    [Senate Hearing 117-666]
    [From the U.S. Government Publishing Office]

                                                           S. Hrg. 117-666

                        PROTECTING COMPANIES AND COMMUNITIES
                             FROM PRIVATE EQUITY ABUSE

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

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                                ECONOMIC POLICY

                                     OF THE

                                  COMMITTEE ON
                       BANKING,HOUSING,AND URBAN AFFAIRS
                              UNITED STATES SENATE

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 FIRST SESSION

                                       ON

                 EXAMINING WHAT PRIVATE EQUITY FIRMS ARE DOING TO OUR
                         ECONOMY AND TO OUR COMMUNITIES

                                   __________

                                OCTOBER 20, 2021

                                   __________

      Printed for the use of the Committee on Banking, Housing, and Urban
                                    Affairs

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                    Available at: https: //www.govinfo.gov /

                                   __________

                        U.S. GOVERNMENT PUBLISHING OFFICE
    52-184 PDF                  WASHINGTON : 2023

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

                COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                         SHERROD BROWN, Ohio, Chairman

    JACK REED, Rhode Island              PATRICK J. TOOMEY, Pennsylvania
    ROBERT MENENDEZ, New Jersey          RICHARD C. SHELBY, Alabama
    JON TESTER, Montana                  MIKE CRAPO, Idaho
    MARK R. WARNER, Virginia             TIM SCOTT, South Carolina
    ELIZABETH WARREN, Massachusetts      MIKE ROUNDS, South Dakota
    CHRIS VAN HOLLEN, Maryland           THOM TILLIS, North Carolina
    CATHERINE CORTEZ MASTO, Nevada       JOHN KENNEDY, Louisiana
    TINA SMITH, Minnesota                BILL HAGERTY, Tennessee
    KYRSTEN SINEMA, Arizona              CYNTHIA LUMMIS, Wyoming
    JON OSSOFF, Georgia                  JERRY MORAN, Kansas
    RAPHAEL WARNOCK, Georgia             KEVIN CRAMER, North Dakota
                                         STEVE DAINES, Montana

                         Laura Swanson, Staff Director

                     Brad Grantz, Republican Staff Director

                          Cameron Ricker, Chief Clerk

                          Shelvin Simmons, IT Director

                        Charles J. Moffat, Hearing Clerk

                                     ______

                        Subcommittee on Economic Policy

                     ELIZABETH WARREN, Massachusetts, Chair

               JOHN KENNEDY, Louisiana, Ranking Republican Member

    JACK REED, Rhode Island              TIM SCOTT, South Carolina
    CHRIS VAN HOLLEN, Maryland           THOM TILLIS, North Carolina
    TINA SMITH, Minnesota                KEVIN CRAMER, North Dakota
    JON OSSOFF, Georgia                  STEVE DAINES, Montana

                  Gabrielle Elul, Subcommittee Staff Director

             Natalia Riggin, Republican Subcommittee Staff Director

                                      (ii)

                                C O N T E N T S

                                  ----------

                          WEDNESDAY, OCTOBER 20, 2021

                                                                       Page

    Opening statement of Chair Warren................................     1
        Prepared statement...........................................    25

    Opening statements, comments, or prepared statements of:
        Senator Kennedy..............................................     1

                                   WITNESSES

    David R. Burton, Senior Fellow in Economic Policy, Roe Institute
      for Economic Policy Studies, Institute for Economic Freedom and
      Opportunity, The Heritage Foundation...........................     2
        Prepared statement...........................................    26
    Doug Holtz-Eakin, President, American Action Forum...............     4
        Prepared statement...........................................    41
    Michael Frerichs, Illinois State Treasurer.......................     5
        Prepared statement...........................................    42
    Shirley Smith, former Sales Manager at Art Van Furniture and
      Leader with United for Respect.................................     6
        Prepared statement...........................................    45
    Peggy Malone, Registered Nurse, Crozer-Chester Medical Center....     8
        Prepared statement...........................................    47
    Eileen Appelbaum, Codirector, Center for Economic and Policy
      Research.......................................................    10
        Prepared statement...........................................    48
        Responses to written questions of:
            Senator Reed.............................................    60
            Senator Van Hollen.......................................    65

                  Additional Material Supplied for the Record

    Statements submitted in support of the Stop Wall Street Looting
      Act............................................................    68
    Letters submitted in opposition to the Stop Wall Street Looting
      Act............................................................   146

                                     (iii)

         PROTECTING COMPANIES AND COMMUNITIES FROM PRIVATE EQUITY ABUSE

                                  ----------

                          WEDNESDAY, OCTOBER 20, 2021

                                   U.S. Senate,
      Committee on Banking, Housing, and Urban Affairs,
                               Subcommittee on Economic Policy,
                                                        Washington, DC.
        The Subcommittee met at 2:14 p.m., via Webex and in room
    538, Dirksen Senate Office Building, Hon. Elizabeth Warren,
    Chair of the Subcommittee, presiding.

              OPENING STATEMENT OF CHAIR ELIZABETH WARREN

        Chair Warren. This hearing will come to order. This hearing
    is in a hybrid format. A few reminders. As you begin, for our
    guests who are joining us virtually, once you start speaking
    there is a slight delay before you are displayed on the screen.
    To minimize background noise please click the Mute button until
    it is your turn to speak or to ask questions.
        You should all have one box on your screen labeled
    ``Clock'' that will show you how much time is remaining. For
    witnesses, you will have 5 minutes for your opening statements.
    For all Senators, the 5-minute clock still applies for your
    questions. At 30 seconds remaining for your statements and
    questions you are going to hear a bell ring to remind you that
    your time is almost expired. It will ring again when your time
    has actually expired.
        And to simplify the speaking order process, Senator Kennedy
    and I have just decided we will go by seniority as people come
    in.
        What we are going to do is we are also in the middle of
    votes, just to add an extra layer of complication to all of
    this. So I am going to hand the gavel over to Senator Kennedy,
    who is going to get us started. I am going to run, and then I
    will come back and he can do the same.
        So thank you all for being with us. Thank you. Thank you,
    Senator Kennedy. All yours.

               OPENING STATEMENT OF SENATOR JOHN KENNEDY

        Senator Kennedy [presiding]. I do not have a very elaborate
    opening statement. I want to thank all of you for being here.
        If there are problems in our private equity markets I would
    like to hear about them. I consider private equity--and we can
    talk about the definition today if you would like--to be an
    essential part of the free enterprise system. I mean, stripped
    to its bare essential, all private equity investment is is a
    decision by one willing buyer and one willing seller, and that
    happens every day, billions of times every minute in the
    American economy.
        Private equity, as we know it, as I know it, of course, is
    limited to accredited investors, very sophisticated investors.
    I am a former State Treasurer and sat on the boards of a number
    of retirement systems. I know, in the retirement systems with
    which I am familiar, private equity is a huge part of those
    retirements systems' investments. So put me in the corner of
    pro-private equity, and I say that because I am pro free
    enterprise. I am not real fond of neosocialism. I think
    neosocialism is just trickle-down poverty. And it bothers me
    that our store shelves are starting to look like the store
    shelves in Cuba and Venezuela. That concerns me a great deal.
        So let us get started. I cannot see, without my glasses,
    and even with my glasses I cannot see that far.
        OK. I am not going to introduce the panel. That will just
    take away from their time. I am just going to introduce the
    speaker. Well, maybe I should. I do not know. I do not want to
    get put on double secret probation here.
        OK, first, I am going to read this. Joining us virtually we
    have Ms. Shirley Smith. Ms. Smith is a former employee of Art
    Van Furniture in Detroit, Michigan, and is a Leader with United
    For Respect. Next here, in person, we have Ms. Peggy Malone.
    Ms. Malone is a registered nurse at Crozer--did I say that
    right?--Chester Medical Center in Upland, Pennsylvania.
        Joining us virtually we have also the Honorable Michael
    Frerichs. Did I say that, Mr. Treasurer, correctly?
        Mr. Frerichs. Senator, former treasurer, close enough.
    Michael Frerichs.
        Senator Kennedy. Yes, sir. Mr. Treasurer, welcome.
        We also have Dr. Eileen Appelbaum here, who is the
    Codirector of the Center for Economic Policy and Research. And
    we have Dr. Doug Holtz-Eakin, President of American Action
    Forum, and last we have Mr. David Burton, Senior Fellow at The
    Heritage Foundation.
        Let us start--well, let us start with our panel here.
        How about Mr. Burton.

    STATEMENT OF DAVID R. BURTON, SENIOR FELLOW IN ECONOMIC POLICY,
       ROE INSTITUTE FOR ECONOMIC POLICY STUDIES, INSTITUTE FOR
       ECONOMIC FREEDOM AND OPPORTUNITY, THE HERITAGE FOUNDATION

        Mr. Burton. Thank you. My name is David Burton. I am Senior
    Fellow in Economic Policy at The Heritage Foundation. I would
    like to thank you, Senator Kennedy, Senator Warren, and the
    other Members of the Committee for the opportunity to be here.
        Entrepreneurship is vital to innovation, improved
    productivity, better products, better wages, and prosperity
    throughout the country. Private capital markets are, by far,
    the primary means by which entrepreneurs raise capital to
    launch and grow their business. Private equity, broadly
    defined, is absolutely vital to the economic future of the
    United States. Private offerings account for at least $2.9
    trillion annually in capital raised. In contrast, registered or
    public offerings raise less than half of that amount, $1.4
    trillion. Regulation D is the most important means of raising
    private capital and accounts for approximately $1.7 trillion as
    of 2018.
        Public capital markets are in decline due to regulatory
    overreach. Firms go public much later in their life cycle,
    fewer firms go public at all, and ordinary investors typically
    do not receive the returns from successful startups and
    entrepreneurial ventures because they go public so much later.
        Being a public company has become extraordinarily
    expensive, both in terms of the initial public offering costs,
    the amount of money you have to spend on lawyers, investment
    bankers, accountants, and so on, but also the continuing
    compliance costs and the annual regulatory costs, not to
    mention regulatory risk, the threat of being sued.
        The number of public companies has declined almost by half
    over the past quarter century, despite the real GDP growing by
    80 percent and the population increasing by almost a quarter.
        There is a major effort underway now to apply the policies
    that have harmed the public market to the private market, on a
    whole host of fronts, including ESG and what have you, and the
    legislation that is part of this hearing today would be part of
    that, the Stop Wall Street Looting Act.
        Private equity funds, narrowly defined, are also an
    important aspect of our capital markets. They are one of the
    primary means of keeping incompetent management accountable.
    They also are one of the primary means by which companies are
    turned around, by an infusion of new equity capital.
        The Stop Wall Street Looting Act would be more aptly named
    the Protecting Incompetent Management Act. It basically would
    erect a high wall and a moat around management of companies
    that are failing, to make it virtually impossible to mount a
    takeover that would be able to change the management and
    protect the continued existence of the company by replacing the
    management and also protecting the employees' jobs, who work
    there and will lose their jobs in the event the company fails.
        Now this may be attractive to corporate elites and
    corporate management and their lobbyists but it certainly is
    not in the interest of shareholders, workers, or consumers.
        One thing I wanted to bring to the attention of the
    Committee, if you read section by section there is a provision
    that imposes a 100 percent tax on fees paid by targeted
    companies to private equity funds, but the actual statutory
    language in that would, in effect, impose the 100 percent tax,
    which is really including State taxes, more than 100 percent,
    on all payments by firms to any fund. It is very poorly drafted
    language and not only would shut down, in effect, the private
    equity fund market but have much broader and extraordinarily
    adverse effects. I think that is a drafting error, but it is a
    really important drafting error.
        Other things in the act that I think are deeply
    problematic, Title V would impose disclosure requirements on
    private equity funds that are roughly comparable to what
    Regulation SK and other aspects of securities law impose on
    publicly traded funds, and I think that is more or less by
    design. It would impose disclosure requirements on private
    equity firms that are roughly analogous to public companies, so
    no one would actually choose to be a private equity fund
    anymore. Shutting down these private equity funds would have an
    adverse impact on millions of people.
        And last, in my written remarks I include 14 specific
    suggestions on how to improve our private equity markets.
        Thank you very much.
        Senator Kennedy. Thank you, sir. Dr. Holtz-Eakin.

    STATEMENT OF DOUG HOLTZ-EAKIN, PRESIDENT, AMERICAN ACTION FORUM

        Mr. Holtz-Eakin. Thank you, Senator Kennedy, Senator Reed,
    Members of the Subcommittee for the chance to be here today. I
    also do not have an elaborate opening statement. Let me say a
    few things and then I would be happy to answer your questions.
        Clearly, financial markets are an important part of the
    U.S. economy. They serve to provide many essential economic
    functions, channeling funds from savers to investors,
    allocating that capital as efficiently as possible, pricing
    risk and return, allowing individuals to diversify away from
    risk as they desire, and the list goes on. And in looking at
    those financial markets you like to have all sorts of business
    models compete to provide those services to the economy. We
    have insurance companies and banks and all sorts of things,
    including private equity.
        My concern today is about the proposed legislation, and I
    am concerned not because I am a big fan of private equity. I am
    not. I also have no particular animus toward private equity. I
    am concerned because the legislation would tilt the legal,
    regulatory, and tax playing field quite strongly against
    private equity, and I think that the objective of policy should
    be that those legal, regulatory, and tax policies be as neutral
    as possible. This is clearly an attempt to tilt the playing
    field against private equity. And if there are problems with
    private equity I think those should be dealt with in other
    ways, identifying the harms and correcting the behaviors.
        So its success in finding undervalued companies, reforming
    their operations, has delivered an enormous footprint. There
    are 11.7 million workers in private equity, earning about $900
    billion in compensation. These are good-paying jobs. The
    average employee is getting $73,000 in 2020, and the private
    equity sector has produced $1.4 trillion in gross domestic
    product, our about 6.5 percent of GDP. That footprint is a
    testament to the success it has had in providing valuable
    economic function.
        The flip side is that this legislation would undo that, and
    that would come at a tremendous cost. The Chamber of Commerce
    estimates that the loss would range from somewhere between 6.9
    to 26.3 million jobs in the U.S. economy, and returns that are
    up to $3.5 billion a year for investors.
        And so my hope is that the discussion can focus on what is
    good policy for private equity and others and where there are,
    in fact, identifiable hard to find remedies that are not so
    sweeping as to disrupt the level playing field from a policy
    perspective. Thank you.
        Senator Kennedy. I am going to turn the gavel back over to
    our Chairperson.
        Chair Warren [presiding]. So it looks like we have the
    Illinois State Treasurer next, the Honorable Michael Frerichs.
    Michael, are you there?
        Mr. Frerichs. I am. Can you hear me?
        Chair Warren. Thank you. Yes, we can.

        STATEMENT OF MICHAEL FRERICHS, ILLINOIS STATE TREASURER

        Mr. Frerichs. Great. Well, good afternoon, Madam Chair and
    Ranking Member Kennedy, Members of the Subcommittee, and
    distinguished guests.
        Now the clock I am looking at shows me a minute and 30
    seconds.
        Chair Warren. No.
        Mr. Frerichs. Oh, there we go.
        Chair Warren. There you go.
        Mr. Frerichs. My name is Michael Frerichs. I am the
    Illinois State Treasurer, elected by the great people of the
    State of Illinois, and as Senator Kennedy knows from his time
    as State Treasurer, and my colleague in the National
    Association of State Treasurers, it is truly an honor being
    trusted with the people's money. It is an honor to be invited
    to speak with this Subcommittee today.
        The Illinois State Treasurer performs many roles. I am the
    State's Chief Investment and Banking Officer. In that role, my
    team and I actually manage approximately $50 billion. This
    portfolio includes roughly $25 billion in State funds, $16
    billion in retirement account savings plans, and $9 billion on
    behalf of local and State governments. Among those investments
    are $500 million in private equity and venture capital.
        But I also serve as a trustee on the Illinois State Board
    of Investment, which manages approximately $31 billion in
    pension assets on behalf of over 226,000 beneficiaries. ISBI
    maintains approximately $1.7 billion of private equity
    investments.
        My job is to prudently invest public funds and pension
    funds, a portion of which are managed by private equity firms.
    I also have responsibility to the long-term fiscal health of
    our State and local government institutions, which rely on a
    vibrant and sustainable economy. And I also have a duty to tend
    to the well-being of the communities I represent, including the
    economic security and dignity of millions of workers.
        Unfortunately, some private equity firms engage in
    practices that harm these objectives. From my experience as an
    institutional investor there are several important challenges
    relating to private equity investments, in particular, the need
    for increased transparency and the need for reforms to ensure
    that workers, communities, and investors are protected from
    predatory practices.
        Before I go into further details I want to say that private
    equity is an essential part of our capitalist system. The idea
    of the industry is simple: sometimes a company has room to grow
    and become more productive, but its current ownership is not in
    a position to capitalize on that opportunity.
        In this situation, it makes sense for an investment
    vehicle, run by experts, to pool private capital, to buy the
    firm and take it to the next level, and then to sell it. This
    generates a profit for private equity firms and their
    investors, it helps the company to grow, and it creates more
    economic opportunity for society at large.
        For investors like the Illinois Treasury, private equity
    provides an opportunity to further diversify our portfolios, to
    help drive economic development, to support small businesses,
    to expand the circle of opportunity to underutilized investment
    firms like those in downstate Illinois or those that are
    minority and women-owned, and to provide a competitive return
    within our overall portfolio.
        Unfortunately, as private equity has continued to evolve
    and become a larger and larger portion of the economy it has
    continued to be regulated as though it was a boutique
    investment that only affected the ultra-wealthy. That means
    that predatory activities, like opaque fees and pillaging
    assets and strategically using bankruptcy without regard for
    the well-being of workers and their communities and their
    pensions remains perfectly legal. And as long as these
    practices are allowed, they will happen, and as long as they
    happen, our communities are at risk, and that is why sensible
    reforms are needed to rein in harmful behavior by bad actors in
    this space.
        Let me talk for a little bit about fee transparency before
    I run out of time. There has been a significant increase in
    demand from public pensions to invest in private equity. It's
    no wonder. The asset class has had historic levels of
    fundraising and record amounts of distribution to investors.
    Private equity is unique in that it is rooted in a sense of
    long-term partnership where investments are designed to mature
    in 10 to 15 years, if not longer.
        Fiduciary duty is the foundation of an effective
    partnership between general partners and limited partners in
    private equity funds, and this is especially important given
    that these investments are illiquid and currently require less
    transparency than other investment vehicles.
        And that brings me to a crucial point. There is a dire need
    for increased transparency and disclosure to help provide
    investors the necessary information to make informed decisions,
    including data on fees, to make clear, complete, consistent,
    and in a not misleading manner, so that institutional
    investors, like myself, can better fill our fiduciary duties.
        I see my 5 minutes is coming to an end, so I look forward
    to any questions you might have.
        Chair Warren. So thank you very much, Mr. Treasurer. I
    appreciate your comments here today.
        And next we have joining us virtually Ms. Shirley Smith,
    who is a former employee of Art Van Furniture in Detroit,
    Michigan, and who is also a leader with United for Respect.
        Ms. Smith, I would like to recognize you for 5 minutes,
    please.

