over the past 20 years, and I think the reason for that is it
    is an asset class that has proven to outperform other asset
    classes. And for a lot of pension funds that are underwater
    right now, they need that extra delivery and investment income.
        Mr. McAdams. Thank you. I thank the panel for their
    testimony, and I yield back.
        Chairwoman Waters. The gentleman from North Carolina, Mr.
    Budd, is recognized for 5 minutes.
        Mr. Budd. Thank you, Madam Chairwoman. And again, thank you
    to each of the witnesses for your time here today.
        My colleague, Mr. Barr, touched on this earlier, and I
    think it is important to reiterate the point that during
    periods of economic downturn or strain, traditional financial
    institutions may pull back from providing commercial credit. So
    when that happens, it is private credit funds who step in to
    provide counter-cyclical support to businesses when they need
    it most.
        This question is for you, Mr. Palmer, and also Mr. Maloney.
    Can you tell us how private funds support the commercial credit
    market during economic downturns when funding from traditional
    institutions may slow down?
        Mr. Palmer. They can be more patient, and patience matters,
    particularly for smaller businesses that don't have access to
    public markets or just selling shares. And so, they are in it
    for the long haul, and they sustain those businesses. North
    Carolina is uniquely positioned to have, for its size, having
    an extraordinary number of capital providers that do that type
    of capital, not just in Charlotte, but also in Raleigh, in
    Greensboro, and now in Wilmington.
        Mr. Budd. Thank you.
        Mr. Maloney?
        Mr. Maloney. Congressman, it is a great question, a great
    point. Private equity is there to help these companies grow.
    And over 70 percent of the companies in America are not
    investment grade, so a lot of times, the banks won't lend to
    them, and they have to go to these private credit funds that
    can facilitate their ability to grow.
        Mr. Budd. Thank you both.
        Ms. Appelbaum, I appreciate your time here today.
    Yesterday, Senator Elizabeth Warren and Senator Bernie Sanders
    released a letter criticizing third-party research about the
    private equity industry. Ms. Appelbaum, do you produce third-
    party research about the private equity industry?
        Ms. Appelbaum. I am not sure what you mean by third-party
    research. I go out and collect data, I interview private equity
    firms, and I report on what I have learned.
        Mr. Budd. And it is research, right? You are not directly--
        Ms. Appelbaum. It is definitely research.
        Mr. Budd. Okay. Right. So, it sounds like third-party
    research. And does your organization accept donations from
    outside groups or from special interests?
        Ms. Appelbaum. No.
        Mr. Budd. AARP, AFL-CIO, Open Society Foundations, none of
    those?
        Ms. Appelbaum. We accept grants from foundations, so we may
    have--
        Mr. Budd. Okay. And those foundations typically have an
    interest--
        Ms. Appelbaum. We don't accept money from corporations,
    from governments, from foreign interests, but we do accept
    money from individuals and from foundations.
        Mr. Budd. Foundations. Okay. Understood. Can you tell this
    committee how your research on private equity was funded?
        Ms. Appelbaum. Yes. This is a very good question, because I
    spent 4 years--Rose Batt and I spent 4 years on a $25,000 grant
    from the Russell Sage Foundation. It was a labor of love. When
    we got into it, we started out by saying, hey, we do a lot with
    labor. Teachers of labor, economics don't understand what is
    going on. We should write something for them. We had in mind a
    small pamphlet. And then as we got into it, we discovered it is
    a very complex subject and a very interesting subject, and so
    we spent 4 years learning about it, writing about it, and
    producing a book that was a finalist for a very prestigious
    award from the Academy of Management. I think if you read the
    book, you will find it is very balanced.
        Mr. Budd. I mean, $25,000 over 4 years, that is definitely
    a labor of love.
        Ms. Appelbaum. It was a labor of love.
        Mr. Budd. I just wonder if any of these--do you think that
    some of the other contributions helped sort of offset that?
        Ms. Appelbaum. We have unrestricted funds that we get, at
    that time from the Ford Foundation, and that is--of course,
    somebody paid my salary with that.
        Mr. Budd. I understand.
        Ms. Appelbaum. But the money for--it is very difficult, to
    tell you the truth, to get money for private equity research
    because usually we are interested in labor issues, and it is
    really hard. Eyes glaze over when you mention finance to people
    who care about labor issues.
        Mr. Budd. Thank you.
        Another question, Senator Warren actually linked to your
    research in her official press release announcing her anti-
    private equity legislation, referring to it as the
    legislation's economic analysis. So I assume you are in
    communication and in close coordination with Warren's team
    about this?
        Ms. Appelbaum. No. Actually, they wrote the legislation. It
    turned out they had read my book. They asked me for a meeting
    because they had other questions, and then when I got there,
    they said, you are probably in a room with the only four people
    who have read your book cover to cover. So I think the book may
    have inspired the legislation. Afterwards, they asked me if I
    would write a letter.
        I want to say the legislation is not anti-private equity.
    It is anti-excess leverage, and this is what the problem is. It
    is true that most of the private equity-owned companies do not
    end up in bankruptcy, but in the last recession, 27 percent of
    the bankruptcies were highly leveraged companies.
        Mr. Budd. Just in the remaining few seconds--thank you so
    much--was there any discussion or coordination with the Warren
    team during the report's development, timing of release, or
    preparation for this hearing?
        Ms. Appelbaum. For this hearing?
        Mr. Budd. Yes.
        Ms. Appelbaum. No.
        Mr. Budd. Thank you. I yield back.
        Chairwoman Waters. The gentlewoman from North Carolina, Ms.
    Adams, is recognized for 5 minutes.
        Ms. Adams. Thank you, Madam Chairwoman. Thank you for
    holding this hearing. And thank you to all of the individuals
    here to testify.
        Dr. Appelbaum, a recent report published by Ernst & Young
    celebrated private equity's role in the economy, noting that
    they employ 8.8 million workers, but another report found that
    private equity investments have led to a loss of 1.3 million
    jobs in the retail industry alone. So should we be concerned
    that so many workers are vulnerable to private equity
    strategies and efforts to maximize their profits, often at all
    costs, with little to no regard for the devastating impact that
    they can have on workers, consumers, and communities?
        Ms. Appelbaum. Publicly traded companies would never put 83
    or 87 or any large amount of debt like that on the company. It
    is not that private equity firms want to drive companies into
    bankruptcy, but if they use excessive amounts of debt, then, in
    fact, those companies are going to struggle. And in retail,
    where there are always changes going on, new fashions, new
    technology and so on, publicly traded retail companies have low
    levels of debt so they can make the changes they have to make.
    Private equity-owned companies do not, and that is why we see
    those particular failures.
        Ms. Adams. Okay. So let's talk about a specific example
    that I find truly heartless and despicable. In 2018, Apollo
    Global Management funded the purchase of the Hahnemann
    University Hospital, an historic hospital that had been serving
    Philadelphia's poorest residents since 1848. That is 171 years
    in the community, providing a critical public good. And despite
    making no capital investments, the management company closed
    the hospital less than a year-and-a-half later, claiming that
    it wasn't profitable.
        The closure of the hospital left over 2,500 union workers
    without jobs, and tens of thousands of Philadelphians without
    access to healthcare, yet the company still stands to profit by
    selling off the hospital's assets and prime real estate. So can
    you explain how the owner of the hospital can profit by
    shuttering the hospital and eliminating a huge source of the
    City's healthcare services?
        Ms. Appelbaum. Yes. This was truly outrageous behavior. The
    private equity firm came in, and bought the hospital with the
    idea that this is a possibility where you might want to improve
    things. The day that they bought the hospital, they separated
    the real estate and put it in a property company from the
    hospital, which was the operating company. And then--I studied
    healthcare as well. I won't go into details, but there are many
    things they could have done that would have helped turn that
    hospital around. They didn't lift a finger to do even one of
    those things, and so a hospital that was in trouble continued
    to be in trouble. Eighteen months later, they said, oh, well,
    the hospital is in trouble. We are going to declare bankruptcy,
    but the real estate was not included in the bankruptcy. The
    hospital has closed.
        Ms. Adams. Okay.
        Ms. Appelbaum. The private equity fund still owns the real
    estate.
        Ms. Adams. Right. So do communities or governments have any
    recourse when an institution like a hospital is shuttered by a
    private equity?
        Ms. Appelbaum. They have no recourse after the fact, no. My
    recommendations going forward, because this is the first time
    this has happened, and it is going to be a model for cities
    with failing--communities that have been poor that are
    gentrifying. When a not-for-profit hospital becomes for-profit,
    the city and the State have a lot to say about what happens.
    They need to put in the charter that if this property is not
    used for healthcare, then the property reverts back to the
    community.
        Ms. Adams. Thank you, ma'am.
        Mr. Maloney, as the head executive at the American
    Investment Council, you represent some of the largest private
    equity firms in the world. And given the profit maximizing
    model often employed by firms, do you believe that there are
    certain asset classes or investments that private equity firms
    should avoid, particularly industries related to public health
    that are incredibly sensitive in nature?
        Mr. Maloney. Congresswoman, thanks for your question, and
    thanks for your concern on these important health issues. I
    will say that we have a role to play and a positive role to
    play across the entire economy. Some of these hospitals and
    some of these medical facilities are private equity-backed.
    Some of them aren't private equity backed, but they are still
    private. And I think we can have a positive role to play in
    that, and we would love to work with you and others on the
    committee to continue that positive role.
        Ms. Adams. Mr. Moore, as you know, in California public
    pensions are required to publicly disclose the fees and
    expenses paid to private equity funds. So why do you think this
    disclosure is necessary or helpful to investors?
        Mr. Moore. So that we can do the proper analysis of costs
    that are being charged to us and compare them between different
    funds for different strategies and different potential
    outcomes, but that is only one part of the data that we need.
        Ms. Adams. Thank you very much.
        I yield back, Madam Chairwoman.
        Chairwoman Waters. Without objection, I will enter into the
    record The American Prospect article, ``Private Equity's Latest
    Scheme: Closing Urban Hospitals and Selling Off the Real
    Estate,'' relative to Hahnemann University Hospital in
    Philadelphia.
        Without objection, it is so ordered.
        The gentleman from Ohio, Mr. Gonzalez, is recognized for 5
    minutes.
        Mr. Gonzalez of Ohio. Thank you, Madam Chairwoman. And
    thank you to our panel here for your attention today.