     STATEMENT OF SHIRLEY SMITH, FORMER SALES MANAGER, AT ART VAN
               FURNITURE, LEADER WITH UNITED FOR RESPECT

        Ms. Smith. Thank you, Senators. Thank you so much for
    having me here.
        My name is Shirley Smith and I live in Detroit, Michigan.
    For 23 years, I worked for Art Van Furniture, the last 9 as a
    sales manager, and it was a job that I truly loved. Art Van was
    a family owned business, and the company culture was centered
    around family. Employees were tight-knit, we had each other's
    backs, and there was a real sense of community.
        I was a single mom and I am grateful for the support and
    flexibility I had at work, so I could be there for my son while
    juggling a successful career. I had the opportunity to build
    relationships with my customers and earn a good living, making
    it possible to buy my own home and provide a good education for
    my son. Working at Art Van was like my own little slice of the
    American Dream, until the private equity firm, T.H. Lee, came
    in and broke up our family.
        Before T.H. Lee took over in 2017, Art Van was a successful
    company, reporting $800 million dollars in revenue that year.
    Up to then, most of my colleagues would have told you it was a
    company they loved working for, but those last 3 years were
    hell.
        It was not obvious right away, but a lot started changing.
    We noticed our top company leaders were being pushed out the
    door. T.H. Lee brought in people who did not know the furniture
    business, and orders started coming in slower. In hindsight,
    that was a big red flag. Sales associates work on straight
    commission, which only gets paid when an order is delivered,
    and customer orders were not being filled.
        Art Van's reputation was being destroyed right before our
    eyes. We had to start making up excuses to our customers, some
    of whom grew violent when they learned they would not be
    getting refunds. One of my colleagues even had a gun pulled on
    her during closing weekend. T.H. Lee made us feel like liars
    and thieves, taking people's hard-earned money when they knew
    they were never going to get their orders.
        We stopped paying our bills on time and started cutting
    staff. For decades, Art Van had been a debt-free company that
    paid all its bills. Under T.H. Lee's ownership, Art Van racked
    up millions of dollars in debt to Wall Street banks and other
    deep-pocketed creditors. T.H. Lee even sold off Art Van's real
    estate to itself, forcing Art Van to pay rent on the same
    properties it once owned. By the end of 2019, under T.H. Lee's
    so-called leadership, Art Van was in the red, and it took just
    three short years for T.H. Lee to strip our company for parts.
        Then the pandemic hit. We first received WARN Act notices
    about our layoffs before the COVID-19 emergency order was
    issued in Michigan, so the bankruptcy and layoffs had nothing
    to do with the pandemic. But then, a few weeks later, Art Van
    changed their original WARN Act notice, citing COVID-19
    instead. As a result, we did not get any severance pay or
    benefits. Nothing. Robbing the American workforce like this,
    hurting the same people on the front lines who have been
    applauded as ``heroes'' for keeping our economy open, should be
    a crime.
        When we were told we would be losing our jobs, we were
    promised a lot. We were promised health insurance after
    closing. We never got it. The only insurance I could afford
    charged me 10 times what I had been paying for prescriptions. I
    was unemployed for 5 months, and many times I had to choose
    between paying for my medication or paying other bills.
        We were also promised a retention bonus that we never got.
    Since my unemployment did not kick in for 2 months, I had to
    take out money from my 401 to make ends meet, which I am still
    paying taxes on today.
        Sadly, my story is not unique. Private equity has quietly
    taken over nearly every facet of life, from retail and grocery
    store chains, to housing, health care, media, and more, turning
    the American Dream into nothing more than a pipe dream for
    millions of working families.
        And T.H. Lee did not only destroy us, the individual
    workers who lost their jobs. Every community that had an Art
    Van store suffered too. We had a deep reach into our
    communities. We were one of the largest taxpayers in the city
    of Warren, where we were headquartered, and the biggest
    contributor to our food banks. When the company went under,
    there was a terrible ripple effect of harm felt throughout the
    State of Michigan.
        I am here today to show you the human toll of Wall Street's
    greed. Our elected leaders, each of you here today, I have to
    ask you why billionaires should be allowed to do this and
    destroy the fiber of America. Why should this be legal? This is
    a sin, it is unconscionable, and something needs to change.
        Thank you for giving me the opportunity to speak with you
    today.
        With nearly 12 million people working for private equity-
    owned companies in the United States, private equity is a major
    employer. Given the industry's poor track record we must also
    take a closer look at how their cost cutting and greed impacts
    workers and the customers they serve across America.
        Chair Warren. Ms. Smith, thank you very much for being with
    us today. We really appreciate it.
        And now we have, in person, Ms. Peggy Malone, who is a
    registered nurse at the Crozer-Chester Medical Center in
    Upland, Pennsylvania.

      STATEMENT OF PEGGY MALONE, REGISTERED NURSE, CROZER-CHESTER
                             MEDICAL CENTER

        Ms. Malone. Thank you, Senator Warren, and Members of the
    Subcommittee for having me here today. I am the Vice President
    of the Crozer-Chester Nurses Association, which is a local of
    PASNAP, and I am also on the executive board. I have been a
    registered nurse for 32 years at Crozer-Chester Medical Center.
        Being a nurse, for me and my colleagues, is a calling. It
    is a profession that we are very proud of, and private equity
    has no business in health care. They have destroyed our
    hospital. They have destroyed the fiber of what we are as
    health care professionals.
        Prospect Medical Holdings, which has 17 hospitals across
    the country, I can go on and on about the owners, Leonard
    Green, David Topper, Sam Lee, and what they have done. That is
    all public knowledge. You can find that out. You can get that
    information. You can see that it is wrong that our tax system
    should not be creating incentives for business practices and
    private equity firms. They should not be able to extract huge
    dividends from hospitals. They were given $173 million of COVID
    relief money, none of which we have seen in the hospitals. We
    take care of patients every day, and I understand some of you
    are very pro private equity. Well, I am going to tell you that
    families were not allowed in the hospital. You did not see what
    was going on in there during this pandemic.
        We served patients moldy bread during that pandemic. We
    were not able to give good-quality care to patients. Patients
    were dying. They had no family. They had no one in the rooms
    but us. It was the nurses. It was the respiratory therapists.
    We were the ones that had to go in. We were scrambling for
    iPads so that families could say goodbye to their loved ones,
    without having anyone in the room. We were their families. We
    were using poor-quality equipment. I would have to try to
    straddle a urinal to collect urine from a patient's bag,
    between my feet, with a gown and a mask and all the PPE. Number
    one, we were wearing trash bags at a certain point because we
    did not even have enough PPE.
        And this is how we were taking care of patients, day in and
    day out. I left my family. I stayed at a house that the local
    college gave us, because I was afraid to take it home to my
    family. I had my children at home who were having graduations
    and everything taken away from them, as all of my colleagues.
    And we went in and we did this job every day, to the best of
    our ability, with no equipment, with no PPE. We were afraid for
    our lives, and we did this job, and we did it every day. For
    every single person in this country we thought we were doing
    good. And you know what? Now we are the bad guys, because we
    are speaking up, and we want to know where that money is, and
    we want to know how these private equity firms cannot take care
    of the patients that are in these hospitals.
        We do not have enough staff. We do not have enough
    equipment. We are fighting every day to give good-quality care
    to patients, and we are not able to do it. We are not able to
    do it, and nobody was in there watching. There were no families
    in there. There was no one watching. It was just us, and we
    were watching people die.
        And so I can give you the statistics. I can talk about
    Leonard Green, and I can talk about all the things that are
    going on, and all the tax credits and things that these
    companies are given. They were given pandemic money and we have
    not seen one bit of it being spent on the patients. That is our
    goal.
        Private equity does not belong in health care. Our job. Our
    job is to do no harm. It is to do no harm. It is to care for
    our patients. That is why we got into this. And we will fight,
    and every nurse I know will fight. But what I see now, we are
    seeing the PTSD. We are seeing the nurses suffering. We are
    seeing the doctors struggle. What we saw was a war zone, for
    the last 20 months, and it is not over. And we have not gotten
    support. We have not gotten support from our administration. We
    have not gotten supplies that we need. We do not have the staff
    that we need.
        Private equity has no business in health care.
        Chair Warren. So thank you, Ms. Malone, and thank you for
    the work that you have done. I lost my brother early in the
    pandemic, and he had no one with him except the nurses who
    showed up to hold his hand. I appreciate all that you have done
    and I know it has been hard.
        We now have our final witness, and that is Dr. Appelbaum.
    Dr. Appelbaum, could you please talk with us a bit.