        My fear as I look at the legislation and read some of the
    talking points is that we are looking at some of the worst
    examples that private equity has to offer, Toys R Us being one
    example. I don't think anybody involved in that deal would do
    it again if they had the opportunity. And we are taking a
    hatchet to an entire industry that supports millions of jobs as
    an important source of returns for many of our pensioners.
        Mr. Palmer, I will start with you. I am going to read a
    list of companies: Smile Direct Club; Slack; BeyondMe; Uber;
    and Lyft. They have all gone public this year. What else do
    they have in common?
        Mr. Palmer. They are all backed by private equity funds, I
    think.
        Mr. Gonzalez of Ohio. Every single one of them.
        Mr. Palmer. Yes.
        Mr. Gonzalez of Ohio. Yes. From start to finish, it turns
    out. And, Mr. Palmer, who ultimately is invested in these
    funds? Who are the returns ultimately going to?
        Mr. Palmer. They are ultimately going to university
    endowments, pension funds, family offices, and individuals.
        Mr. Gonzalez of Ohio. Teachers, firefighters--
        Mr. Palmer. Absolutely.
        Mr. Gonzalez of Ohio. --police officers. Wonderful.
        And, Mr. Moore, just because I think it is such a strong
    example, what is the highest returning asset class net of fees?
        Mr. Moore. Let's see, I think this is the seventh time I
    have just--
        Mr. Gonzalez of Ohio. Just again, I like to hear it.
        Mr. Maloney. It is private equity.
        Mr. Gonzalez of Ohio. Okay. Wonderful. So to destroy the
    industry in its entirety would rob many of our pensioners--
        Mr. Moore. That is not the intent.
        Mr. Gonzalez of Ohio. --of important returns. It's not the
    intent, but it would certainly happen.
        Mr. Palmer, in your opinion, to follow up on that, would
    the Warren bill that we are talking about result in more money
    in private equity funds or less, in your opinion?
        Mr. Palmer. Less, and particularly for smaller businesses
    which are otherwise seen as risky.
        Mr. Gonzalez of Ohio. I want to talk about one specifically
    which happens to be in my district, Hyland Software. Have you
    heard of Hyland?
        Mr. Palmer. I think I have.
        Mr. Gonzalez of Ohio. You have. They are an awesome
    business. They are owned by Thoma Bravo. Are you familiar with
    Thoma Bravo?
        Mr. Palmer. Yes.
        Mr. Gonzalez of Ohio. Okay. So Thoma Bravo has owned the
    business for close to a decade or maybe a little more than a
    decade. They provided liquidity to the founding family, and
    have supported the growth of thousands of jobs. Thoma Bravo has
    been a great partner to Hyland. When I talk to folks at both
    Thoma Bravo and at Hyland, it's just an incredible story for
    our region.
        Northeast Ohio, the community where I am from, is in need
    of more private capital, frankly. We need as much private
    capital into our community as we can get. We need more
    businesses like Hyland Software to grow in fast-growing,
    exciting industries and create jobs and opportunity for our
    community.
        And again, based on what you just said, I think the fear
    that I have, and I think everybody should have, when we look at
    this Warren bill, which I think would be a disaster for jobs,
    and certainly for my community, is the effect that it would
    have on the real economy. I know research papers are nice and
    wonderful, but these have real implications for people on the
    street. And I am happy to see that the bill is not supported
    widely by my colleagues on the other side of the aisle, and I
    hope it dies here and in this committee.
        And with that, I yield back.
        Chairwoman Waters. The gentleman from Illinois, Mr. Garcia,
    is recognized for 5 minutes.
        Mr. Garcia of Illinois. Thank you, Madam Chairwoman. And I
    would like to thank all of the panelists for joining us today.
        I would like to begin noting Ms. De La Rosa's testimony,
    where you mentioned that you worked at Toys R Us for 20 years.
    When Toys R Us was bought by KKR and Bain in 2005, it was
    profitable. In fact, it had over $11 billion in sales the year
    before it was acquired. KKR and Bain's first order of business
    after they bought Toys R Us was to load it up with $5 billion
    in debt. By 2007, that interest consumed 97 percent of the
    company's operating profit.
        Dr. Appelbaum, what kind of effect would loading up Toys R
    Us with debt have on making the company more valuable and
    allowing it to be sold at a profit to its new owners?
        Ms. Appelbaum. The purpose of loading it up with debt--and
    I agree with everyone who said that the goal is not to bankrupt
    the companies. But when you load a company up with debt and you
    sell it later, you make a massive profit just off of the sale
    because you have so little equity there.
        But, of course, debt is a two-edged sword. You can sell the
    company and the private equity fund makes tons of money, but
    the company itself, which is responsible for repaying the debt,
    is at much greater risk of bankruptcy. I am not saying they all
    go bankrupt, but the risk of bankruptcy definitely increases
    with this debt. And we saw in the Toys R Us case what happened.
    They tried to go public. They didn't want to own it for all
    these years.
        Mr. Garcia of Illinois. Got it.
        Ms. Appelbaum. The public didn't want to buy it because
    they could see the debt. Publicly traded companies don't have
    debt at that level.