    STATEMENT OF EILEEN APPELBAUM, CODIRECTOR, CENTER FOR ECONOMIC
                          AND POLICY RESEARCH

        Ms. Appelbaum. Yes. Thank you, Senator Warren, Senator
    Kennedy, Members of the Subcommittee. I am very happy to be
    here to testify today.
        Private equity is a largely unregulated financial actor,
    and it is playing a growing role in both the U.S. economy and
    in global economies. In 2020, global assets under management
    reached $4.5 trillion, and this is expected to double to $9
    trillion by 2025, so it is a big and important player.
        In the U.S., private equity owns or backs 8,000 companies
    in every nook and cranny of the economy, ranging from health
    care, as we just heard, to IT, to retail chains, to
    supermarkets, single-family rental homes, and payday lenders.
    They are in every part of the economy. The private equity
    industry and its companies employ nearly 12 million workers.
        Pension funds and other limited partners have been pouring
    money into private equity funds, seemingly unaware that it is
    really hard for any private equity fund to beat a booming U.S.
    stock market, and they have not beaten it. Research has shown
    that the median private equity fund in every vintage since
    2006, has just tracked the stock market. It has not actually
    beaten it.
        Yet fundraising by the largest private equity firms has
    reached stratospheric levels. It is not that investors in
    private equity do not see a return on their money. They do see
    it. However, the point is that they could have gotten the same
    returns by investing in stock market index funds without all
    the risk. So they are not beating the stock market. The point
    is they could have done as well in the stock market.
        The big private equity funds are just raking in money from
    institutional investors. In the last 5 years, Blackstone and
    KKR each raised more than $90 billion. This year, KKR was
    launching an $18.5 billion for its North America Fund, and
    Carlyle has announced plans to raise $27 billion for its next
    fund, in what would be the biggest private equity fund.
        It is not possible to take that kind of money, they have
    just a few years to deploy it, and to invest it in small
    companies. They invest in really big companies which do not
    give you much opportunity for turning them around. We have just
    seen the $38 billion purchase of Medline, a family owned
    company, by private equity firms. You do not pay $38 billion
    for a company you think you have to turn around.
        With all that cash on hand, private equity is poised to buy
    up large swaths of the U.S. economy, with no limit on how much
    debt they can leverage on the companies, with no limit on how
    much wealth they can take out, and no limit on how hard they
    can squeeze the employees.
        A study examining private equity buyouts of public
    companies found that when private equity takes these public
    companies private employment declines by 13 percent in just the
    first 2 years. Another study that looked at private equity
    buyouts that used a lot of debt found that the bankruptcy rates
    were as high as 20 percent. For affected workers, their
    families, and communities, this is devastating. But win or
    lose, the private equity firms always walk away with a profit.
        Thank you.
        Senator Reed [presiding]. Well, I want to thank Chair
    Warren and Ranking Member Kennedy for allowing me to go first
    and ask question. Chair Warren will return promptly from the
    vote.
        Dr. Appelbaum, what do you believe to be the primary gaps
    in the regulation and supervision of private equity?
        Ms. Appelbaum. I think that there is little recognition
    that while they once wanted to buy on leveraged buyouts,
    private equity firms have now really developed many, many
    avenues for making money and for participating in the economy.
    So it is not just leveraged buyouts. It is also the credit
    funds, which I think are playing a huge role in a shadow
    economy.
        Back in 2013, the regulators provided guidance that
    essentially said to the banks, ``Really, you should not put
    more debt on a company than six times earnings, because our
    research shows that when you go beyond that point the company
    is very likely to default on its debts, experience financial
    distress, and to even go bankrupt.'' So they put that out
    there.
        And KKR came along, and it had difficulty raising the kind
    of money it wanted to put debt on a company that it was buying.
    And so it was not long before the private equity firms figured
    out they needed their own credit funds. And these credit funds
    act like investment bankers, but there is no banking regulation
    of them. So I think that is really a huge gap in our knowledge
    of what is going on.
        Private equity now has real estate funds. These real estate
    investment funds move back and forth. Sometimes they are
    publicly traded. Sometimes they are privately held by the
    private equity firm. They are playing a role that I think is
    little understood in the economy .
        I have been studying health care so I have seen their role
    there. When you say that a chain like Steward sold its real
    estate to a real estate investment trust, that would be
    something that operates without much regulation, and provides a
    lot of money to operators to go out and buy up, in this case,
    more hospitals. So we have seen a buying spree of hospitals, by
    private equity or formerly private equity-owned chains, funded
    by the real estate investment trusts.
        Real estate investment trusts are in many aspects of the
    economy. We look to the SEC to say, shouldn't you be taking a
    look at them? But, in fact, it is not just the SEC that needs
    to be involved. Banking regulators regulate investment banks,
    and I think if these credit funds want to operate as investment
    banks, they should be regulated in the same way. And I think we
    need to know a lot more about the role of real estate
    investment trusts in the economy. They fly completely below the
    radar, but they fund a lot of the expansion that we see going
    on by private equity firms.
        Senator Reed. Thank you very much, Dr. Appelbaum.
        Now if the Treasurer is still on Webex or Zoom, Treasurer
    Frerichs, I would like to ask if you could share your
    experience with private equity in terms of fee-and-expense
    arrangements, and do you believe these arrangements are
    adequately disclosed and transparent?
        Mr. Frerichs. OK. So my office experience is similar to
    what other institutional investors are recognizing, and that is
    as private equity continues to evolve there is a growing need
    for improved disclosures around direct and indirect fees,
    expenses, and performance-based fees, such as carried interest
    in particular.
        It is safe to say that investors such as ourselves or
    public pension plans would be greatly benefited with increased
    level of disclosure and transparency between general partners
    of private equity firms and investors. Given the fees charged
    by private equity managers are among the highest shouldered by
    institutional investors, a lack of transparency represents a
    meaningful risk factor.
        It is necessary to ensure transparency for all investors
    and ensure investors can validate fees but also understand if
    there are any potential conflicts of interest around certain
    fees that may be passed through to companies that may
    negatively affect our investments.
        Senator Reed. Well, thank you very much, Treasurer, and
    thank you to the panel. I would happily yield back to my
    colleague from Louisiana. Then I am going to vote.
        Thank you, John.
        Senator Kennedy [presiding]. Thank you. Thank you, Senator.
        Mr. Treasurer, I am a little confused. As Treasurer you
    invest in private equity, do you not?
        Mr. Frerichs. That is correct.
        Senator Kennedy. And your concern, and a concern we should
    all share, is you say the fees are opaque and there is not
    enough transparency.
        Mr. Frerichs. Correct.
        Senator Kennedy. Are you telling me that you make private
    equity investments, as a fiduciary, without understanding the
    fees, and if so, whose fault is that?
        Mr. Frerichs. We put a lot of time and effort into
    understanding these fees and working, but that adds increased
    cost to us, and there are also smaller pension plans out there
    who do not have the resources.
        Senator Kennedy. Well, why don't you just do not make the
    investment?
        Mr. Frerichs. Oftentimes we do not, if they are not willing
    to work with us.
        Senator Kennedy. So what is the problem?
        Mr. Frerichs. Just as in other fields, in other investment
    classes, the transparency has been helpful in bringing down the
    cost of fees, in things like mutual funds. We think we would
    see improvements in fees with greater transparency.
        Senator Kennedy. But if I go to buy a car and the car
    salesman does not explain the details of the financing to me, I
    just walk away. I do not call for the Federal Government to
    take over every car salesman in America. What am I missing
    here?
        Mr. Frerichs. Well, I would say we are not----
        Senator Kennedy. I mean this----
        Mr. Frerichs. ----calling on the Federal Government to----
        Senator Kennedy. ----this is--these are two players in the
    financial market. You are not required to invest in private
    equity. In fact, you breach your fiduciary duty to invest in
    private equity if you do not understand the fees, do you not?
        Mr. Frerichs. As I said, we put a lot of effort and time
    into this. I am the first one to note that we at the Illinois
    Treasury have significantly increased our allocation to the
    private equity space, given the opportunities and our ability
    to manage risks.
        Senator Kennedy. Well, have you ever invested in private
    equity when you did not understand the fees?
        Mr. Frerichs. I never said we did not understand the fees.
    We are advocating for the elimination--not advocating for
    elimination of private equity. We are seeking reforms to make
    it easier for us to do our jobs, to stop abuses, to increase
    transparency, to help create more efficient markets, and
    provide basic protections----
        Senator Kennedy. I understand. Have you ever invested in a
    private equity deal, as a fiduciary, as the State Treasurer,
    without understanding the fees?
        Mr. Frerichs. We put a lot of effort into this, but that
    results in increased costs as well. And just as we saw public--
    --
        Senator Kennedy. I understand that. I heard you the first
    time. But have you ever invested in a private equity deal
    without understanding the fees?
        Mr. Frerichs. No.
        Senator Kennedy. OK. Let me ask Dr. Holtz-Eakin, I have
    looked at this legislation. It will gut private equity like a
    fish.
        Mr. Holtz-Eakin. I think that is correct.
        Senator Kennedy. Now what will that impact have on workers
    of America?
        Mr. Holtz-Eakin. We know that, you know, the private equity
    markets are very large, as David Burton pointed out, that this
    is an important source of capital. Capital is how firms invest
    in skills for their workers, technologies, equipment, it raises
    productivity, and that productivity flows into higher real
    wages. So you are really affecting the standard of living----
        Senator Kennedy. Is it going to cause layoffs?
        Mr. Holtz-Eakin. Absolutely.
        Senator Kennedy. You get rid of private equity, whether you
    do it in the de facto or de jure way, you could abolish private
    equity. You could also regulate it half to death. No, regulate
    it completely to death. Now if you do that, I know it is in
    vogue to talk about rich billionaires around here, but they
    comprise a very small part of the American free enterprise
    system. We are going to have massive layoffs, are we not?
        Mr. Holtz-Eakin. Yes. I mean, you need the capital to run
    the economy.
        Senator Kennedy. In fact, is not that what free enterprise
    is, a marriage of capital and labor?
        Mr. Holtz-Eakin. Yes.
        Senator Kennedy. Some of my colleagues think it is a zero-
    sum game. They think that the American economy is like it was
    back in primitive times. To take a Marxist approach, some of my
    colleagues think that the only value in an economy is labor,
    and if you make money in an economy you have to make money. If
    you become wealthy, you do it by exploiting labor. That is not
    an accurate description of the American economy today. Capital
    joins with labor, and today they both improve their value. That
    is how we grow our GDP, is it not?
        Mr. Holtz-Eakin. That is correct.
        Senator Kennedy. All right. Do you disagree with anything I
    said, Mr. Burton?
        Mr. Burton. No. The one thing that you did not really
    mention is it is not just capital and labor. It is also
    entrepreneurship and innovation, and it takes capital to
    innovate, to acquire new technologies, and that is how
    productivity improves, and that is how wages go up. If you do
    not become more productive through technological innovation or
    better management practices then you cannot see wages go up
    over any extended period of time.
        I also think everything you said is absolutely true with
    respect to private capital markets. If we were to restrict
    private capital markets we would destroy the United States
    economy, because they are the most important means of raising
    capital for businesses, and particularly for entrepreneurship.
        There is a more narrow case of these private equity funds
    that are basically engaged in acquiring failing public
    companies----
        Senator Kennedy. Can I stop you, because I am way over
    time.
        Mr. Burton. Yep. Yep. Yep.
        Senator Kennedy. Since Senator Warren is coming back. Do
    they have private equity in Cuba?
        Mr. Burton. No.
        Senator Kennedy. Do they have private equity in Venezuela?
        Mr. Burton. No.
        Senator Kennedy. If they have private equity in China it is
    State-owned, right?
        Mr. Burton. China is a little bit more ambiguous, but they
    are certainly restricting private enterprise----
        Senator Kennedy. So is that where we are headed here, to
    have government-run private equity, like President Xi does in
    China?
        Mr. Burton. Yes.
        Senator Kennedy. Would this bill move us toward that end?
        Mr. Burton. This bill would make private equity funds,
    narrowly defined, utterly uneconomic.
        Senator Kennedy. Now my understanding of private equity is
    that you have a company that goes out and says, ``We are really
    good at investing money, and we ask you to invest your money,
    private investor, with us, the venture capital company. And in
    order to invest in that venture capital company you have got to
    be an accredited investor.'' I mean, you have got to have a net
    worth and show that you are a sophisticated investor.
        Mr. Burton. Generally, yes.
        Senator Kennedy. And then that private equity company goes
    and buys a private business. When it buys that private
    business, does it put a gun to the head of the owner of the
    private business and say you have to sell?
        Mr. Burton. No.
        Senator Kennedy. So it is usually a voluntary transaction.
        Mr. Burton. Yes.
        Senator Kennedy. And so now you have got a new owner of the
    business. Is that right?
        Mr. Burton. Yes.
        Senator Kennedy. And that new owner tries to increase the
    value of that business, because that new owner wants to make
    money. Am I right?
        Mr. Burton. Yes.
        Senator Kennedy. Does it always work?
        Mr. Burton. No.
        Senator Kennedy. If it does not work, who loses?
        Mr. Burton. There can be a lot of losers--the shareholders,
    the equity fund, the employees, customers, vendors.
        Senator Kennedy. But if it does work it is a beautiful
    thing.
        Mr. Burton. Yes.
        Senator Kennedy. And we call this free enterprise.
        Mr. Burton. Yes.
        Senator Kennedy. As opposed to the Government saying you
    cannot invest there but you have to invest there.
        Mr. Burton. Right.
        Senator Kennedy. OK. I went way over.
        Chair Warren [presiding]. That is OK.
        Senator Kennedy. But I had to stall.
        Chair Warren. Are you good?
        Senator Kennedy. I am done.
        Chair Warren. All right.
        Senator Kennedy. I am going to go vote. Thank you all for
    coming today.
        Chair Warren. And thank you again. Sorry about the
    confusion about all the things that are going on at once.
        Let me start. I would like to talk about private equity and
    its impact on workers and communities. Ms. Smith, I think you
    are with us virtually. I want to thank you for being here
    today. Since you experienced it firsthand I would like your
    help in walking through how Art Van went under, so that we can
    better understand the private equity model.
        So could you tell me, was Art Van profitable before it was
    acquired by THL in 2017?
        Ms. Smith. We were. We had about $8 million in sales that
    year, and we literally owned about 55 to 60 percent of the
    market share in the furniture sales industry.
        Chair Warren. OK. So this private equity company takes over
    this successful, profitable, I think you said 58-year-old
    company, saying they were going to make it more profitable.
        Ms. Smith. Exactly.
        Chair Warren. So let's talk about how they made it more
    profitable. Ms. Smith, once THL came in, what did they do first
    to supercharge Art Van's growth? Did they boost the marketing
    budget? Did they invest in retaining management? Did they start
    a staff training program? Did they build a new website? What
    did they do to help boost the profits? What did they do,
    straight out of the chalks?
        Ms. Smith. Straight out of the gate, the first thing they
    did was sell off all of the real estate. Art Van was a debt-
    free company. They owned the land that every building was on.
    The first thing they did was sold the real estate, made back
    the money that they spent buying the company, and then they
    started destroying the company.
        They got rid of all of our top leadership and brought in,
    as I said, people that did not know the furniture industry at
    all. They hired the worst CEO, something that was rated the
    worst CEO in the Nation, in 2016, to run the company, and some
    could say he did not do his job, but I will say that he did his
    job very well. He was hired to run his company out of business,
    and that is what he did.
        Chair Warren. OK. So let us talk through this. So this is a
    standard play out of the private equity book. THL put out very
    little of its own money. It took out a bunch of debt to buy Art
    Van, and then made Art Van responsible for that debt.
    Meanwhile, THL is collecting huge fees just for putting its own
    deal together. And then before the ink dries on that deal, Art
    Van, this once very profitable company, as you say, that had no
    debt, gets hit with now two big expenses--the new debt that THL
    put on the company and now, if they sell off all the real
    estate, it is not that they move out and shut down their
    business yet. It is that they have got to pay rent on all the
    buildings that they used to own.
        THL, however--so Art Van is a whole lot worse off. THL,
    however, is a whole lot better off. They take some of that
    money from the buildings, they pay themselves back they money
    they had originally invested in the deal, and then they just
    keep collecting fees on everything that is happening, including
    managing the rental property here.
        So now Art Van has its back against the wall. So let me ask
    you, Ms. Smith, at this point then how did Art Van meet these
    new expenses? Did these investments in the business help boost
    revenue so they could offset these new debts?
        Ms. Smith. There were no real investments into the company.
    T.H. Lee took money out of the company and never put anything
    back in. They started laying off workers. They kept
    advertising. The one thing they did was they kept the
    advertising budget up, but that was to keep customers coming
    in, spending money. But where the money was going, we do not
    know. They said that we were losing money. However, even though
    our actual intake might have dropped in dollar-volume wise, our
    profit margin went up.
        Chair Warren. Mm-hmm.
        Ms. Smith. So when you talk about $800 million, 6, 7
    percent is a lot of money.
        Chair Warren. All right. OK. But I take it what happens is
    they keep cutting, they keep cutting the costs, and then Art
    Van gets into a situation, because they no longer own their
    real estate, they have now got to pay rent, they ultimately
    cannot pay their bills. And so Art Van files for bankruptcy.
    That destroys about 3,000 jobs. And you and your coworkers were
    left without health care during a pandemic. Do I have that
    about right?
        Ms. Smith. You have that right. They told us that we would
    have health care to the end of the month, and we did not. They
    did not give us the severance pay they told us. They told us
    that we did not get it because they did not close because they
    were going out of business. They closed because of COVID so,
    you know, let me use this as a shield to change my attitude and
    change my dance so I do not have to pay.
        Chair Warren. Right. So, you know----
        Ms. Smith. Everything they did was to profit them and to
    hurt the people, and they did not care.
        Chair Warren. One of the things that we often hear about
    from the private equity industry is that it is not in their
    interest to drive companies into bankruptcy. I think that was
    kind of the point that Senator Kennedy was making. And that
    cases like yours are unfortunate, but they are just part of
    doing business. They say that most businesses survive after
    being taken over by private equity while only a few, like Art
    Van, actually fail. Do you find that a persuasive argument, Ms.
    Smith?
        Ms. Smith. So I do not find it a persuasive argument. I
    know that T.H. Lee did not intend for Art Van to go out of
    business. They intended to take us into debt, because that is
    the model. Let us take the company into debt. Let us suck
    everything out of it we can, take it into debt, and then sell
    it to somebody else.
        However, Mr. Van's name was so golden that they were able
    to borrow so much against this company that they could not sell
    it. They took this company so deep into debt. And, you know, I
    keep hearing the Senators talk about capitalism, and this
    country was built on capitalism, and yes, it was. It was built
    on capitalism. But this is cannibalism. It is not capitalism.
    This is cannibalism. They are going in and they are stripping,
    destroying, and they do not care. They are plundering and
    leaving debt in their wake, and they do not care.
        Chair Warren. Well what really troubles me here is that
    private equity has worked out a business model that helps them
    get rich at the expense of workers like you and your families.
    You know, the model is pretty simple. They gamble with other
    people's money, they squeeze out what they can, they cram their
    pockets full, and then they bail, leaving workers and
    communities to deal with the fallout.
        So let me ask you, Dr. Appelbaum, how would the Stop Wall
    Street Looting Act help address these market failures?
        Ms. Appelbaum. Thank you. So it is very clear that the Stop
    Wall Street Looting Act would play a role in these kinds of
    situations. It would require that the private equity firm keep
    some skin in the game. It would reduce incentives for them to
    load portfolio companies with excessive amounts of debt.
    Obviously reasonable amounts of debt are not a problem. As our
    speaker just described, the amounts of debt that they put on
    that company is what the problem was.
        And so it protects companies from bankruptcy. The act
    includes protections for workers in the case of bankruptcy,
    severance pay and other protections. And it also increases
    transparency. The institutional investors in these private
    equity funds have little to no information about the companies
    that the fund has acquired, and this would provide them with
    some information, alter an asymmetrical information situation,
    and, in my opinion, it would stop the worst abuses and
    encourage private equity to do what it says it does and help
    companies to grow and be successful.
        Chair Warren. Thank you. Thank you very much, Dr.
    Appelbaum.
        I am just going to go to another round of questions, since,
    like I said, we are in a little mix-and-match here.
        What I would like to talk about now is what happens when
    companies buckle under the weight of private equity debt and
    mismanagement and go bankrupt and how workers and their
    families and communities have to deal with that fallout. We
    understand--and that is what happened in Art Van--that
    particular version of the problem, but even when companies do
    not go under, the consequences of the private equity playbook
    can still be devastating. In the worst cases, as we have seen
    with private equity's involvement in health care, people get
    sick and they die.
        So Ms. Malone, you have been a registered nurse at Crozer
    for more than 30 years. Your hospital was acquired by Prospect
    Medical, which was owned by the private equity firm Leonard
    Green, in 2016. Did you notice a change when private equity
    took over?
        Ms. Malone. Yes, almost immediately. We immediately saw
    staff were cut. We were unable to get supplies. We were told by
    vendors that bills had not been paid and that is why we were
    not able to get supplies. I work in the substance abuse
    department. We were not able to have our acupuncturist come,
    our music therapist. They had not been paid in several months
    and they were going to be unable to continue to come and
    provide their services to our patients. And we saw that happen
    pretty quickly.
        Staff was at a minimum, and the quality of the supplies--
    which, when you have poor quality it takes several more
    attempts to put an IV in, you are increasing your rate of
    infection. When you have poor quality Foley catheters your
    instance of infection goes up.
        And so all of these things result in death. You have the
    potential every time you make cuts in staff, when you are
    giving nurses more patients than they are safely able to
    handle. We are constantly putting patients at risk. These are
    people's lives that we deal with. Workplace violence has
    increased. People who are waiting. When you have 20 people over
    and above what your emergency room holds, waiting to be seen,
    the staff, we are abused. We are physically abused. We are
    verbally abused.
        I mean, the trickle-down of the cuts that this company made
    almost immediately, we are still feeling. And unfortunately,
    the pandemic happened, and so everything is being hidden under
    the guise of this pandemic. These things were happening long
    before the pandemic, and they are using the pandemic as an
    excuse that there is a nursing shortage, that we cannot get
    supplies, when the reality is they are not providing us with
    what we can have. There is not a nursing shortage.
        There is a shortage of nurses who are willing to work at
    the bedside under these kinds of conditions. We take an oath to
    do no harm, and we are no longer able to do that. Nurses are
    fleeing. I can tell you of 20-plus nurses who have left Crozer
    in the last 2 weeks.
        Chair Warren. So you are saying here, just so I can get
    this together, with private equity, so they cut staffing, cut
    supplies. That reduces the quality of patient care, and, in
    fact, increases infections, ultimately mortality rates.
        Talk to me just a little bit, though, about other parts out
    of the playbook. For example, what did they do with the real
    estate, in your case?
        Ms. Malone. So they did sell the real estate, and so, once
    again, they made a large profit. Leonard Green took $400
    million out of Prospect Medical.
        Chair Warren. So they took how much money out of the----
        Ms. Malone. $400 million.
        Chair Warren. So they take $400 million out while they are
    laying off people, shortchanging you on supplies.
        Ms. Malone. Yes. Yes. They took all of that money, and they
    had made a commitment. They had made a commitment to make a
    $200 million investment in our hospital as part of the
    acquisition deal, and none of that has happened.
        Chair Warren. None of it happened. You know, this is not a
    business model. This is looting.
        Ms. Malone. It is.
        Chair Warren. And unfortunately, we are seeing it all
    around the health care sector, including, as COVID has made
    painfully clear, at nursing homes. Private equity firms have
    been buying up nursing homes, and the consequences have been
    deadly. Researchers have found that private equity ownership,
    quote, ``increases the short-term mortality of Medicaid
    patients by 10 percent,'' end quote. That implies that more
    than 200,000 people died between 2000 and 2017, simply because
    they lived in a nursing home that was owned by a private equity
    firm.
        So, Ms. Malone, from what you have experienced with private
    equity at your hospital, does the fact that private equity
    ownership has been found to kill people in nursing homes
    surprise you?
        Ms. Malone. No, it does not. It does not at all. Private
    equity firms are focused on making the biggest profit. They are
    not focused on providing the best care. And I do not ever see
    how their incentives could be aligned with patients and staff.
    It just does not work that way. These are people's lives.
        Chair Warren. I think I misspoke on the number of deaths. I
    think I looked down and said 200,000 instead of 20,000. One
    death is one death too many.
        Ms. Malone. It is too many.
        Chair Warren. Too many. So this is one of those things we
    need to act, and this is why I have introduced the Stop Wall
    Street Looting Act, so that we can better align incentives
    between private equity and the companies they take over by
    restricting the ability of private equity to buy a company and
    profit from running it straight into the ground. This is a bill
    that would ensure that private equity has skin in the game, as
    Dr. Appelbaum was talking about. Because if private equity has
    skin in the game, maybe they will think twice about their
    actions, especially when their looting leads to increased
    illness, suffering, and death among our most vulnerable people.
        So thank you very much. Thank you for being here. I
    appreciate it, Ms. Malone.
        Should I do another round of questions? All right. Right
    here. Here we go. This is what happens when you get out of
    order here. You guys just have to take me straight through on
    this.
        So I want to talk about the returns. Let us talk about the
    financial part of this now, the returns from private equity
    investments. After all, private equity keeps scooping up money
    because they promise super-high returns, higher than more
    traditional investments like stocks and bonds. In fact, that is
    why giant private equity firms get the big fees. They
    supposedly deliver big returns.
        Strong and steady returns are important. Public pension
    funds and retirement security of teachers and firefighters and
    local government employees across the country depend on these
    returns. So it is no wonder that pension funds and other
    institutional investors would find private equity's promises so
    very attractive and why they might be willing to tolerate the
    risks, and even the consequences that we have talked about
    today.
        So let us start with the data. Dr. Appelbaum, you have
    studied market returns in detail. This is pretty much your
    specialty. So let me ask you, does private equity outperform
    the market?
        Ms. Appelbaum. No, no, it does not, and there are quite a
    few studies now that show that the returns basically--well, let
    us be clear. Since 2006, it is the median private equity firm
    in each vintage launched since then that has just about tracked
    the market, using the metric that the finance professors would
    use, which is the public market equivalent.
        Nobody who studies private equity uses the internal rate of
    return, which is what is used in the industry and which is
    quite misleading. You never get the amount of money that the
    internal rate of return suggests to take to the bank. That is
    not money you can take to the bank. If we have time I can tell
    you all about what is wrong with the IRR.
        But what the researchers use is the public market
    equivalent, and what they find is that since 2006, the median
    fund, the typical fund has not outperformed the market. That
    means half of the funds are underperforming the market. Right?
        Chair Warren. Right. But that means for 15 years now----
        Ms. Appelbaum. Yes.
        Chair Warren. ----I just want to be crystal clear on this--
    for 15 years the typical private equity fund has failed to
    outperform the stock market, which sounds a lot like private
    equity has been fooling everyone for the past 15 years.
        So let me ask, Dr. Appelbaum, if the typical private equity
    fund is not generating the returns that the private equity
    industry claims it does, then what are the investors paying
    for?
        Ms. Appelbaum. Yes, that is a very good question, and, of
    course, as you know, they are paying billions of dollars in
    fees. I mean, those fees really add up. So I am just going to
    point to a study by Oxford University finance professor,
    Ludovic Phalippou. He calls private equity funds ``billionaire
    factories.'' They produce little for investors but they make
    private equity firm partners billionaires.
        Chair Warren. Wow. So teachers and firefighters are being
    asked to take money out of their retirements to pad the pockets
    of private equity billionaires, and they are not even getting
    the above-average market returns that they thought that they
    were paying for. Is that a fair summary?
        Ms. Appelbaum. It is definitely a fair summary. And you
    have to remember that these are risky investments, and the idea
    at the beginning was that they would get a return that was 3
    percent above the market to reward them for the risk that they
    are taking. And now they get no premium whatsoever.
        Chair Warren. OK. So they are getting no premium but they
    are taking on more risk.
        So we have a chance here now to talk with the Treasurer of
    the number one State employee pension fund, the fund that is
    doing better than any other public employee pension fund. I
    mean, hurrah, right? This is not the one in the middle. This is
    the one way down on the top-performing end.
        Treasurer Frerichs, you have been doing very well with
    private equity. Is that a fair statement?
        Mr. Frerichs. Yes. That is correct.
        Chair Warren. Good. And you are an investor. That is, you
    manage a pension fund on behalf of your office. You are a
    trustee for a public pension plan that invests in private
    equity on behalf of teachers and firefighters and other public
    employees.
        So the question I want to ask you, as an investor, you are
    on the side that is trying to make money out of this, are you
    satisfied with the current rules governing private equity or
    would you like to see some new rules in place requiring
    transparency about fees and aligning the interests of PE
    managers with their investors?
        Mr. Frerichs. I will say that PE has done well by us, but
    it would be beneficial to see new rules and sensible reforms.
    For example, standard reporting would ensure transparency for
    all investors and ensure investors can validate all fees
    charged by private equity to know that they conform with their
    negotiated agreements. That would be one good reform.
        Our office does due diligence. Senator Kennedy asked if I
    had made any investments without that, no. We do our due
    diligence, but for us, and many of our public fund peers, there
    is difficulty receiving proper disclosure and transparency
    around direct and indirect fees in a clear and consistent
    manner. There has been characterization that we are heading
    toward socialism here. I believe in the market here, and I
    believe markets work well and efficiently with proper access to
    information.
        This opaqueness makes it difficult to shop around and
    determine whether we are getting a competitive rate. He is
    right, if we are buying a car and someone would not disclose to
    us, we would not want to buy there, but sometimes they will
    just flood you in information and bury things in that sale
    document at that car dealer. You know, and we regulate car
    dealers to make sure there is proper disclosure.
        Without proper disclosures, tracking the fees and expenses
    charged by a private equity firm is a cumbersome process, and
    markets should not be cumbersome. This can then potentially
    enable firms to hide and shift fees, potentially manipulate
    returns reporting, and avoid disclosing certain deals.
    Ultimately, I believe new rules would be valuable.
        Chair Warren. Yeah. So as I understand this, you are saying
    you like the market but it is very hard for you to be able to
    see what you are paying in fees, and if that is hard, that
    means it is very hard to make comparative judgments.
        And I just want to emphasize here, you are not one of the
    little funds. Am I right on this? You have a pretty big shop
    there.
        Mr. Frerichs. Correct. We oversee tens of billions of
    dollars in investments, between ISBI and internal, billions of
    dollars in private equity. So we have the resources here, but
    still, in order to use those resources to try and sort through
    all of this, it costs us extra money, and smaller pension funds
    do not have the resources that we have.
        Chair Warren. Yeah. I think there is just a really
    important point about markets. If we want markets to work then
    people have to have consistently reported information so you
    can get comparisons across them, and the information has to be
    made available.
        You know, I appreciate your testimony on this. My Stop Wall
    Street Looting Act would require private equity funds to
    clearly disclose their fees and returns so that public pensions
    and other investors have the information that they need in
    order to make informed decisions.
        America faces a retirement crisis, but the solution is not
    to squeeze employees more or to cut retail jobs and wages or to
    undermine the health and safety of people in hospitals and
    nursing homes. The solution is to put stronger rules in place
    that investors and retirees and families do not get gouged by
    private equity firms that are trying to fleece them. So to me,
    that is what this hearing is about today.
        Since I did not get to do an opening statement at the
    beginning I just want to do a kind of overview as we wrap this
    up and say thank you to everyone who has been here. You know,
    this is the first hearing that the Senate has held that has
    focused entirely on private equity, and it is about time that
    we do this. We need to get the facts on the table about what
    private equity firms are doing to our economy and to our
    communities.
        Private equity firms have plenty of money to spend on
    lobbyists and PR campaigns. They have their own trade
    association, which I know has been making the rounds in
    Congress ahead of this hearing. They have worked hard to
    portray themselves as good actors that bring jobs and
    investments to communities in need, and they have no problem
    telling their version of the story.
        But their version of the story glosses over a lot of what
    happens to local workers, to local businesses, to local
    communities when some private equity firm waltzes into town.
    Once private equity starts buying up local stores or hospitals
    or newspapers or prison commissaries or for-profit colleges or
    nursing homes or hospitals or any of dozens of other
    industries, the smiling private equity managers and their
    secret investors profit hugely while workers and local
    businesses and local communities too often come out as the
    losers.
        In 2019, I opened a broad investigation of the role of
    private equity in the economy, and this investigation exposed
    how the industry is fundamentally broken. Private equity relies
    on a business model that pays managers to go after short-term
    profits, charging huge fees even as they destroy the long-term
    prospects of the businesses that they buy. It is bad for
    workers and bad for consumers when local retailers, or even
    large chains, are bought out by private equity. These firms
    load up the target company with debt, as we have seen the
    examples here today, they strip out assets, and the next thing
    you know thousands of workers have lost their jobs and the
    stores are shut down.
        It is also bad for seniors and their families when private
    equity firms buy up nursing homes and other health care
    providers. It is the same pattern: assets are stripped out,
    cost-cutting runs rampant, and the quality of care declines,
    with real consequences for people's health and for their lives.
        It is bad for students when private equity firms buy up
    for-profit colleges. The industry already has a bad record of
    ripping off students, and private equity just makes it worse.
        It is bad for communities when private equity firms buy up
    thousands of manufactured homes and the land that they sit on.
    Costs skyrocket, forcing residents to choose between paying the
    rent and paying for basic necessities like food and medicine,
    and meanwhile the investments in these communities decline and
    conditions get worse and worse.
        And by the way, we will be hearing more about that
    particular abuse of private equity in the housing sector
    tomorrow at the Banking Committee hearing, and I am looking
    forward to joining Senator Brown on that.
        What I see here is across the board. In industry after
    industry it is the same pattern. Private equity executives make
    off with massive short-term gains and they leave workers,
    consumers, communities, and ordinary investors with pretty much
    nothing to show for it. And all of this has been magnified
    during the COVID pandemic. The companies that are owned by
    private equity firms have received over $5 billion in taxpayer
    money from the CARES Act. I appreciate you pointing it out in
    your case, Ms. Malone.
        Their record has only gotten worse. Private equity-owned
    nursing homes had a terrible safety record before the pandemic.
    Private equity-owned retails were weighed down with debt and
    shut their doors for good. Private equity landlords laid in
    wait for the eviction moratorium to end so they could make more
    money, even if meant kicking families out of their homes. What
    almost every American experienced as a crisis, private equity
    viewed as an opportunity.
        And I know, we have heard from the private equity industry
    in response to this hearing. They say this is all for the best.
    We hear about the standard talking points that private equity
    firms employ millions of people and create big returns for
    pension funds for teachers and firefighters. But when you fact-
    check those claims, it just turns out they are not true. In
    fact, private equity investments often result in fewer jobs and
    lower wages, and despite how hard they squeeze the businesses
    they acquire, private equity does not offer an above-market
    return to investors.
        So what are we doing to do about this? Well, I want to set
    some minds at ease. I do not want to eliminate private equity,
    but I do want to fix it, and that is why I have introduced the
    Stop Wall Street Looting Act, which is groundbreaking
    legislation to clean up this industry. My legislation aims to
    make the entire industry more transparent and to end the
    misaligned incentives that create private equity's ``heads, I
    win, tails, you lose'' business model.
        So I appreciate all of the witnesses who joined us today. I
    very much appreciate the first-hand accounts you have given us
    about what it is like to live through this on the receiving
    end, as an employee. I appreciate the academic perspective that
    is going on, and I very much appreciate the Treasurer joining
    us and telling us what it is like as an investor, even someone
    who has done well with private equity, how we could make
    improvements that make this market work better.
        So thank you all for being here today. Thank you for
    providing testimony. Before we go I would also like to submit a
    statement for the record from the Private Equity Stakeholder
    Project.
        For Senators who wish to submit questions for the record,
    those questions are due 1 week from today, which is Wednesday,
    October 27.
        I also want to enter into the record a statement from my
    friend, Senator Baldwin, who has been a fighter for the workers
    and the communities of Wisconsin in the face of predatory
    private equity abuses. And so thank you, Senator Baldwin. We
    will make sure that is entered into the record.
        And for our witnesses, you will have 45 days to respond to
    any questions.
        Thank you all very much, and with that this hearing is
    adjourned. Thank you.
        [Whereupon, at 3:34 p.m., the hearing was adjourned.]
        [Prepared statements, responses to written questions, and
    additional material supplied for the record follow:]
                  PREPARED STATEMENT OF CHAIR ELIZABETH WARREN
        Good afternoon, and welcome to today's hearing on ensuring that
    companies and communities are not destroyed by private equity firms.
    This is the first hearing that the Senate has held focused solely on
    private equity, and it's about time. We need to get the facts on the
    table about what private equity firms are doing to our economy and to
    our communities.
        Private equity firms have plenty of money to spend on lobbyists and
    PR campaigns. They have their own trade association, which I know has
    been making the rounds in Congress ahead of this hearing. They have
    worked hard to portray themselves as good actors that bring jobs and
    investments to communities in need, and they have no problem telling
    their own version of the story.
        But the industry version glosses over what happens to the local
    workers, to the local businesses, and to the local communities when
    some private equity firm waltzes into town. Once private equity starts
    buying up local stores, or hospitals, or newspapers, or prison
    commissaries, or for-profit colleges, or nursing homes, or any of the
    dozens of industries, the smiling private equity managers and their
    secret investors pocket huge profits while local workers, local
    businesses, and local communities come out the losers.
        In 2019, I opened a broad investigation of the role of private
    equity in the economy. This investigation exposed how the industry is
    fundamentally broken. Private equity relies on a business model that
    pays managers to go after short-term profits, charging huge fees even
    as they destroy the long-term prospects of the businesses they buy.
        It's bad for workers and consumers when local retailers or even
    large chains are bought out by private equity firms. These firms load
    the target companies up with debt, strip out their assets, and next
    thing you know, thousands of workers have lost their jobs, and the
    stores are shut down.
        It's bad for seniors and their families when private equity firms
    buy up nursing homes and other health care providers. It's the same
    pattern: assets are stripped out, cost-cutting runs rampant, and the
    quality of care declines--with real consequences for people's health
    and lives.
        It's bad for students when private equity firms buy up for-profit
    colleges. The industry already has a bad record of ripping off
    students, and private equity makes it worse.
        It's bad for communities when private equity firms buy up thousands
    of manufactured homes or the land they sit on. Costs skyrocket, forcing
    residents to choose between paying the rent and paying for basic
    necessities like food and medicine, meanwhile investments in these
    communities decline and conditions get worse and worse. By the way,
    we'll be hearing more about the abuses of private equity in the housing
    sector at tomorrow's Banking Committee hearing, and I'm looking forward
    to joining Chairman Brown there.
        Across the board, in industry after industry, we see the same
    pattern: private equity executives make off with massive short-term
    gains, and leave workers, consumers, communities, and ordinary
    investors with nothing to show for it.
        All of this has been magnified during the COVID pandemic. The
    companies that are owned by private equity firms have received over $5
    billion in taxpayer money from the CARES Act, and their record has only
    gotten worse. Private equity-owned nursing homes had a terrible safety
    record during the pandemic. Private equity-owned retailers were weighed
    down with debt and shut their doors for good. Private equity landlords
    laid in wait for the eviction moratorium to end so they could make more
    money, even if it meant kicking families out of their homes. What
    almost every American experienced as a crisis, private equity viewed as
    an opportunity.
        I know what we'll hear from the private equity industry in response
    to this hearing. They'll say that all this is for the best. We'll hear
    the standard talking points that private equity firms employ millions
    of people and create big returns for pension funds for teachers and
    firefighters. But it's time to fact-check those claims. In fact,
    private equity investments often result in fewer jobs and lower wages.
    And despite how hard they squeeze the businesses they acquire, private
    equity doesn't always offer a good return to pension funds. In fact,
    pension funds turn over millions in fees for these funds to manage,
    then they end up with no better returns than index funds in the stock
    market.
        So what do we do about it? Well, let me set some minds at ease. I
    don't want to eliminate private equity. But I do want to fix it. And
    that's why I've introduced the Stop Wall Street Looting Act, my
    groundbreaking legislation to clean up the industry. My legislation
    aims to make the entire industry more transparent and to end misaligned
    incentives that create private equity's ``heads I win, tails you lose''
    business model.
        I appreciate our witnesses joining us today--I'm looking forward to
    hearing their first-hand accounts of what private equity meant for
    their jobs and their communities. It's long past time to reform this
    industry and end their most destructive practices.
                                     ______

                     PREPARED STATEMENT OF DAVID R. BURTON
      Senior Fellow in Economic Policy, Roe Institute for Economic Policy
     Studies, Institute for Economic Freedom and Opportunity, The Heritage
                                   Foundation
                                October 20, 2021
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

                     PREPARED STATEMENT OF DOUG HOLTZ-EAKIN
                        President, American Action Forum
                                October 20, 2021
    Introduction
        Chairman Warren, Ranking Member Kennedy, and Members of the
    Subcommittee, thank you for the opportunity to discuss financial
    markets, in general, and, in particular, the role of private equity
    firms. In this testimony, I hope to make three main points:

        Financial markets serve key economic functions such as
            intermediation between savers and investors, allocation of
            capital, diversification of risk, separation of ownership and
            management, pricing return and risk, and others.

        Participants in financial markets have myriad business
            models--banks, insurance companies, pension funds, hedge funds,
            private equity, etc.--to undertake these functions; legal,
            regulatory, and tax policies should be as neutral as possible
            with respect to the choice of business models.

        The Stop Wall Street Looting Act violates this basic
            dictum, discriminating against public equity firms, damaging
            the outlook for the private equity industry and the economy as
            a whole.

        Let me discuss each of these in greater detail.
        Financial markets are a crucial component of developed economies.
    Well-functioning financial markets permit savers to provide their
    pooled savings to firms for investment in skills, technologies, and
    physical capital. They permit savers to diversify across risks and
    provide important price signals regarding the expected returns and
    risks of alternative investments. In the absence of financial markets,
    owners would be forced to also manage each firm and hold
    undiversifiable risk regarding its performance; financial markets
    permit specialization of management functions as well as
    diversification of risks.
        These economic functions may be supplied by a variety of entities--
    banks, pension funds, insurance companies, mutual funds, and others
    offer various combinations of these desirable economic activities. In
    developing the legal, regulatory, and tax frameworks within which they
    operate, it is desirable to tilt the playing field as little as
    possible, allowing financial market participants to compete on the
    basis of performance. As noted by most economists and this
    Administration, healthy market competition leads to lower prices,
    higher quality goods and services, greater variety, and more
    innovation.
    Background on Private Equity
        Private-equity (PE) firms are a crucial part of capital allocation
    and the pricing of return and risk. PE firms invest in businesses they
    see as undervalued, provide additional capital and management services,
    and raising value. The vast majority (over 85 percent) of these
    investments are in small businesses (under 500 employees).
        PE has been very successful. For example, the American Investment
    Council's 2021 Public Pension Study shows PE has the highest return of
    any asset class public pension portfolios. In 2020, PE had a median
    annualized return of 12.3 percent over a 10-year period.
        Its success in raising value has resulted in a substantial economic
    footprint. According to E&Y, the PE sector directly employed 11.7
    million workers earning $900 billion in employee compensation. The
    average employee earned roughly $73,000 in wages and fringe benefits in
    2020, while the median worker received approximately $50,000 in wages
    and benefits in 2020. These workers helped the private equity sector
    produce $1.4 trillion of gross domestic product (GDP), or roughly 6.5
    percent of total GDP.
        The PE sector has substantial backward linkages. Suppliers
    generated $900 billion in GDP, employing another 7.5 million workers,
    and paying roughly $500 billion in wages and benefits.
        In short, PE is a very successful sector of the economy and the
    fruits of its success are widely shared by the investors in PE and the
    economy as a whole. As a corollary, unwise policies that damage PE
    would impose widespread harm in the economy.
    Economic Implications of the Stop Wall Street Looting Act
        The proposed Stop Wall Street Looting Act (SWSLA) is one such
    potential policy misstep. The SWSLA would impose a separate set of tax,
    regulatory, and legal frameworks on the PE industry. Among other
    provisions, it would impose:

        A 100 percent surtax on fees received from portfolio
            companies,

        A tax increase on carried interest capital gains,

        Limitations on interest deductibility,

        Restrictions on dividends,

        Joint and several liability on holders of economic
            interests in a private fund for all liabilities of a portfolio
            companies, and

        Alternative rules for the treatment of worker claims in
            bankruptcy.