        Mr. Garcia of Illinois. Okay. Ms. De La Rosa, you were at
    Toys R Us both before and after private equity's takeover. How
    did things start to change for you?
        Ms. De La Rosa. They immediately eliminated positions, like
    full-time positions, management positions, all around. We
    switched operating companies that we used to manage the stores
    that were--being in management, I was able to tell what the
    cost was, and switching companies, we were going to companies
    that were costing double what we did before. There were many
    different things that definitely cost; cut of hours, cut of
    positions.
        Mr. Garcia of Illinois. So things changed for everyone, for
    you as a manager, for workers, and many people lost their jobs.
    That is precisely why I am supporting the Stop Wall Street
    Looting Act, because it seeks to rein in the excesses that have
    occurred and continue to occur in our economy, not because
    anyone is running for President, whether it is Senator Sanders
    or Senator Warren.
        So to summarize, jobs were cut, hours were cut, and
    inventory was cut. For private equity, investing in Toys R Us
    really meant squeezing workers at every opportunity. Private
    equity squeezed so hard that the company collapsed, leaving
    workers and their families and whole communities to pick up the
    pieces. The retail apocalypse.
        Mass bankruptcies and closures of legacy retail stores is
    often blamed on online shopping and technology, but that
    doesn't tell the full story. As we have heard today, private
    equity is playing a big role too. It is estimated that nearly
    600,000 retail workers like Ms. De La Rosa have lost their jobs
    at the hands of private equity over the last decade.
        I want to talk about another sector that has experienced
    significant disruption in recent years as well. Although
    technology gets blamed, private equity is forcing layoffs in
    the media as well. In 2007, things hit close to home for me
    when the media company, the Tribune Company headquartered in
    Chicago, was saddled with over $13 billion in debt and driven
    into bankruptcy by what private equity investor Sam Zell called
    the deal from hell. More than 4,200 people lost jobs after that
    deal at newspapers and news stations around the country,
    including the Chicago Tribune, the Los Angeles Times, the
    Baltimore Sun, and more.
        Dr. Appelbaum, what kind of job losses usually follow when
    private equity takes over media companies?
        Ms. Appelbaum. As you pointed out, I don't have the exact
    numbers on this, but there have been huge job losses. There has
    been huge consolidation. There has been less local news for
    people to be able to get. One of the big things that we see is
    not only are the jobs lost, but local people have no
    information about their local governments. The old beats that
    covered the things that were important to people so they could
    make decisions about their lives are gone now.
        Mr. Vargas. [presiding]. The gentleman's time has expired.
        Mr. Garcia of Illinois. Thank you. And that is why we are
    advancing this legislation, to rein in the excesses.
        Thank you, Mr. Chairman. I yield back.
        Mr. Vargas. Thank you.
        The gentleman from Virginia, Mr. Riggleman, is recognized
    now for 5 minutes.
        Mr. Riggleman. Thank you, Mr. Chairman. And thank you to
    all the witnesses here today.
        I find this very interesting as we are talking about this
    because we just had the megabank witnesses not too long ago. In
    that hearing, we were talking about really wanting to stop
    buybacks, especially in curbing investment returns, and private
    sector growth. And one of the reasons I ran for Congress--I
    have been in for 11 months now, and so I have lots of
    experience--but one of the reasons that I ran for Congress,
    specifically, was government overreach into my own businesses,
    but also to my wife and daughters. And this is why I am so
    interested in what is going on here.
        When we talk about private equity, we are not just talking
    about large companies, pension funds, things of that nature. I
    know we have mentioned this multiple times, but I wouldn't be
    here without private equity. First, in my Department of Defense
    business, I had a $90,000 investment from private equity. We
    were able to turn that into a 60-time multiplier on gross
    revenues where we had 20 direct employees and 50 subs.
        Now, my wife owns a chemical manufacturing plant of
    distilled spirits, but the issue we had with private equity
    then is we couldn't get a bank loan. Even though this is what
    she wanted to do, and we put a lot of our own money into it, we
    couldn't get the banks--they did not know how to valuate
    anything when it came to cogs, when it came to overhead, when
    it came to labor salaries, based on the fact that we had to
    build specific types of inventory that they had no way to
    valuate as we went forward.
        So as we are going forward in this, what I always fear is
    that the government is a board member on my company, on another
    company. What I also fear is when you see legislation this bad,
    which I call the ``Stop Entrepreneurship Act,'' I am wondering
    if it is individuals writing this with good intentions not
    understanding the law of unintended consequences or the
    cascading effects of this type of damaging thing.
        Let me ask a question, and I will start with Mr. Palmer and
    go to Mr. Maloney. I am talking about asymmetric companies and
    I am talking about companies that maybe are nontraditional. For
    example, when you start a niche company, say, in the Department
    of Defense and the intelligence community space, you are
    talking about maybe companies that have a very specific niche
    thing that they do. They can't get a loan to start. They can't
    even get a loan for office space. Do you know where they have
    to go? Your own money or private equity.
        If you are starting a manufacturing plant, and you are one
    of the first three or four to do it the way that you are doing
    it, say, in a whole State that doesn't understand it, you
    cannot get a loan. You have to go to private equity.
        Now, you have to have, as you know, pro formas. You have to
    know what pro formas are and P&Ls. You have to know all of
    those things.