        As a matter of logic, the net result would be to make investments
    in PE less attractive, pushing capital to less productive uses, and
    imposing a loss on the economy. The only question is how large the
    losses would be.
        A 2019 study by the U.S. Chamber of Commerce found that the
    ``imposition of increased risk, taxes, and restrictions . . . would
    likely cause some (and potentially all) of the private equity industry
    to cease to exist.'' As a result, the SWSLA would result in a loss in
    the range of 6.9 million to 26.3 million jobs, from $671 million to
    $3.36 billion per year in investor earnings (about half of which would
    be lost to pension fund retirees), and substantial tax revenue for
    local governments, State governments, and the Federal Government.
        Thank you. I look forward to answering your questions.
                                     ______

                     PREPARED STATEMENT OF MICHAEL FRERICHS
                            Illinois State Treasurer
                                October 20, 2021
        Good afternoon Chair Warren, Ranking Member Kennedy, and other
    distinguished Members of this Subcommittee and guests. My name is
    Michael Frerichs. I am the Illinois State Treasurer, and it is an honor
    to be invited to speak to you today to share my experience managing
    investments on behalf of the people of Illinois.
        The Illinois State Treasurer is a constitutionally established,
    elected office in our State that performs a variety of roles. I am the
    State's Chief Investment and Banking Officer. In that role, my office
    manages approximately $50 billion, including $25 billion in State
    funds, $16 billion in retirement and college savings plans, and $9
    billion on behalf of State and local government entities. \1\ I also
    serve as a trustee on the Illinois State Board of Investment (ISBI),
    \2\ which manages approximately $31 billion in assets on behalf of over
    226,000 beneficiaries of a number of State retirement plans. \3\
    ---------------------------------------------------------------------------
         \1\ Illinois State Treasurer, Investments, available at https://
    illinoistreasurer.gov/Office-of-the-Treasurer/Investments.
         \2\ I am testifying today in my capacity as the Illinois State
    Treasurer and as an individual trustee of ISBI. These views are my own
    and are not intended to represent the views of ISBI.
         \3\ Illinois State Board of Investments, ``About Us'', available
    at https://www.isbinvestment.com/.
    ---------------------------------------------------------------------------
        As an elected steward of public funds, I have a responsibility to
    make prudent investment decisions, and I also have a responsibility to
    the long-term fiscal health of our State, which relies on a vibrant and
    sustainable economy. Furthermore, I have a responsibility to the
    communities that I represent to tend to their well-being and to be
    mindful of how the decisions that our office makes might impact the
    livelihoods of workers and their families.
        As an active investor in the space, I view private equity as an
    essential part of our capitalist system. The idea of the industry is
    simple and reasonable: sometimes a company has room to grow and become
    more productive, but its current ownership is not in a position to
    capitalize on that opportunity. In this situation, it makes sense for
    an investment vehicle run by experts to pool private capital, buy the
    firm, take it to the next level, and then sell it. This generates a
    profit for private equity firms and their investors, it helps the
    company grow, and it creates more economic opportunity for society at
    large.
        For investors like the Illinois Treasury and other institutional
    investors, private equity investments provide an opportunity to further
    diversify our portfolios, help drive economic development in Illinois
    and beyond, support small businesses, invest in qualified minority- and
    women-owned investment firms, and provide a competitive return that
    complements our investments in other asset classes such as public
    equities and fixed income.
        The problem is that as private equity has continued to evolve as an
    asset class, becoming a larger and larger portion of our economy, it
    has remained dangerously under-regulated. That means that predatory and
    destructive activities like pillaging assets, opaque fees, and
    strategically using bankruptcy without regard for the well-being of
    workers remain perfectly legal. As private equity continues to evolve,
    there is a need for sensible reforms that will enhance long-term
    outcomes for investors, including public pensions, and continue to
    focus private equity on what it does best, helping companies to grow
    and expanding economic opportunity for our communities.
        As Treasurer, my office directly invests in private equity funds,
    and we intend to continue to do so in the future. Through the Illinois
    Growth and Innovation Fund (ILGIF), my office makes targeted
    investments with venture capital, growth equity, and private venture
    debt funds that invest in technology-enabled businesses that are either
    based in Illinois or possess a significant workforce in Illinois with
    the goal to attract, assist, and retain these quality technology-
    enabled businesses in Illinois. \4\ As of March 31, 2021, we have $430
    million invested in private equity and venture capital through this
    program. To date, these investments have been our highest performing
    asset class with a net internal rate of return of 21.3 percent since
    the inception of the program in 2016. \5\ After evaluating this
    program, I saw great potential in these investments for Illinois, both
    in terms of the return on investment and the ability to stimulate
    growth in our economy, and that led me to advocate for a change in the
    State law to allow my office to increase the percentage of funds
    invested in ILGIF from 2 percent of the State investment portfolio to 5
    percent. \6\
    ---------------------------------------------------------------------------
         \4\ See Illinois Growth and Innovation Fund, Mission, available at
    http://www.ilgif.com.
         \5\ See Illinois Growth and Innovation Fund, Impact, available at
    https://www.ilgif.com.
         \6\ See the Technology Development Act, 30 ILCS 265, available at
    https://ilga.gov/legislation/ilcs/ilcs3.asp?ActID=502&ChapterID=7; see
    also ``Treasurer Frerichs Announces Increase in Venture Funding To Help
    Grow Technology Businesses in Illinois'', Illinois Venture Capital
    Association, Aug. 29, 2020, available at https://ivca.memberclicks.net/
    treasurer-frerichs-announces-increase-in-venture-fundingto-help-grow-
    technology-businesses-in-illinois.
    ---------------------------------------------------------------------------
        A core investment objective for ILGIF in addition to driving
    performance and economic development, is fostering a more diverse and
    inclusive manager and private equity ecosystem across Illinois. It is
    my core belief that a more inclusive private equity ecosystem means
    more opportunities for diverse founders which in the long term, has the
    opportunity to build generational wealth and advance equity, diversity,
    and inclusion in our communities. We know the importance of providing
    individuals with traditional and nontraditional backgrounds necessary
    opportunities to grow within the private equity space and the benefits
    a greater level of diversity adds to the ecosystem overall.
        As of March 31, 2021, of the $430 million committed to Illinois
    venture capital firms under ILGIF, $183 million has been committed to
    minority-, women-, veteran-, and disabled-operated (MWVD) venture
    capital firms. That represents over 42 percent of committed capital to
    date.
        Investments from ILGIF fund managers have supported more than 110
    diverse-owned portfolio companies to receive funding. Through ILGIF,
    the Illinois Treasurer actively seeds and anchors new MWVD-operated
    venture capital and private equity funds furthering the investment
    objective to foster a more diverse and inclusive manager pool and
    entrepreneurial community across Illinois.
        For example, our office continues to push toward increasing
    economic equity to broad swaths of Chicago, in which there has been
    decades of disinvestment and undercapitalization that has left entire
    communities vulnerable and marginalized. Entrepreneurship is a potent
    tool in closing longstanding wealth gaps. That is why in partnership
    with minority-owned and operated venture capital firm Cleveland Avenue,
    ILGIF anchored and helped launch the Cleveland Avenue State Treasurer's
    Urban Success Fund, a $70 million fund dedicated to investing in
    underrepresented founders within underserved communities on Chicago's
    South and West sides.
        Likewise, as a trustee of ISBI, which maintains approximately 7
    percent of its total portfolio in private equity investments, I have
    also given considerable thought to the role that these investments play
    in support of the long-term growth of our State pensions.
        I have seen first-hand the benefits of private equity investment
    for our State, but also the ways in which the current lack of
    regulation allows for abuses that harm institutional investors,
    workers, and businesses. Specifically, I want to underscore the need
    for greater transparency to allow institutional investors, including
    ILGIF and our State pension programs, to fairly evaluate the
    prospective costs and benefits associated with a particular private
    equity investment, as well as the need for reforms targeting bad actors
    in this industry that allow workers and their families to become
    collateral damages when an investment goes awry. I see these reforms as
    a way to enhance this industry by aligning the goals of private equity
    firms, institutional investors, and the people and communities that
    work every day to make their businesses a success.
    Lack of Transparency
        Regulators have recognized that the lack of transparency in this
    industry often operates to the detriment of institutional investors.
    Since 2014, the SEC has brought to light many cases where fees and
    expenses were improperly charged or insufficiently disclosed to
    investors in private funds. \7\ In June 2020, the Office of Compliance
    Inspections and Examinations (OCIE) at the U.S. Securities and Exchange
    Commission (SEC) released a risk alert identifying numerous issues with
    allocation and disclosure of fees and expenses by private fund advisors
    that had arisen in recent compliance examinations. \8\ OCIE noted that
    many of the deficiencies discussed in the Risk Alert may have caused
    investors in private funds ``to pay more in fees and expenses than they
    should have or resulted in investors not being informed of relevant
    conflicts of interest concerning the private fund advisor and the
    fund.'' \9\ Earlier this year, in testimony before the full Senate
    Banking Committee, SEC Chairman Gary Gensler stated that
    ``[u]ltimately, every pension fund investing in these private funds
    would benefit if there were greater transparency and competition in
    this space.'' \10\
    ---------------------------------------------------------------------------
         \7\ See Andrew J. Bowden, Director of OCIE, ``Spreading Sunshine
    in Private Equity'', May 4, 2014, available at https://www.sec.gov/
    news/speech/2014-spch05062014ab.html; see also Marc Wyatt, Acting
    Director of OCIE, ``Private Equity: A Look Back and a Glimpse Ahead'',
    May 13, 2015, available at https://www.sec.gov/news/speech/private-
    equity-look-back-and-glimpse-ahead.html.
         \8\ See U.S. Securities and Exchange Commission, Office of
    Compliance Inspections and Examinations, Risk Alert, dated June 23,
    2020, available at https://www.sec.gov/files/
    Private%20Fund%20Risk%20Alert-0.pdf.
         \9\ See OCIE Risk Alert, supra.
         \10\ Testimony of Gary Gensler before the United States Senate
    Committee on Banking, Housing, and Urban Affairs, September 14, 2021,
    available at https://www.banking.senate.gov/imo/media/doc/
    Gensler%20Testimony%209-14-21.pdf.
    ---------------------------------------------------------------------------
        In my own experience, the lack of transparency surrounding private
    equity investments, specifically related to fee arrangements and the
    calculation of the internal rate of return creates significant
    challenges for institutional investors like my office and our State
    retirement plans. The fees and costs associated with a particular
    investment can significantly affect the longterm return on these
    investments. The fees charged by private equity managers are among the
    highest in the investment industry, thus, any lack of transparency
    represents a meaningful risk.
        Private equity firms use different terms, different methodologies
    around calculating asset values, and different metrics to report on
    their performance, with some breaking out fees and expenses to
    investors while others make fee and expense information much harder to
    identify. This makes evaluation cumbersome and makes direct comparisons
    between funds nearly impossible.
        Additionally, private equity firms are increasingly using bridge
    loans, known as subscription lines, to pay for assets, manage capital
    calls, and boost returns, adding more debt to already leveraged
    transactions without always accounting for their true impact on
    returns. In order to assess the value of these investments,
    institutional investors have to hire specialists who are expensive and
    drive up costs, or risk paying more for an investment than we should.
        Clear and standardized fee and expense disclosures, similar to the
    template established by the Institutional Limited Partners Association,
    would allow institutional investors to streamline their analysis and
    will drive better decision making. These basic reforms would also
    reduce the compliance burden and cost, not only on Limited Partners,
    such as the programs my office manages, but also on General Partners
    being asked to report against a range of varying templates from
    investors. Investors would also be able to accurately understand and
    account for general partner fees, fee offsets, and fund expenses in
    order to verify what they are being charged against what was agreed
    upon in investment contracts.
        While some might argue that access to more granular reporting can
    be achieved through negotiations between more sophisticated Limited
    Partners like large institutional investors and the private equity
    firms, this approach has yet to result in a change in market practice.
    As a larger institutional investor, my office attempts to negotiate an
    increased level of transparency by leveraging a reporting template that
    is modeled off of the Institutional Limited Partners Association's
    reporting template to ensure private equity firms demonstrate that they
    are allocating costs appropriately. However, basic market transparency
    should be available to all investors, including smaller institutional
    investors such as city or county pension funds, not just those with the
    buying power to negotiate a more favorable release of information.
    Protection for Workers and Communities
        In my role as an elected officer of the State of Illinois, I take
    my responsibility towards the communities in my State very seriously.
    As an investor of public funds, I also see it as my obligation to
    integrate sustainability factors into our investment decisions,
    including minimizing risks and negative impacts to what we call our
    human capital--the workers who drive our economy. While I see strong
    value in private equity investment, there are many examples of firms
    that have profited off a business model that allows them to buy
    companies, load them up with debt, pay themselves massive and often
    opaque fees with that borrowed money, and then leave the company in
    bankruptcy. Hundreds of thousands of workers have lost their jobs in
    private equity owned corporate bankruptcies, \11\ tearing families and
    neighborhoods apart. To this end, Congress should consider reforms that
    prioritize worker pay in the bankruptcy process, create incentives for
    job retention so that workers can benefit from a company's second
    chance, and incentivize value-generating management and investment over
    asset-stripping.
    ---------------------------------------------------------------------------
         \11\ The Center for Popular Democracy, ``Pirate Entity: How Wall
    Street Firms Are Pillaging American Retail, The Center'', July 23,
    2019, available at https://www.populardemocracy.org/pirateequity.
    ---------------------------------------------------------------------------
    Conclusion
        Madam Chair, Ranking Member Kennedy, and other distinguished
    Members of this Subcommittee and guests, I ask for your help in
    strengthening private equity markets, which will help ensure the long-
    term success of the industry, establish market efficiencies, and lead
    to better outcomes for all stakeholders. I firmly believe that private
    equity can help unlock economic opportunity in ways that grow our
    communities, expand the circle of possibility, and provide excellent,
    long-term returns for investors like the Illinois Treasury. With your
    support, I know that a reformed private equity market can accomplish
    all this, and more.
                                     ______

                      PREPARED STATEMENT OF SHIRLEY SMITH
     Former Sales Manager at Art Van Furniture and Leader with United for
                                    Respect
                                October 20, 2021
        Good afternoon, Senators. My name is Shirley Smith and I live in
    Detroit, Michigan. For 23 years, I worked for Art Van Furniture as a
    sales manager--a job I truly loved. Art Van was a family owned
    business, and the company culture was centered around family. The
    employees were tight-knit and we had each other's backs; there was a
    real sense of community. I was a single mom and I'm grateful for the
    support and flexibility I had at work, so I could be there for my son
    while juggling a successful career. I had the opportunity to build
    relationships with my customers and earn a good living, making it
    possible to buy my own home and provide a good education for my son.
    Working at Art Van was like my own little slice of the American Dream--
    until the private equity firm Thomas H. Lee (THL) came in and broke up
    our family.
        Before T.H. Lee took over in 2017, Art Van had been a successful
    company, reporting $800 million dollars in revenue \1\ that year. Up to
    then, most of my colleagues would have told you it was a company they
    loved working for, but those last 3 years were hell.
    ---------------------------------------------------------------------------
         \1\ https://www.crainsdetroit.com/awards/40-art-van-furniture-inc
    ---------------------------------------------------------------------------
        It wasn't obvious right away, but a lot started changing. We
    noticed our top company leaders were being pushed out the door. T.H.
    Lee brought in people who didn't know the furniture business, and our
    orders started coming in slower. In hindsight, that was a big red
    flag--sales associates work on commission which only gets paid when an
    order is delivered--and customer orders weren't being filled. Art Van's
    reputation was being destroyed right before our eyes, and we had to
    start making up excuses to our customers, some of whom grew violent
    when they learned they wouldn't be getting refunds. One of my
    colleagues even had a gun pulled on her during closing weekend. T.H.
    Lee made us feel like liars and thieves, taking people's hard-earned
    money when they were never going to receive their orders.
        We stopped paying our bills on time, and started cutting staff. For
    decades, Art Van had been a debt-free company that paid all its bills.
    Under T.H. Lee's ownership, Art Van racked up millions of dollars in
    debt to Wall Street banks and other deep-pocketed creditors. T.H. Lee
    even sold off Art Van's real estate to itself, forcing Art Van to pay
    rent on the same properties it once owned. By the end of 2019, under
    T.H. Lee's so-called leadership, Art Van was in the red. It took just 3
    short years for T.H. Lee to strip our company for parts. Then the
    pandemic hit.
        We first received WARN Act notices about our layoffs before the
    COVID-19 emergency order was issued in Michigan, so the bankruptcy and
    layoffs had nothing to do with the pandemic. But then, a few weeks
    later, Art Van changed their original WARN Act notice, citing COVID-19.
    As a result, we didn't get any severance pay or benefits. Nothing.
    Robbing the American workforce like this--hurting the same people on
    the front lines who've been applauded as ``heroes'' for keeping our
    economy open--should be a crime.
        When we were told we'd be losing our jobs, we were promised a lot.
    We were promised health insurance after closing. We never got it. The
    only insurance I could afford charged me 10 times what I had been
    paying for prescriptions. I was unemployed for 5 months, and many times
    I had to choose between paying for my medication or paying other bills.
    We were also promised a retention bonus that we never got. Since my
    unemployment didn't kick in for 2 months, I had to take out money from
    my 401K to make ends meet, which I'm still paying taxes on today.
        Sadly, my story is not unique--private equity has quietly taken
    over nearly every facet of life--from retail and grocery store chains,
    to housing, health care, media, and more--turning the American Dream
    into nothing more than a pipe dream for millions of working families.
    And T.H. Lee didn't only destroy us, the individual workers who lost
    their jobs; every community that had an Art Van store suffered too. We
    had a deep reach in our communities--we were the largest taxpayer in
    the city of Warren where we were headquartered, and the biggest
    contributor to the Food Bank. When the company went under, there was a
    terrible ripple effect of harm felt throughout the State of Michigan.
        Art Van is not the only bankruptcy in T.H. Lee's portfolio. Between
    2009 and 2019, T.H. Lee drove three other companies into bankruptcy. In
    each instance, T.H. Lee attempted to profit while paying down creditor
    interest by steadily decreasing the operational quality of these
    companies, destabilizing their real estate holdings, extracting their
    resources, and cutting jobs. While under T.H. Lee's ownership, over
    6,000 people lost their jobs at four companies, including Art Van, that
    filed for bankruptcy in sectors spanning food processing, media,
    retail, and manufacturing. You can find more information about these
    bankruptcies in the attached research brief, Thomas H. Lee Partners
    Creates ESG Risk for Investors (Appendix III).
        I'm here today to show you the human toll of Wall Street's greed.
    Our elected leaders--each of you here today--have the power to stop
    private equity firms from coming in and taking over our companies,
    leaving employees with nothing and gutting our local economies.
    Billionaires shouldn't be allowed to gamble with our livelihoods,
    driving thriving companies into bankruptcy just to make another buck.
        When faced with private equity's abuses, we fought back. More than
    500 of my former coworkers and I teamed up with United for Respect to
    demand that T.H. Lee create a hardship relief fund. We called, wrote
    letters and told our story of what happened at Art Van, and after a
    year, T.H. Lee relented and ultimately provided nearly $2 million
    dollars to the relief fund, with eligible employees who signed up
    receiving about $1,200 dollars each. Make no mistake, we're proud of
    this hard-fought victory--but $1,200 dollars falls far short of the
    fair severance each of us deserved.
        With nearly 12 million people working for private equity-owned
    companies in the United States, private equity is a major employer.
    Given the industry's poor track record we must also take a closer look
    at how their cost cutting and greed impacts workers and the customers
    they serve across America.
        One example I'd like to share with you is the ongoing efforts of
    PetSmart employees to sound the alarm about unsafe conditions in stores
    that hurt both workers and pets under their care. With 56,000 employers
    and 1,650 stores across the U.S. and Canada, PetSmart is the largest
    pet retailer in North America. PetSmart is also owned by London-based
    private equity firm BC Partners.
        When BC Partners acquired PetSmart for $8.7 billion in March 2015,
    it was the largest private equity buyout of the year. In true private
    equity form, BC Partners took an $800 million dividend from PetSmart
    less than a year after taking over. \2\
    ---------------------------------------------------------------------------
         \2\ Forbes, Feb 18, 2016, ``PetSmart's $8.7 Billion LBO Is Already
    Paying Off for Consortium Led by BC Partners''.
    ---------------------------------------------------------------------------
        Like me and my former Art Van coworkers, the people who worked at
    PetSmart before BC Partners took over started noticing alarming changes
    to store practices and policies after private equity took over.
    PetSmart workers who started after the 2015 acquisition report having
    to struggle to provide quality pet care while dealing with
    understaffing, stagnant wages, lack of supplies, and broken equipment.
        In July 2020, over 500 current and former PetSmart employees wrote
    to BC Partners alerting them to these serious problems. It has been
    over a year since PetSmart employees reached out to BC Partners and
    workers are still waiting for a response. You can read more about BC
    Partners mismanagement of PetSmart in a recently published report,
    ``Greed Unleashed: PetSmart, BC Partners, and what happens when private
    equity preys on workers and pets'' (Appendix IV [In Additional Material
    section of this Hearing]).
        Imagine the victories we could win for working families with the
    power of Congress behind us. I'm asking you, Senators, to summon the
    same courage we found to stand up to these Wall Street executives and
    corporate billionaires, because essential workers can no longer be
    treated as collateral damage. The Stop Wall Street Looting Act will
    finally close regulatory loopholes and change the rules that have only
    served the billionaire class while wreaking havoc in our communities.
    It's way past time to protect essential workers over wealthy corporate
    executives--Congress must pass the Stop Wall Street Looting Act and
    finally put essential workers first.
        Thank you for inviting me to testify today, Senator Warren. I hope
    all the Senators on this Committee will join me in standing up to Wall
    Street.
                                     ______