        But I think that is why the first thing I want to do before
    I get to the question is I want to--and this is a third-party
    report, Mr. Chairman. I want to submit the Economic Impact
    Analysis of the Stop Wall Street Looting Act and ask unanimous
    consent to insert it into the record, please.
        Mr. Vargas. Without objection, it is so ordered.
        Mr. Riggleman. My question is this: When we are talking
    about private equity, we are talking about the things that
    drive the American economy. My question is, what happens to
    asymmetric or nontraditional businesses, Mr. Palmer, if this
    bill passes or something like this passes?
        Mr. Palmer. They will have less access to capital. Private
    equity fills those gaps that don't fit neatly for a simple bank
    loan.
        Mr. Riggleman. Mr. Maloney, same question.
        Mr. Maloney. I agree with Brett, that it will dry up
    capital needed for these asymmetrical businesses.
        Mr. Riggleman. In this report that I am going to put in the
    record, it says this can result in the loss of 6.2 million to
    26.3 million jobs across the United States. That is a
    projection. Do you know what that should say? 6.2 million and
    31, because it is the 31 jobs in our manufacturing facility
    that we wouldn't have right now. It is the 70 total jobs and
    the multiple subcontracting companies that we have that would
    not be in business today.
        Now, I know it is not perfect. Trust me, I have dealt with
    private equity and venture firms. It is fantastic, and I would
    not recommend it to anyone. But anyhow, I think what is amazing
    is that they were able to get us started, and they were able to
    do great things. And right now, if you talk about
    Charlottesville, Virginia, in my district, without them,
    without that angel network, I wouldn't have 31 employees. My
    wife wouldn't have locations in Virginia and Pennsylvania, and
    I would never have been able to even get to that point without
    private equity.
        I think as we go forward--and I had all these statistics
    that I wanted to throw out there, but I have 54 seconds, and
    people know how fast I talk on data, so we don't want to do
    that right now. This bill is not a law yet, and I think for me,
    as we are going forward and some of the other questions I
    wanted to ask and some of the things that blow my mind, if we
    actually--right now, if we were to do this, to actually create
    a loss of somewhere between $671 million to $3.36 billion per
    year, about half of which would be lost to pension fund
    retirees, I shudder to think that we are not going to go over
    this with a fine-tooth comb to make sure that we are not
    stopping the American economy in its tracks because we don't
    understand the law of unintended consequences, we don't
    understand cascading effects, and we don't understand the fact
    that government has no idea sometimes what it is doing in
    private business.
        That is all I have right now. Thank you, and I yield back
    my time.
        Mr. Vargas. The gentleman yields back.
        The gentleman from Florida, Mr. Lawson, is recognized for 5
    minutes.
        Mr. Lawson. Thank you, Mr. Chairman. And I would like to
    thank all of you for being here today.
        There is one thing that is very interesting. We have some
    of you testifying that if this bill passed, what it is going to
    do to the private equity market, and then we have some who are
    speaking in terms of, we need more transparency.
        I would like to say that the Florida government pension
    system is one of the largest in the country. It plays an
    important role in the lives of over a million workers. Private
    equity is often the best-performing asset class for pensions.
    That is true in Florida.
        How can private equity funds such as the Florida government
    pension system become more of a model for other private funds?
    And I would ask Mr. Moore that.
        Mr. Moore. The question is, how could Florida--
        Mr. Lawson. How could the pension program become a model
    for other pension plans, especially because a lot of them are
    having trouble all over the country?
        Mr. Moore. Okay. I think I met your chief executive officer
    a few weeks ago, and he is a leader in the Council of
    Institutional Investors, and I think that is the forum that
    your pension fund can lead in bringing thousands of pension
    funds in the country together to kind of look at policy
    prescriptions that would make everyone more successful in
    implementing their programs and follow the success that you
    have had.
        Mr. Lawson. Thank you.
        We are speaking of more transparency, Dr. Appelbaum, and
    that is what will be in this bill. What is the difference
    between my colleagues here, Mr. Palmer and all of them who say
    that this is going to cause a lot of problems in terms of
    investments that we need in private pension funds?
        Ms. Appelbaum. I think transparency is a problem for the
    private equity firms that do not wish to reveal even to their
    limited partners exactly what they are doing. It also makes it
    very difficult for anybody to do objective research.
        Unlike publicly traded funds where you--companies where you
    have a lot of information available, we do not have information
    available from the private equity firms about the performance
    of their funds. There is no publicly available database. There
    is no place that you can go. We do not have publicly available
    information about any actions that have been taken by a
    regulator against these firms. So they have an interest in
    being able to keep private as much as they want to keep
    private. That is why they are called private equity. It is in
    order that they can protect that privacy, and it is not to the
    advantage either of the pension funds that do the investing or
    to the general public that wants to understand what is
    happening in the economy or to be able to really evaluate the
    returns across all of the private equity firms and all of the
    pension funds. We don't have that kind of information. We
    really just have snapshots, and I really don't know what
    measure is used.