                       PREPARED STATEMENT OF PEGGY MALONE
                Registered Nurse, Crozer-Chester Medical Center
                                October 20, 2021
        Thank you Senator Warren and Members of the Subcommittee for having
    me here today. My name is Peggy Malone, RN, and I have provided care at
    the Crozer-Chester Medical Center for 32 years. I am the Vice President
    of the Crozer-Chester Nurses Association, which is a local of the
    Pennsylvania Association of Staff Nurses and Allied Professionals, or
    PASNAP. I am also a member of the PASNAP Board of Directors.
        Being a nurse for me and my colleagues is more than a job. It is a
    calling. We are first and foremost, fierce patient advocates. That is
    why I am here today. Our patients are suffering due to the greed of a
    major private equity firm that has enriched itself and its owners at
    the expense of our patients.
        Prospect Medical Holdings, which owns 17 hospitals across the
    country including mine, was majority-owned until June 2021 \1\ by the
    major private equity firm Leonard Green & Partners. Leonard Green and
    Prospect's founders and current owners, Sam Lee and David Topper,
    extracted over $400 million from Prospect since taking ownership just a
    few short years ago. \2\ Simply put, we were looted.
    ---------------------------------------------------------------------------
         \1\ ``Rhode Island Regulator Approves Hospital Sale''. Laura
    Cooper, Wall Street Journal. June 1, 2021.
         \2\ ``Investors Extracted $400 Million From a Hospital Chain That
    Sometimes Couldn't Pay for Medical Supplies or Gas for Ambulances'',
    Peter Elkind with Doris Burke, Propublica. September 30, 2020.
    ---------------------------------------------------------------------------
        I am here to testify in support of Senator Warren's Stop Wall
    Street Looting Act, because Congress needs to take action now. We
    cannot have a health care system in this country that allows, even
    enables, this to happen.
        Eighteen months ago, we were called upon to face a global pandemic
    head on. We had no idea what we were up against. We did not have enough
    PPE. We did not have enough staff. We were away from our families. It
    was the hardest work of our careers. But we showed up at every shift
    and took care of our patients. We took care of them like they were our
    own family. We had one goal: to do no harm and help save as many lives
    as we could. Were we scared? Sure. But we hid it behind our masks.
        Eighteen long months later, we are still wearing masks, but we
    can't hide what we feel now. We are sad, frustrated, overworked and
    disrespected, but we still show up to work to take care of our patients
    every day.
        We have done our jobs. Prospect has not done theirs. In fact,
    things have gotten progressively worse since our community hospital
    system was converted to for-profit status under Prospect's ownership in
    2016. The quality of care has gone downhill, and our hospital is only
    kept from collapsing by the sheer will of the nurses and health care
    workers that keep the ball rolling.
        We are now at a crisis point. Due to Prospect's misguided efforts
    to save money, we are now severely understaffed and without the
    supplies we need to do our job. There are many shifts when our nurses
    are overwhelmed with the number of patients they have to care for--
    significantly higher than the safe maximum number of patients per
    nurse.
        This decline comes as Prospect has received $173.8 million in COVID
    grants from the Federal Government. \3\ Where has that money gone? We
    don't know. It certainly hasn't prevented conditions from getting worse
    at the bedside.
    ---------------------------------------------------------------------------
         \3\ Covidstimuluswatch.org Query. October 18, 2021.
    ---------------------------------------------------------------------------
        Senator Warren's Stop Wall Street Looting Act would have helped to
    prevent the worst abuses by Leonard Green, Sam Lee, and David Topper.
    The bill would ``[p]rohibit interest on excessive debt obligations from
    being tax deductible by target companies,'' as pointed out by Senator
    Warren's office. \4\ The increased interest rates that Prospect was
    charged for issuing the debt lowered the tax payments made by Prospect.
    ---------------------------------------------------------------------------
         \4\ ``The Stop Wall Street Looting Act of 2019 Section-by-
    Section''.
    ---------------------------------------------------------------------------
        What was most of the debt issued for? Not to provide care at the
    bedside. Instead, the debt was issued to pay $400 million in dividends
    to Leonard Green, Sam Lee, and David Topper.
        They took this money while leaving our patients at risk. At the
    same time they failed to fully fund our pension, leaving our families
    and retirement at risk as well.
        This is wrong. Our tax system should not be creating incentives for
    bad business practices, and private equity firms should not be able to
    extract huge dividends while failing to fund employee pensions. Senator
    Warren's Stop Wall Street Looting Act would put an end to it.
        Our calls to Prospect and its owners over the years have fallen on
    deaf ears. We now turn to you. The 1,300 nurses and health care
    professionals represented by PASNAP at Prospect are in full support of
    Senator Warren's bill, and we call on you, our elected officials, to
    support us, and support this bill.
        Thank you so much.
                                     ______

                     PREPARED STATEMENT OF EILEEN APPELBAUM
              Codirector, Center for Economic and Policy Research
                                October 20, 2021
        Thank you, Senator Warren, Ranking Member Kennedy, and
    distinguished Members of the Subcommittee. I am pleased to be here
    today, at this important hearing, to discuss how the Stop Wall Street
    Looting Act will rein in excesses and end abuses by private equity
    firms, keep American companies strong, and protect the economic
    vitality of communities.
        By way of background, I am currently the Codirector of the Center
    for Economic and Policy Research. Prior to joining CEPR, I held
    academic positions as Distinguished Professor of Labor Studies and
    Employment Relations in the School of Management and Labor Relations at
    Rutgers, the State University of New Jersey, and as Professor of
    Economics at Temple University. I earned a Ph.D. in economics at the
    University of Pennsylvania.
        My coauthored book with Cornell University Professor Rosemary Batt,
    ``Private Equity at Work: When Wall Street Manages Main Street'', is a
    balanced account of private equity that was selected by the Academy of
    Management--the premier professional association of business school
    faculty--as one of the four best books published in 2014 and 2015. The
    book was a finalist in 2016 for the prestigious George R. Terry Book
    Award. \1\ More recently, Professor Batt and I have studied the role of
    private equity in health care. Our publication, ``Private Equity
    Buyouts in Health Care--Who Wins, Who Loses?'' examines the private
    equity business model in health care. It focuses, among other topics,
    PE's acquisitions of physician practices and its growing role in the
    collection of medical debt--so-called revenue cycle management. \2\
    ---------------------------------------------------------------------------
         \1\ http://aom.org/Meetings/awards/George-R-Terry-Book-Award-
    (2016).aspx
         \2\ https://www.ineteconomics.org/research/research-papers/
    private-equity-buyouts-in-healthcare-who-wins-who-loses
    ---------------------------------------------------------------------------
    Private Equity, Largely Unregulated, Plays a Growing Role in the U.S.
            Economy
        By net asset value, global private equity assets under management
    have grown ten-fold since 2000. In 2020, global assets under management
    by private equity firms reached $4.5 trillion--and growing. There are
    about 5,000 private equity firms worldwide. \3\ More than half of
    assets under management are held by U.S. PE firms.
    ---------------------------------------------------------------------------
         \3\ https://www.mckinsey.com/media/mckinsey/industries/
    private%20equity%20and
    %20principal%20investors/our%20insights/
    mckinseys%20private%20markets%20annual%20review/2021/mckinsey-global-
    private-markets-review-2021-v3.pdf, p.11, 12, and 18.
    ---------------------------------------------------------------------------
        About 8,000 companies in the U.S. are currently owned by or have
    financial backing from private equity firms. \4\ The cumulative number
    would be far larger. According to the website of the American
    Investment Council (AIC), the U.S. PE lobbying arm, employment in the
    private equity industry and private equity-backed companies combined
    numbers more than 11.7 million U.S. workers. \5\ In the year 2019, AIC
    reports that PE firms in the U.S. invested $700 billion in 4,841
    businesses (latest year). \6\
    ---------------------------------------------------------------------------
         \4\ https://www.mckinsey.com/-/media/McKinsey/Industries/
    Private%20Equity%20and
    %20Principal%20Investors/Our%20Insights/Private%20markets%20come%20of
    %20age/Private-markets-come-of-age-McKinsey-Global-Private-Markets-
    Review-2019-vF.ashx
         \5\ https://www.investmentcouncil.org/
         \6\ https://www.investmentcouncil.org/aic-announces-top-states-
    and-districts-by-private-equity-investment/
    ---------------------------------------------------------------------------
        The industry is a sizable and growing financial player in the U.S.
    economy. Yet, it is largely unregulated. It is famous for loading
    companies with excessive amounts of debt, for selling off the real
    estate of companies it acquires, for its lack of transparency about
    fees it collects or the performance of the companies it owns, and
    fiercely protective of tax loopholes that allow PE partners to line
    their pockets with billions that should have gone to the Treasury.
    Private equity provides a newly acquired company with a game plan for
    its first 100 days and the metrics it is expected to meet. It selects
    the company's board members and freely fires its CEO if he doesn't get
    with the program. The ``Stop Wall Street Looting Act'' will establish
    guardrails that rein in behavior that undermines the viability of
    companies it owns to the detriment of workers, vendors, suppliers,
    creditors, and the communities where they are located.
        The PE industry claims that it provides access to financing and to
    expertise on organizational improvements--upgrading accounting and IT
    systems, improving the company's digital and social media presence--and
    advising on business strategy. This is often the case when smaller PE
    firms buy out small to mid-sized companies for its portfolio and
    provides this support. The PE firm ``turns these companies around'' and
    sells them at a profit. Small and mid-sized companies have relatively
    few assets to be used as collateral for loans, so the amount of debt
    loaded on them is not excessive. By the same token, they have
    relatively few assets that could be stripped, and their cash flow will
    not support further borrowing in the junk bond market to pay their PE
    owners dividends. In this case, the PE firm relies on operational
    improvements to create value for the company and the economy in order
    to achieve a successful exit at a price much higher than it paid to
    acquire the company, often via a sale to a strategic buyer who sees
    value in the company's products or services.
        Most private equity deals, by deal count, fall into this category
    and PE firms are able to provide small and mid-sized portfolio
    companies with operational and strategic improvements. The Stop Wall
    Street Looting Act will have little effect on the operations of these
    PE firms.
        However, most of the capital committed to private equity by pension
    funds, endowments, sovereign wealth funds, and other institutional
    investors flows to PE firms that sponsor large PE funds. Mega funds--
    those with capital commitments of $5 billion or more--used to be rare.
    Now they are becoming increasingly common. Mature, successful companies
    with predictable cash flow make attractive acquisition targets for the
    portfolios of large funds. But the companies provide few, if any,
    opportunities for organizational or strategic improvements. They do,
    however, present many opportunities for the PE firm to make money for
    itself and its investors through financial engineering--that is, by
    using the assets of the company as collateral for the high levels of
    debt loaded onto it to finance its acquisition by the PE fund;
    restructuring the organization not for a productive purposes but to
    reduce the taxes it pays; using the revenue it generates to have the
    company take out junk bond loans in order to pay dividends to its PE
    owners; charging its portfolio companies monitoring and transaction
    fees that go straight to the coffers of the PE firm; and stripping the
    company of valuable assets and using the sale proceeds to line the
    pockets of the PE investors. The Stop Wall Street Looting Act will end
    the most extreme and abusive of these practices.
        PE firms are playing with other people's money--capital committed
    by PE investors to the PE fund it sponsors and the loans advanced to it
    by creditors as it loads debt on the companies it acquires. Keeping up
    with payments on the debt often means the company must squeeze its
    workforce, cutting pay and benefits and even laying off workers. If
    despite these efforts, the company faces financial distress, it is the
    creditors who will lose money and, in extreme but not uncommon cases,
    force the liquidation of the company in order to recover as much of the
    money they lent as possible.
        A veil of secrecy hides much of what private equity firms do, the
    fees and expenses they charge to their investors for managing their
    money, or the monitoring fees and transaction costs they charge to
    their portfolio companies. In particular, there is virtually no
    information about the financial condition or performance of portfolio
    companies available to the public or even to the PE investors that own
    the companies. Private equity is famously ``private,'' requiring
    nondisclosure agreements and preventing even the investors in its funds
    from speaking to each other about the deal they cut with the PE firm.
        The Stop Wall Street Looting Act will establish guard rails that
    will protect the interests of investors in PE funds and the creditors
    that provide the financing for leveraged buyouts. It will not mandate
    the level of debt that can be levered on portfolio companies, but it
    will discourage the excessive use of debt by holding the decisionmaking
    General Partner of the PE fund and the private equity firm jointly
    responsible with the portfolio company for repaying the debt in case of
    financial distress. It will tear back the veil of secrecy that
    surrounds the actions of private equity and hides the financial health
    of portfolio companies from public view. We--and the PE firm's
    investors and creditors--have to take the word of the PE firms for the
    value of companies in their portfolios.
        The PE industry promotes the myth that if PE firms are making
    money, they must be creating value for the companies they own, the
    companies' investors and creditors, and for the economy. In my
    testimony today, I want to address that myth by describing how large PE
    firms can make money without creating value and even when they destroy
    it.
    Leveraged Buyout Model
        Private equity firms recruit institutional investors--pension
    funds, insurance companies, foundations, endowment, sovereign wealth
    funds--for funds that they sponsor. A committee consisting of partners
    and principals in the PE firm is called the General Partner (GP) of the
    fund and makes all the decisions. Investors in the fund include
    institutional investors (pension funds, sovereign wealth funds,
    endowments, and so on) as well as wealthy individuals. These investors
    are Limited Partners (LPs) and have no say in decisions about the
    fund's financial activities. The LPs put up most of the equity in these
    funds, with the General Partner typically putting in one to two cents
    (occasionally as much as 10 cents) for every dollar the Limited
    Partners contribute. The LPs pay a management fee to the GP (the
    private equity firm), typically 2 percent annually of the money they
    have committed to the fund. The larger the fund, the larger are these
    no-risk payments to the GP (and thus the private investment firm). The
    GP also collects a lion's share of any profits, typically 20 percent
    (but may be as high as 30 percent) of the fund's returns. And the PE
    firm typically contracts separately with the portfolio company for
    payment of monitoring fees and transaction expenses to the PE firm.
        Large companies that are attractive targets for a private equity
    buyout possess considerable assets that can be used as collateral to
    finance the takeover of the company. A large amount of debt (referred
    to as leverage) is used to acquire the company for the fund's
    portfolio, and it is the company, not the PE fund that owns it, that is
    obligated to repay this debt. Debt is a double-edged sword. For the PE
    fund, high debt and little equity used to acquire the portfolio company
    means that even a small increase in the enterprise value of the
    portfolio company translates into a large return to the PE fund. For
    the portfolio company, however, high debt increases the risk of
    financial distress or even bankruptcy and liquidation. Private equity
    is gambling with the future viability of the company when it loads it
    with debt. It is assuming that the company will be able to service the
    debt and refinance it as it matures. In the case of an unanticipated
    development, however, the portfolio company may find its margin of
    safety has been eroded by debt payments. It may be forced into
    bankruptcy. The private equity firm will lose at most its equity
    investment in the portfolio company, and often this has already been
    repaid via monitoring fees the PE firm collects directly from the
    portfolio company or from the proceeds of the sale of the portfolio
    company's assets. The PE firm has little skin in the game; it's the
    company, its workers, suppliers, creditors, and customers whose
    livelihoods have been put at risk.
    The Case of Retail Chains
        Investments in large retail store chains provide private equity
    with rich opportunities for asset stripping, dividend payments, and
    monitoring fees; and for many years, retail was the sweet spot for
    private equity. Retail is a cyclical business that can be undermined by
    a change in customer tastes or a downturn in the economy. To weather
    the inevitable bad times, retail chains typically have low debt burdens
    and own their own real estate. This protects them from having to pay
    rent or make high interest payments when things get tough. Retail is
    also a high cash flow business. These characteristics made retail an
    attractive target for private equity. There is room to load retail
    companies with lots of debt in the buyout. The real estate opens up the
    possibility of sale-leaseback transactions that benefit PE investors
    but leave the chain paying rent. And the high cash flow means the
    retail company is able to make payments directly to the PE firm for
    advisory services and transaction fees pursuant to an advisory
    agreement between the chain and the firm. It also facilitates the
    payment of dividends to the company's PE owners.
        Overloading retail chains with debt or selling off their real
    estate and burdening them with rent payments has made them financially
    fragile. Any change in the company's prospects could lead to financial
    distress, bankruptcy, and even, in extreme cases, to liquidation and
    the shuttering of stores. Toys `R Us, owned by KKR, Bain Capital and
    Vornado Realty Trust, is the poster child for this. But there are many
    other well-known examples of private equity-owned retail chains that
    closed all stores and laid off thousands of workers, left vendors with
    unpaid invoices, and creditors facing steep haircuts. They include Sun
    Capital-owned ShopKo, Alden Global Capital and Invesco-owned Payless
    ShoeSource, Bain Capital-owned Gymboree, Sun Capital-owned The Limited,
    Leonard Green-owned Sports Authority, Cerberus Capital Management-owned
    Mervyns Department Store and, most recently, the Michigan-based Art Van
    furniture store chain owned by Thomas H. Lee Partners.
        Toys `R Us was still profitable at the time of its takeover in 2005
    by the KKR, Bain and Vornado consortium, though its sales were flat and
    its profit and share price had fallen substantially compared with a
    decade earlier. At the time it was acquired, the toy store chain was
    valued at about $7.5 billion, including nearly $1 billion in debt. Its
    capital structure was 87 percent equity and a very manageable 13
    percent debt. This was turned on its head when the chain was acquired
    by the financial firms for $6.6 billion--$1.3 billion in equity
    contributed equally by funds sponsored by those firms and $5.5 billion
    in debt. With the almost $1 billion in debt the chain was already
    carrying, its debt burden increased to $6.2 billion--a capital
    structure of 17 percent equity and 83 percent debt. Toys `R Us now had
    to make interest payments on this debt that exceeded $400 million in
    every year and $500 million in some (see Appendix A for details and
    sources). But for the investment funds that owned the chain, the low
    amount of equity they paid in would mean a very rich payoff if they
    exited the company at a profit in three to five years as planned. In
    2010, five years after acquiring the company, KKR, Bain and Vornado
    attempted to return the company to the public market via an IPO. The
    effort failed however on concerns about the toy chain's ability to
    refinance its high debt load.
        It is this reckless loading of debt onto companies that the Stop
    Wall Street Looting Act would end by requiring the PE fund's General
    Partner and the PE firm to be jointly liable with the company for
    repaying the company's debts.
        Toys `R Us would have been broadly profitable in the years
    following its takeover if not for the interest payments, which largely
    ate up the company's profits. The chain struggled and ultimately
    collapsed under its massive debt load as creditors reasoned that their
    best chance to recoup some of their money was to liquidate the business
    and sell off its assets. Nine-hundred communities lost an important
    retail anchor as the stores closed, 33,000 workers lost their jobs,
    vendors and landlords went unpaid, and creditors lost money they had
    loaned to the retail chain. The limited partners in the PE funds had
    their investment in Toys wiped out. But KKR, Bain and Vornado managed
    to make money despite not creating--and, in fact, destroying--value.
        The bankruptcy protections for workers in the Stop Wall Street
    Looting Acy include mandatory severance payments for workers who lost
    their jobs in the bankruptcy, which would provide further protection
    not just for workers but for businesses that have a stake in the
    survival of companies like Toys. We cannot know whether Toys' creditors
    would have made a different decision if seniority-based severance
    payments to 33,000 workers, some with decades of service, had to be
    paid out in the case of liquidation. But it would definitely have
    altered the calculus.
        As for the funds that owned the chain, they each put in $433
    million in equity when Toys was purchased. Bain contributed 10 percent
    of the equity in its fund or $43 million. KKR put up $10 million (2.3
    percent of the equity in its fund). Vornado's contribution is unclear.
    At the time of its acquisition, Toys `R Us had entered into an advisory
    agreement with each of the three sponsoring firms (not the funds) that
    specified payments that Toys `R Us would make to KKR, Bain and Vornado
    for advisory services. Over the life of the agreement, Toys `R Us paid
    Bain, KKR and Vornado a total of $185 million for these services, or
    $61 million each. Bain did not agree to share these payments with its
    limited partners so net of its equity contribution, it had a gain of
    $17 million. KKR had agreed to share 58 percent of its advisory fees
    with its limited partners, leaving it with $24 million. Net of its $10
    million contribution to its PE fund, KKR had a gain of $14 million.
    It's not clear how much of Vornado's $61 million was a net gain. In
    addition to the advisory fees, the three companies collected a total of
    $8 million in expense fees, $128 million in transaction fees, and $143
    million in interest on loans they had made to Toys `R Us. In total,
    Toys `R Us paid the firms that owned it $464 million. In addition, some
    of the chain's real estate was sold to Vornado and leased back by the
    stores, resulting in a total of $73 million paid to Vornado in rent
    (details and sources in Appendix A). Toys' PE firm owners made a profit
    despite recklessly endangering the toy store chain.
    Buy and Build PE Model
        ``Buy and build'' is another strategy that private equity uses to
    make money. In this strategy, the private equity firm acquires a
    company in a leveraged buyout and then expands the company--now called
    a platform company--through a series of debt-fueled horizontal mergers
    with its smaller rivals. The strategy has several advantages for the PE
    firm. It enables the PE firm to establish local monopolies and reduce
    competition. Its portfolio company can exploit its dominance in the
    market to increase its profits by raising prices and/or degrading the
    quality of its services without fear of competition for its customers.
    And adding-on smaller rivals is a faster path to revenue growth than
    investing in the original company. A growth strategy of using leveraged
    buyouts to add-on smaller competitors to the original portfolio company
    is more lucrative than investing in the original company and taking the
    time to allow it to grow organically.