        The internal rate of return is a very poor measure of
    private equity performance. It is not used by finance
    professors anywhere to talk about private equity. We use the
    public market equivalent, and I don't really--which is now
    published by PitchBook on a regular basis, but I don't hear
    that being used. And on that basis, at the median, the middle
    pension fund has not--the private equity fund has not beaten
    the stock market since the financial crisis. They were great
    before that, not so great since. And it is true there is a
    sliver, there is 10 percent of the pension funds invested in
    private equity funds that are getting really good returns. But
    half of the private equity funds are not even matching the
    market.
        So it's good that we have somebody here who represents a
    fund that does really well, but many, many pension funds are
    below water if you compare them with the public markets.
        Mr. Lawson. And I am very aware of it, because when I
    served in the Florida legislature, we looked at all of them
    across the country, and they really are. I don't have much
    time, but, Mr. Palmer, would you care to comment?
        Mr. Palmer. Sure. The limited partners, these
    institutionals, they negotiate with the private equity fund
    before you start investing and before they decide whether they
    want to be in that fund or not. They get to choose what
    information they get or what they don't, and so they can get
    that. So Mr. Moore can get that or other institutionals can get
    that.
        Particularly the smaller funds, they have to be very
    accommodating to pension funds in the information that they are
    looking for. These large institutions have vast amounts of data
    on private equity in returns that may not be public but they
    have because they have done thousands of investments.
        Mr. Vargas. The gentleman's time has expired.
        I now recognize myself for 5 minutes.
        We are not here to vilify an entire industry, but we are
    also not here to canonize them either. And listening to my
    colleagues on the other side of the aisle, it seems like
    private equity has already been beatified and they are only
    waiting for sainthood.
        No, it is not the case. There are a lot of bad actors. And
    I think there are a lot more bad actors in private equity than
    there are in the public companies. And what happened to Toys R
    Us is, I think, a good example of one of those very bad actors
    in private equity.
        As has been noted up on the board here repeatedly, Toys R
    Us paid $470 million in fees and interest to private equity and
    wanted to give nothing, absolutely nothing, zero, in severance
    to the workers. In fact, after the buyout, my understanding
    from the testimony of Ms. De La Rosa--and I read all of your
    testimony--is they got rid of holiday pay, staff Christmas
    parties, birthday gifts, and some of the full-time positions
    started to get eliminated, health benefits for part-time
    employees were taken away. And this was supposedly the new
    technology.
        It is always stated that human capital is the most
    important asset a company has. To act like this certainly shows
    that they didn't think that their human capital was the best
    asset that they had.
        And I have to say, I am familiar with that store. I hate to
    shop, I have to admit, but in 1998, my daughter was 2-years-
    old, and I went to buy a present for her for Christmas, and it
    turned out that there was a beautiful kitchenette there. And I
    bought it.
        I couldn't fit it into my Toyota Supra, so I had to get
    help to tie it onto the roof. And one of the employees at Toys
    R Us came and helped me tie it onto the roof. I drove it back,
    my daughter opened it up for Christmas, and I became a hero, of
    course.
        And that was Toys R Us. I enjoyed going to Toys R Us
    because of the service that I got there, and also the
    selection, so I didn't have to go anywhere else. But that
    seemed to change quite a bit, did it not, Ms. De La Rosa, once
    you had private equity come in?
        Ms. De La Rosa. Yes, it did, sir.
        Mr. Vargas. And how did it change in a negative way? Were
    people happy that they were there? Were the employees more
    satisfied with their work?
        Mr. Delaney. No. People were expected to do the jobs of
    three or four people. So productivity was increased, but, yes,
    for the half of the crew that was left with a job.
        Mr. Vargas. And I think that is one of the interesting
    things that a lot of the large companies, especially banks,
    have been saying recently, that it is not just about the bottom
    line. It is also about the community. It is about the workers.
    It is about the nation.
        And I think that is one of the things we have to look at,
    and that is one of the things that private equity,
    unfortunately, I don't think does look at. It looks at simply
    the bottom line. And so that is why I think we do have to take
    a look at the law and how to change it.
        Now, my colleagues on the other side of the aisle say,
    well, we can't change the law at all because it is all about
    letting the private sector do what it wants.
        Well, we change the law all the time. In fact, we have
    workers' compensation, we have workers' rights, you can't
    discriminate against people based on a whole bunch of issues.
    So absolutely we can have laws that demand more transparency
    disclosures, more fair workers' rights, we can do this. In
    fact, I think a well-running system demands this.
        So, again, I am not here to vilify an entire industry,
    because I do think that there are in fact opportunities and
    times when private equity is appropriate. I am not here to
    vilify. But at the same time, to say that somehow they are
    beatified, they are somehow saintly in what they do, that is
    absolutely not true. I think there are a whole lot of problem,
    and I think we have to deal with them.
        And again, I appreciate everyone who is here.
        I would add, though, at the end, that one of the things
    that I think has to happen is that we have to take a look at
    what really is happening with the sense of who owns so much in
    the country. We talk about private equity and why do we have so
    few public companies and so many private. Because the money is
    going to the very few at the top. That is why.
        You talked about pension funds, yes, but you didn't talk
    about the billionaires. And now we have people who are not only
    billionaires, but hundred billionaires, a person who has a
    hundred billion dollars. Yes, of course, they can afford then
    to put it in private equity, and they are paying less and less
    in taxes, and that is not right.
        So that being said, I will yield back the rest of my time.