        The use of add-ons by PE firms has become a popular strategy. It
    has grown as a proportion of leveraged buyout activity across all
    segments of the economy, from 56.5 percent of buyouts in 2009 to 70.5
    percent in 2020 and is on a path to reach 73.2 percent, an all-time
    high, in 2021. \7\ The key to the strategy is to pursue healthy add-on
    acquisitions in highly fragmented markets and utilize the platform
    company's access to leveraged loans to expand into hundreds of smaller,
    local territories through multiple add-on acquisitions.
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         \7\ https://files.pitchbook.com/website/files/pdf/PitchBook-Q3-
    2021-US-PE-Breakdown.pdf#page=1
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    Physician Staffing Firms
        A familiar example of how PE firms extract wealth and make money
    using the buy and build strategy comes from the world of physician
    staffing firms. Private equity-owned emergency room physician practices
    and the use of surprise billing to collect sometimes astronomical
    payments from patients who are treated by these doctors have raised
    concerns among consumers and patient advocates. These are patients who
    are treated at hospitals that are in their insurance networks by out of
    network emergency doctors on private equity-owned company payrolls.
    Private equity firms have been actively acquiring doctors' practices
    through leveraged buyouts and rolling them up into large, debt-burdened
    physician staffing firms, a form of Managed Services Provider (MSP). PE
    firms have consolidated these previously fragmented markets, and are
    now dominant players able to exploit the market power of their MSPs to
    increase prices paid by patients and private insurance payers. Many of
    the acquisitions have been too small to trigger antitrust oversight.
    But cumulatively, they have led to large, national consolidated
    doctors' practices able to exercise monopoly pricing power in local
    health markets.
        In addition to increased market power in pricing emergency room
    procedures, the takeover of doctors' practices affects the practice of
    emergency medicine. Physicians are shielded from dealing with billing
    and collections. But on the flip side of this, the PE-owned staffing
    firms often inflate prices for treatment of patients, while doctors on
    PE payrolls do not have a right to see invoices sent out in their
    names. They are, thus, unable to serve as a check on fraud or
    exploitation of patients. From the point of view of the private equity
    firm, physicians are the major expense, and they would like to see
    revenue per physician increase or the cost of employing these doctors
    reduced. Pressure is on these emergency medicine doctors to use
    charting and documentation to maximize payments to the staffing firm,
    and to increase the number of patients they see per hour. PE firms also
    decrease the number of emergency medicine physicians on staff and
    increase the number of lower cost nonphysician practitioners (NPPS) in
    emergency rooms, increasing the length of time that patients in ERs
    wait to see a doctor. Not only do these practices reduce the employment
    of trained physicians in emergency rooms, but the number of NPPs that
    each physician is tasked with overseeing is increased. There are few
    complaints about working conditions or patient care from doctors on
    private equity payrolls. Doctors employed by PE-owned physician
    staffing firms put their jobs on the line if they speak up about their
    concerns. They can be fired on short notice and given no opportunity to
    contest the termination. When the focus is on making money, doctor
    staffing levels decline, the pressure on emergency medicine doctors
    increases, and the quality of patient care suffers. \8\
    ---------------------------------------------------------------------------
         \8\ Robert M. McNamara, MD, and Professor of Emergency Medicine at
    Temple University's Medical School power point presentation at Take EM
    Back Summit, https://www.youtube.com/channel/UCQqx7Ajl6uAudQAJTARcjew;
    https://www.medpagetoday.com/special-reports/exclusives/95022.
    ---------------------------------------------------------------------------
        Most States require that physician practices be owned by doctors
    and make the corporate practice of medicine illegal. Private equity
    firms get around this requirement by having the physician practices
    nominally owned by a medical practitioner. In recent legal proceedings
    against an emergency medicine staffing firm, it was revealed that a
    single physician was on record as owning and managing 270 to 300
    physician practices across 20 States. \9\ This was clearly a sham
    arrangement to hide PE's role in the illegal corporate practice of
    medicine. While a physician nominally owns the doctor practices. all of
    the assets of the practices, from the chairs in the waiting room to
    accounts receivable, are owned by the physician staffing firm. The Stop
    Wall Street Looting Act would require that all entities receiving
    Federal money--so nearly all entities in health care--to reveal their
    ultimate owners.
    ---------------------------------------------------------------------------
         \9\ Ibid.
    ---------------------------------------------------------------------------
        The initial focus of private equity acquisitions was on hospital-
    based specialties like emergency medicine and anesthesiology. The
    largest physician staffing companies in these specialties are Envision
    Healthcare and TeamHealth, MSPs acquired respectively by funds of
    private equity firms KKR in 2018 for $9.9 billion and the Blackstone
    Group in 2016 for $6.1 billion. The two staffing companies have
    cornered 30 percent of the market \10\ for outsourced emergency
    medicine doctors, and collectively employ almost 90,000 health care
    employees that fill a variety of roles. Debt-financed consolidation of
    emergency medicine practices has enabled these PE firms and their MSPs
    to dominate the physician staffing industry. Multiple rounds of private
    equity ownership, punctuated by IPOs and a return to public markets,
    have left these companies with high debt loads. Envision's $5.45
    billion loan is due in October 2025; TeamHealth's loan is due in
    January 2024. The companies have relied on high fees for doctor
    services and surprise medical bills to provide sufficient revenue to
    meet debt obligations.
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         \10\ https://isps.yale.edu/sites/default/files/publication/2017/
    07/surpriseoutofnetwrokbilling-isps17-22.pdf
    ---------------------------------------------------------------------------
        Envision came under heavy scrutiny for the huge out-of-network
    surprise medical bills it sent to ER patients. A team of Yale
    University health economists \11\ examined the billing practices of
    EmCare, Envision's physician staffing arm. They found that when EmCare
    took over the management of hospital emergency departments, it nearly
    doubled its charges compared to the charges billed by previous
    physician groups. TeamHealth, the Yale University economists found,
    took a somewhat different tack. It used the threat of surprise billing
    to gain high reimbursements from insurance companies to keep its
    doctors in-network.
    ---------------------------------------------------------------------------
         \11\ https://isps.yale.edu/sites/default/files/publication/2017/
    07/surpriseoutofnetwrokbillin-isps17-22.pdf
    ---------------------------------------------------------------------------
        In a victory for patients and the health care system, Congress
    passed the No Surprises Act in December 2020. The act bans the practice
    of sending surprise medical bills to patients beginning on January 1,
    2022. In a concession to the private equity-owned staffing companies,
    such bills can still be sent to insurance companies, and disputes over
    payment are subject to arbitration. But arbitrators are instructed to
    begin from what innetwork doctors are paid for procedures rather than
    from the often massively inflated charges from the PE-owned doctors'
    practices. PE-owned practices may still receive somewhat higher
    payments than other doctors, but the expectation is that these payments
    will be much more in line with what others receive, and a great savings
    to the health care system. The effects of these measures on the massive
    amounts of debt owed by TeamHealth and Envision coming due in 2024 and
    2025 are currently not known. But default would surely throw the health
    care system into chaos.
        More recently, the corporate practice of medicine has grown as
    private equity has turned its attention to specialties that are not
    hospital-based. Dermatology is the bleeding edge of this development,
    having been among the earliest to attract private equity's attention.
    But dermatology has been quickly followed by gastroenterology,
    orthopedics, ophthalmology, women's health, and other specialties that
    cater to patients with private insurance, assuring a more lucrative
    payer mix. The effects of COVID-19 proposed spending in President
    Biden's Build Back Better bill have further fueled private equity's
    already considerable interest in home health care, hospice services,
    and behavioral health--the latter to treat both victims of the opioid
    crisis and those suffering mental health problems caused by the
    isolation and disruption of the pandemic. Patient care is likely to
    suffer as the PE owners hold the medical specialists, now their
    employees, to metrics that increase revenue per patient and reduce
    costs. The substitution of less expensive Nonphysician Practitioners
    for physicians and an increase in the number of NPPs a physician is
    required to supervise are likely to affect patient care. Requiring
    these practices to identify private equity firms as their owners, as
    the Stop Wall Street Looting Act requires, will enable patients to make
    informed decisions about where they want to be treated.
        A similar situation is emerging in the accounting industry. Like
    physician practices, accounting firms have legal requirements that
    require that certified public accounting firms be owned by certified
    public accountants (CPAs). An ``attest'' service--in which a CPA
    conducts an independent review of a company's financial statements and
    attests to their accuracy--can only be conducted by a CPA-owned firm.
    As with health care, the accounting business is largely recession
    proof. It's a predictable business with high cash flow and little
    volatility. So, it is not surprising that PE is looking for a work
    around that will let it take over large, successful accounting firms.
        In mid-September 2021, PE firm Lightyear Capital announced that it
    is buying a large stake in Schellman & Co., a top CPA firm, ranked 65th
    in the country in the Accounting Today 2021 list. Schellman is being
    split into two entities--a CPA firm that will perform attest services
    and a new company, in which the PE firm is the majority owner, that
    that will provide tax and consulting services. A month later, PE firm
    TowerBrook Capital Partners announced it would take an ownership stake
    in top 20 accounting firm EisnerAmper. It again split the company into
    two entities and took a majority stake in the consulting business. \12\
    These large accounting firms with high cash flow can be loaded with
    debt that will be used to acquire smaller competitors. This has the
    potential to crush competition and establish the dominance of these
    accounting firms in local and national markets. Main Street businesses
    are likely to suffer from a lack of alternatives when it comes to
    having tax and auditing work done. They might want to be informed about
    whether private equity has a stake in an accounting firm with which
    they do business.
    ---------------------------------------------------------------------------
         \12\ https://www.journalofaccountancy.com/news/2021/oct/private-
    equity-push-into-accounting.html
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    The Paradox of Private Equity
        The ``paradox of private equity'' \13\ refers to the finding that
    smaller private equity funds often outperform mega funds and tend to
    deliver the best returns to investors, while the bulk of the money
    invested in private equity flows to large funds and mega funds. Better
    performance of smaller funds is actually not surprising. In our
    research, Rosemary Batt and I found that smaller PE funds typically
    acquire small and medium-sized enterprises that can benefit from the
    access to financing and improvements in operations and business
    strategy that private equity firms can provide. These enterprises have
    relatively little in the way of assets that can be mortgaged, which
    rules out the excessive use of debt to acquire them. In addition to
    lower levels of debt, these PE funds provide access to financing to
    upgrade operations, advise on implementation of modern IT, accounting,
    and management systems, and appoint board members that can assist with
    business strategy.
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         \13\ https://www.institutionalinvestor.com/article/b1hx33sxljv1r0/
    The-Private-Equity-Paradox
    ---------------------------------------------------------------------------
        These improvements in governance, operations, and strategy create
    value for the companies and the economy. But while the large majority
    of PE deals are carried out by smallish funds buying out smallish
    companies, large or mega funds receive he lion's share of funds from PE
    investors. Limited partner investors have committed billions of dollars
    to massive funds sponsored by a relative handful of PE firms. In the 5
    years ending in April of 2021, the top 300 PE firms worldwide raised a
    total of $2.25 trillion. This is an increase of 13 percent from the
    previous 5-year period. Blackstone retained its position as top fund
    raiser--its funds raised $93.2 billion over the 5 years, with KKR not
    far behind. \14\ Eight of the top 10 (out of 300) funds are U.S. firms.
    \15\ The flow of capital to the largest PE firms in the aftermath of
    the pandemic is even more extreme than when the Stop Wall Street
    Looting Act was first introduced, making its passage all the more
    urgent. Capital raised by individual funds in the first three-quarters
    of 2021 make clear that mega funds dominate fund raising. PE firm
    Hellman & Friedman raised $24.4 billion for its 10th fund while KKR is
    closing in on $18.5 billion for its North America fund and the Carlyle
    Group has announced plans to raise $27 billion for its next fund--the
    largest private equity fund ever if, as expected, they reach their
    goal. Silver Lake Partners whose latest fund closed this year at $20
    billion, Clayton, Dubilier & Rice at $16 billion, and Bain Capital at
    nearly $12 billion are also among the mega funds at the top of the
    fund-raising pyramid. Twelve mega funds have closed through August,
    with a quarter of the year still left. \16\ All of this money needs to
    be deployed in just a few years.
    ---------------------------------------------------------------------------
         \14\ https://www.privateequityinternational.com/pei-300/
         \15\ They are Blackstone, KKR, Carlyle, Thomas Bravo, Vista Equity
    Partners, TPG, Warburg Pincus, and Neuberger Berman Private Markets
    https://www.privateequityinternational.com/database/#/pei-300.
         \16\ https://pitchbook.com/news/articles/mega-funds-private-
    equity-investing
    ---------------------------------------------------------------------------
        Mega funds have incentives to acquire large companies even if the
    returns are mediocre compared with smaller companies. A mega fund has a
    huge amount of capital it needs to deploy in a relatively short period
    of time. This is more easily done if the fund acquires a few very large
    companies. (The exception, as noted earlier, is when a PE fund buys up
    small competitors and adds them onto a large company it already owns,
    flying below the radar of antitrust regulators as it creates a national
    powerhouse.) PE funds plan to exit their acquisitions in 3 to 5 years.
    This is too short a time horizon to ``turn around'' a struggling
    company. In contrast to the myth that PE funds buy troubled companies,
    it turns out that attractive acquisition targets tend to be successful
    businesses. Medline Industries, a family owned medical supply company,
    sold for $34 billion in June of 2021 in a club deal in which
    Blackstone, Carlyle, Hellman & Friedman, and GIC participating.
    Clearly, a company that sells for $34 billion to some of the biggest
    names in private equity offers few opportunities for improvement.
        Large, successful companies present few opportunities for creating
    value by improving operations or business strategy. They nevertheless
    present opportunities for PE funds to load them with debt, extract
    wealth via financial engineering, and make PE partners rich.
    Millionaire and billionaire partners in private equity firms make money
    even when the funds they sponsor do not create value and even when they
    destroy it. Good jobs have been lost and inequality has worsened.
        Meanwhile, private equity firms contend that their freewheeling
    behavior results in returns that beat the stock market by a wide margin
    and help fund retirees' pensions. They caution against killing the
    goose that lays the golden eggs. This is an argument that might once
    have made sense, but no longer. Studies by finance professors find that
    since 2006, the median private equity fund has just tracked the market.
    \17\
    ---------------------------------------------------------------------------
         \17\ Eileen Appelbaum and Rosemary Batt. 2018. ``Are Lower Private
    Equity Returns the New Normal?'' in Michael Wright, et al. (editors),
    ``The Routledge Companion to Management Buyouts'', Routledge. Robert S.
    Harris, Tim Jenkinson, and Steven N. Kaplan. 2015. ``How Do Private
    Equity Investments Perform Compared to Public Equity?'' Journal of
    Investment Management. Darden Business School Working Paper No.
    2597259, June 15. Available at http://ssrn.com/abstract=2597259; Jean-
    Francois L'Her, Rossitsa Stoyanova, Kathryn Shaw, William Scott, and
    Charissa Lai. 2016. ``A Bottom-Up Approach to the Risk-Adjusted
    Performance of the Buyout Fund Market''. Financial Analysis Journal,
    73(4), July/August. https://www.cfainstitute.org/en/research/financial-
    analysts-journal/2016/a-bottom-up-approach-to-the-risk-
    adjustedperformance-of-the-buyout-fund-market; Ludovic Phalippou. 2020.
    ``An Inconvenient Truth: Private Equity Returns and the Billionaire
    Factory''. Journal of Investing, Volume 29, December. Available at
    https://papers.ssrn.com/sol3/papers.cfm?abstract-id=3623820.
    ---------------------------------------------------------------------------
    Conclusion
        In ways large and small, Main Street is being pillaged by Wall
    Street's largest private investment firms. Factories and stores have
    closed as wealth has been extracted, hollowing them out and leaving
    them bereft of the resources they need to invest in the technologies
    and worker skills required for success in the 21st century. PE firms
    view the companies their funds acquire for their portfolios as
    financial assets whose purpose is to provide returns to the fund and
    its private equity investors, not as operating companies that employ
    workers, produce valuable products for customers, and foster
    sustainable growth.
        Private equity is poised to buy up key segments of the U.S.
    economy. The rising tide of capital flowing into PE funds has left them
    sitting on piles of dry powder. They are now ins a better position than
    ever to buy up and hollow out large parts of the U.S. and global
    economies. Estimates of how much global dry powder PE firms are sitting
    on varied from $1.5 to $2 trillion in August with 4 months to go in
    2021. In September 2020, U.S. buyout funds had $746 billion in dry
    powder. \18\ The figure below shows the amounts of dry powder that some
    of the largest PE firms are getting ready to deploy.
    ---------------------------------------------------------------------------
         \18\ https://www.investmentcouncil.org/wp-content/uploads/trends-
    2021q1.pdf Figure 4.
    ---------------------------------------------------------------------------
        In the U.S. PE firms have set their eyes on everything from health
    care to single family homes, and are even trying to figure out how to
    make money from the chaos in fossil fuels as attention turns to
    combatting climate change. \19\ We need the Stop Wall Street Looting
    Act now to provide incentives to PE funds sitting on many billions of
    dollars to use them in ways that create good jobs, high-quality goods
    and services, and help build a sustainable economy that supports the
    planet. No one will object if they also make an honest profit.
    ---------------------------------------------------------------------------
         \19\ https://www.nytimes.com/2021/10/13/climate/private-equity-
    funds-oil-gas-fossil-fuels.html?smid=tw-share
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             RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                         FROM EILEEN APPELBAUM