    And now the gentlewoman from Michigan, Ms. Tlaib, is recognized
    for 5 minutes.
        Ms. Tlaib. Thank you, Mr. Chairman.
        And thank you all so much for coming before our committee
    and giving us a better sense of why it is important for us to
    oversee some of the activities of private equity firms.
        There is a case that the Michigan ACLU is working on, that
    I want to talk to you all about, for one of their clients,
    Davontae Ross. Davontae is a resident of Detroit who spent days
    behind bars because he couldn't afford to pay the $200 of bail
    related to a 5-year-old ticket for allegedly staying in a park
    after dark. He missed a job interview, and even more critical
    was an appointment with a government caseworker. His life was
    turned upside down.
        And this is a story of too many folks who live in poor
    communities, and struggle with paying cash bail throughout my
    district.
        The largest bail bond company in the United States, Aladdin
    Bail Bonds, is owned by Endeavor Capital, a private equity firm
    that invests money on behalf of pension funds and endowments.
    Because Congress has yet to act to restrict private equity
    firms like Endeavor Capital, they continue to still be allowed
    to capitalize off of people behind bars simply because they are
    poor.
        This question is for Mr. Moore, Trustee Moore. Is it
    appropriate for a private equity firm like Endeavor Capital to
    invest public employee retirement funds into predatory
    industries, like the bail bond industry, who prey heavily on
    poor communities?
        Mr. Moore. I personally think no, and I would not vote for
    us to engage in any activities with that kind of firm. Our
    pension fund doesn't have any direct investments in any
    organizations that are involved in private prisons and that
    whole associated group of companies.
        Our only issue is that in the public markets, where we are
    invested in index funds--and index includes everything, so we
    had have to go in and ferret out and try to exclude those
    companies from our indexed and passive investments. But I would
    not support that at all.
        Ms. Tlaib. There is a growing bipartisan consensus
    throughout our country that incarcerating so many of our
    neighbors, our people, and for-profit bail is a significant
    part of that problem. And The Washington Post last year
    highlighted private equity firms like Endeavor Capital's
    spending. They spent so much money opposing bail reform, noting
    that they are the largest funder of a campaign to roll back
    California's recently adopted bail reform law.
        Ms. Appelbaum, you talked a little bit about this when it
    came to the healthcare industry. How much money does the
    private equity industry, like the cash bail industry, spend
    trying to keep government officials beholden to their
    interests?
        Ms. Appelbaum. Yes, it would be good if we had some public
    information about that.
        Ms. Tlaib. That is right.
        Ms. Appelbaum. But just to set the record straight on the
    amount of money that was spent preventing the passage of really
    good bipartisan legislation in both the Senate and the House
    that would have reined in surprise medical bills and that
    really had a good chance to pass, which is why they spent so
    much money, they first spent the $4.1 million that was
    mentioned to lobby for an amendment. They got the amendment. It
    didn't do them any good, because the debt markets think that
    without being able to charge these high prices, they will not
    be able to make good on debt that is coming due in a couple of
    years.
        And their debt became distressed. So now, they--the last
    figure I saw was a $28 million campaign by Doctors and Patients
    United, which is actually Envision and TeamHealth, backed by
    KKR and Blackstone, to prevent any legislation from passing,
    and they have just stymied it for the moment.
        But these are bipartisan bills with a lot of support in
    both the House and the Senate. I think we are going to see
    them.
        Ms. Tlaib. Thank you.
        And, Ms. De La Rosa, I just want you to know, I think there
    are a lot of my colleagues, especially this new class, who
    understand corporate greed is a disease in our country. And you
    can see it just with the behavior of private equity firms.
        Even when we are trying to do the right thing, a bipartisan
    effort, even around incarceration in our country, around
    surprise billing in our country, trying to address the issues
    around healthcare, corporate greed is tainting our democracy.
    And it is coming in a way that is pretty much hijacking any
    opportunity for regular folks like us to be able to have some
    sort of justice when it comes to issues that we feel like in
    very many ways is weighing heavily on communities like mine.
        I represent the third-poorest congressional district in the
    country. When I come here, I represent 650,000 people. And I
    have to do this and try to push for legislation like
    disclosures and reporting. And what does it lead to? Going
    around the table, using all of these coalitions of folks and
    pushing kind of a misleading, gaslighting folks that it is not
    the right thing to do.
        Thank you all so much again for being here.
        I yield back, Mr. Chairman. Thank you.
        Mr. Vargas. Thank you very much.
        The gentlewoman from New York, Ms. Ocasio-Cortez, is
    recognized now for 5 minutes.
        Ms. Ocasio-Cortez. Thank you, Mr. Chairman.
        And thank you to all of our witnesses for coming here
    today.
        I have to admit that I am quite upset throughout this
    hearing, because I feel like a lot of the initial questions
    that we are hearing almost betray the priorities that we have
    had in our economy that have eroded people's quality of life.
    Because the first question that I hear from so many members
    are, how are the returns? But the returns are great, aren't
    they? How are the returns?
        I wasn't sent here to safeguard and protect profits. I was
    sent here to safeguard and protect people. And we are talking
    about reining in private equity, which is responsible for
    wiping out tens of thousands of jobs at Toys R Us alone. And
    then we are hearing, but what about the companies that made 100
    jobs here or 200 jobs there?
        Toys R Us, 30,000 jobs wiped out. Shopko, 14,000 jobs.
    Brookstone, David's Bridal, Payless. Not to mention the
    impacts, the undemocratic impacts on media companies, Splinter,
    Deadspin, Sports Illustrated, local and regional newspapers. In
    the last 10 years, private equity is behind 597,000 lost jobs.
        And it is not just about the number of jobs, isn't that
    right, Ms. De La Rosa, it is about the quality of jobs, right?
    When private equity took over Toys R Us, did you see folks'
    work schedules get cut back?
        Ms. De La Rosa. Yes, definitely.
        Ms. Ocasio-Cortez. Did you see people's benefits in some
    other ways cut back?
        Ms. De La Rosa. Yes.
        Ms. Ocasio-Cortez. Did your access to healthcare get
    damaged after private equity took over Toys R Us?
        Ms. De La Rosa. Yes, it was.
        Ms. Ocasio-Cortez. Did your mental health care get--was
    your mental health sacrificed as a result of how your quality
    of life was changed?
        Ms. De La Rosa. Very much so.
        Ms. Ocasio-Cortez. Very much so.
        We need to think about our economy not just in terms of the
    returns for stockholders, but in terms of how the lives of
    workers are impacted.
        In May of this year I sent a letter, along with Senator
    Warren, to Secretary Mnuchin regarding the Treasury
    Department's involvement in decisions related to the Sears
    bankruptcy.
        I want to take a step back and think about how some private
    equity companies, on the other end, take pension money on the
    front, to acquire poorly rated indebted companies.
        Ms. Appelbaum, because of the high returns usually
    associated with private equity, pension funds invest the
    retirement funds of our teachers, firefighters, and civil
    servants in PE firms, correct?
        Ms. Appelbaum. They do. But the measure that they use, the
    metric for measuring success, is a very poor one. They use
    something called the internal rate of return. With more time I
    can explain why this is an algorithm that does not really
    measure money you can take to the bank.
        Ms. Ocasio-Cortez. Right.
        Ms. Appelbaum. And so there is a lot of illusion-creating
    here. They could report the public market equivalent, which
    would give us a lot more information.
        Ms. Ocasio-Cortez. Yes. And we hear from a lot of folks
    saying, okay, we are using teachers' pension funds to buy into
    private equity, and they are getting fabulous returns, this
    should be great, right? Can you explain to me why that may not
    be great?
        Ms. Appelbaum. One of the things that we know, if we
    measure this appropriately, is that since the financial crisis,
    about half of the private equity funds have underperformed the
    stock market. Another quarter of them have barely beaten the
    stock market.
        CalPERS itself had to roll back its benchmark because it
    could not--it had a benchmark for its private equity returns.
    They are more risky, so they should yield more return. They
    could not meet that more return, so they have cut their
    benchmark in half.
        Ms. Ocasio-Cortez. So private equity contains more risk
    than other parts of the market, correct?
        Ms. Appelbaum. Oh, absolutely, that is true.
        Ms. Ocasio-Cortez. And so--
        Ms. Appelbaum. And the returns are good for the very top.
        Ms. Ocasio-Cortez. And would you say that more of these
    teachers' and firefighters' pensions are exposed to more risk
    or to more private equity now than they were, say, 10 years ago
    in the 2008 financial crisis?
        Ms. Appelbaum. Yes. Yes, they are.
        Ms. Ocasio-Cortez. They are. And if there is an economic
    downturn again, would they be exposed to more risk than they
    were before?
        Ms. Appelbaum. What I have not been able to say is that in
    the last economic downturn, 27 percent of highly leveraged
    firms went under. And what we know about private equity-owned
    companies is that they are highly leveraged.
        So saying that today there is no difference between
    publicly traded and private equity-owned companies is not
    really the issue.
        I agree with the regulators. Private equity, we are
    spending a lot of time on it here, is really small, compared to
    the rest of the economy. So those leveraged loans are not going
    to bring down the whole economy. But trust me, there will be a
    lot of pain. Many, many companies employing workers that we all
    care about, important to communities that we all live in, are
    going to go under in the next recession.
        Ms. Ocasio-Cortez. Thank you. Thank you very much.
        Mr. Vargas. Thank you very much.
        Without objection, I would like to add the following
    submissions for the record: Communications Workers of America;
    Private Equity Stakeholder Project; NewsGuild; Leo Hindery, co-
    Chair of the Task Force on Jobs Creation, member of the Council
    on Foreign Relations, former CEO of AT&T Broadband, managing
    partner of media-based private equity fund InterMedia Partners;
    Institutional Limited Partners Association; David Halperin,
    Republic Report; CalSTRS; the Center For Popular Democracy;
    Truthout; Americans for Financial Reform; Worth Rises; the
    Economic Policy Institute; Adam Levitin, professor of law at
    Georgetown University Law Center; Manufactured Housing Action.
        Without objection, it is so ordered.
        On behalf of Chairwoman Waters, I would like to thank our
    witnesses for the testimony here today.
        The Chair notes that some Members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        This hearing is adjourned.
        [Whereupon, at 1:24 p.m., the hearing was adjourned.]

                                A P P E N D I X

                               November 19, 2019

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