    Q.1. Several private equity firms have recently announced
    acquisitions of life insurance companies. Please explain the
    primary conflicts of interest for investors and sources of harm
    to policyholders caused by these acquisitions.

    A.1. Thank you, Senator Reed, for shining a light on private
    equity industry activities that are flying under the radar.
        Private equity firms have had their eye on individual
    retirement savings since 2013, when they were first allowed to
    market directly to people. Pension funds already allocate
    workers' retirement savings to private equity firms that use
    these assets to fund a range of risky equity and debt
    investments. Access to personal retirement savings would open
    up a huge new source of capital for PE.
        PE firms first attempted, unsuccessfully, to get a piece of
    the very large direct contribution assets (IRAs and 401(k)s)
    that individuals use to save for their own old age. More
    recently, they have succeeded in gaining control of life
    insurance and annuity assets. They use these assets to invest
    in high fee alternative investments, including in the PE firm's
    own buyout, real estate investment, and debt funds. These
    insurance assets provide PE firms with a form of ``permanent
    capital.'' A private equity firm typically raises capital by
    recruiting investors and launching an investment fund with a
    life span of 10 years, after which all the capital in the fund
    is paid out and the fund is liquidated. PE firms launch these
    funds every few years. Individual retirement savings, unlike
    these sources of capital, do not need to be paid out at the end
    of 10 years and don't require the PE firm to recruit investors
    every couple of years.
        For the public that owns these insurance and annuity
    policies, there is the danger that investments in risky assets
    may not provide them with the peace of mind and the assurance
    that the benefits will be there when they are needed.
    Investments in private debt and equity pay higher rates of
    interest than plain vanilla bonds and stocks of publicly traded
    companies. But they are illiquid, meaning that they will be
    difficult to sell in case cash is required to satisfy a spike
    in payouts on these insurance policies. In addition, the
    possibilities for corruption and self-dealing are very real as
    PE firms can use these insurance assets to bolster the
    performance of their own struggling funds. Even in the absence
    of patently illegal actions, PE control of life insurance
    assets raises basic conflict of interest questions: are PE
    firms looking out for the interests of insurance beneficiaries
    or are they more concerned with making a profit for themselves
    and their investors? Moreover, the claim that investing life
    insurance assets in risky alternative strategies increases
    benefits for policy holders may fail, either because the
    investment fails or because the high fees charged for managing
    complex investments eat up the higher performance associated
    with greater risk. For consumers who bought life insurance and
    annuity policies from stodgy insurance companies making plain
    vanilla investments, it may be disconcerting to learn that
    their policy has been sold to a private equity firm that will
    be making risky investments with their retirement savings.
        There is a clear need for regulations to protect the
    retirement savings of holders of life insurance and annuity
    policies. The opaqueness of private equity and the lack of
    transparency regarding its activities makes regulation
    difficult. Federal regulation to cap the fees that policy
    holders pay and to assure that PE firms that control insurance
    assets hold adequate reserves for their risky investments is
    important. Moving the headquarters of PE-owned insurance
    companies to Bermuda raises red flags because of the low
    reserve requirements in that country when insurance companies
    invest retirement savings of annuity holders in risky assets.
        In what follows, I examine the size of retirement savings
    in the U.S; briefly review earlier, largely unsuccessful,
    attempts by PE firms to gain access to the savings of
    individuals; and discuss PE's foray into life insurance and
    annuities in recent years. Private equity's control of life
    insurance assets has greatly increased, with little to no
    regulatory oversight or protections for beneficiaries.

    U.S. Retirement Assets

        U.S. retirement savings have exploded in the last 30 years,
    reaching $35 trillion in 2020, nine times as much as in 1990.
    Pensions (direct benefit plans) have declined as a share of
    retirement savings, most dramatically in the private sector.
    Direct contribution plans (IRAs and 41(k)s) have grown in
    volume and importance. IRAs have seen the most dramatic growth,
    but 401(k) plans account for a large share of retirement
    assets. (see figures below) \1\
    ---------------------------------------------------------------------------
         \1\ SEI Investment Manager Services. 2021. ``Evolving Forces:
    Convergence in the U.S. Retirement Market Place''. SEI. https://
    seic.com/sites/default/files/SEI-IMS-Evolving-Forces-Retirement-2021-
    Whitepaper-US.pdf
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    PE Tries (Unsuccessfully) To Tap Individual Retirement Savings of
            Workers' Pensions

        Workers' pensions have been at the center of the equity
    contributions to private equity investment funds. Public
    pension funds have provided about a quarter of the equity in PE
    investment funds and private pension funds have provided about
    10 percent. But pension funds' share of retirement savings has
    been declining over the last decade and longer. Private Equity
    firms have had their eye on workers' individual retirement nest
    eggs--401(k) and IRA accounts--since late 2013 when rules on
    advertising to individuals were relaxed. But PE firms have had
    only limited success tapping into IRA and 401(k) accounts. They
    were stymied by the Obama Labor Department, which held the line
    against letting risky private equity and hedge fund products
    into workers' individual retirement accounts. \2\ Private
    equity had some success during the Trump administration as the
    Labor Department approved some private equity and hedge fund
    products for these accounts. \3\ But brokers who manage
    workers' defined contribution accounts were slow to include
    them, because they lacked the experience and the confidence to
    recommend them and because of the high fees attached to these
    products. They were concerned that poor performance of these
    assets could expose them to litigation and liability claims.
    ---------------------------------------------------------------------------
         \2\ Eileen Appelbaum. 2015. ``As Public Pensions Shift From Hedge
    Funds, Hedge Funds Look to Main Street''. The Hill, November 30.
    https://thehill.com/blogs/pundits-blog/finance/261455-as-public-
    pensions-shift-from-hedge-funds-hedge-funds-look-to-main
         \3\ Eileen Appelbaum. 2020. ``CEPR Statement on New Labor
    Department Guidance Allowing Risky Private Equity Investments in
    Workers' 401(k) Accounts''. Center for Economic and Policy Research,
    June 4. https://cepr.net/cepr-statement-on-new-labor-department-
    guidance-allowing-risky-private-equity-investments-in-workers-401k-
    accounts/
    ---------------------------------------------------------------------------
        Private equity firms have long included very wealthy
    individuals among the investors in their funds. But since 2015
    have tried to develop new products for the merely very rich.
    \4\ These efforts continue to the present time, but with only
    limited success. Most of these ``retail'' investors are
    effectively excluded from private equity and hedge fund
    investments. The Trump administration's SEC chair, Jay Clayton,
    pushed to open these funds to more investors. And in September
    2021, an SEC panel formed in 2019--the Asset Management
    Advisory Committee--recommended letting ordinary investors into
    these funds. \5\ But current SEC chair Gary Gensler's remarks
    indicating that the agency will take a tougher stance for
    greater transparency on fees and expenses and against conflicts
    of interest may undermine PE's efforts to attract money from
    retail investors. \6\
    ---------------------------------------------------------------------------
         \4\ Eileen Appelbaum. 2015. ``Private Equity Is Going Retail''.
    Huffington Post, March 11, https://www.huffpost.com/entry/private-
    equity-is-going-r-b-6842394.
         \5\ Chris Cumming. 2021. ``SEC Panel Backs Letting Ordinary
    Investors Into Private Equity'', WSJ, September 28. https://
    www.wsj.com/articles/sec-panel-backs-letting-ordinary-investors-into-
    private-equity-11632778962
         \6\ Paul J. Davies. 2021. ``Gary Gensler's Everything Crackdown
    Reaches Privat Equity''. Bloomberg, November 17. https://
    www.washingtonpost.com/business/gary-genslerseverything-crackdown-
    reachesprivate-equity/2021/11/16/591d740a-46d1-11ec-beca-3cc7103bd814-
    story.html
    ---------------------------------------------------------------------------

    PE Is Eating up Life Insurance and Annuities Companies

        Recruiting limited partner investors for the PE funds that
    private equity firms raise every few years has become
    increasingly burdensome. Tapping into retirement savings
    creates a source of ``permanent capital'' as savings flow into
    retirement assets, creating a pool of assets that can fund PE
    investment activities. Despite the lack of success penetrating
    workers' IRAs and 401(k)s, retirement savings remain an
    enticing source of capital for PE investment funds. And PE
    firms have found another way to get their hands on people's
    retirement savings. Private equity firms are taking a leaf out
    of Warren Buffet's playbook. For decades Buffett has funded
    investments in publicly traded companies from his $360 billion
    insurance arm. \7\ Accumulated life insurance and retirement
    assets and ongoing premium payments for annuities and death
    benefits are an attractive, permanent source of investment
    capital. In the last few years, private equity firms have
    looked to the management or acquisition of life insurance
    assets as a source of permanent capital that can fund a wide
    range of activities and reduce the need to raise new investment
    funds every couple of years. Private equity firms have found a
    way to get rich from the retirement savings and bequests of
    individuals. In just a few years, insurance assets have become
    a major component of assets under management of PE firms.
    ---------------------------------------------------------------------------
         \7\ Paul J. Davies. 2021. ``Apollo Wants To Be a Bit Like Buffett,
    But It's Complicated''. Bloomberg, October 29. https://
    www.bloomberg.com/opinion/articles/2021-10-29/apollo-wants-to-be-a-bit-
    like-warren-buffett-but-it-s-complicated
    ---------------------------------------------------------------------------
        Some PE firms are buying up entire life insurance companies
    and annuity businesses. Others are taking a minority stake in
    them and then managing all of their assets. Only the largest PE
    firms have the financial wherewithal to afford deals to manage
    or own the life insurance and annuity businesses of major, old
    line insurance companies. But even smaller PE firms have gotten
    into the game, buying up smaller life insurance businesses and
    selling indexed annuities, a line of business they view as an
    extension of their investment experience. At the end of 2020,
    aggregate holdings of cash and invested assets of U.S. life
    insurance companies was $4.9 trillion. Private equity firms
    controlled 9.6 percent of these assets--a total of $471
    billion. Of the slightly more than 400 U.S. life insurance
    companies, 50 are owned or controlled by more than 24 private
    equity firms. These include well-known PE firms such as
    Blackstone, Apollo, and KKR. But also, many that most people
    have never heard of. \8\
    ---------------------------------------------------------------------------
         \8\ Allison Best. 2021. ``Private Equity Firms Keep Eating U.S.
    Life Insurers''. ThinkAdvisor, July 20. https://www.thinkadvisor.com/
    2021/07/20/private-equity-firms-keep-eating-u-s-life-insurers/
    ?slreturn=20211028142207; Leslie Scism. 2021. ``Who Owns Your Life
    Insurance Policy? It Might Be a Private Equity Firm''. WSJ, September
    21. https://www.wsj.com/articles/insurance-policy-private-equity-
    11632236526.
    ---------------------------------------------------------------------------
        Apollo is probably the most advanced. It has had a stake in
    life insurance company Athene since 2015; in 2021, it acquired
    the entire company and now owns Athene's insurance assets worth
    about $194 billion. Apollo says it plans to invest about 5
    percent of Athene's funds in riskier, fee-paying alternative
    assets, including its own private equity and debt funds. \9\
    This kind of self-dealing is rife with conflicts of interest.
    Will Apollo's insurance units look out for its beneficiaries or
    for its investors and shareholders?
    ---------------------------------------------------------------------------
         \9\ Paul J. Davies. 2021. ``Apollo Wants To Be a Bit Like Buffett,
    But It's Complicated''. Bloomberg, October 29. https://
    www.bloomberg.com/opinion/articles/2021-10-29/apollo-wants-to-be-a-bit-
    like-warren-buffett-but-it-s-complicated
    ---------------------------------------------------------------------------
        Unlike Apollo, Blackstone prefers to take minority stakes
    in life insurance companies and take over management and
    control of most or all of their assets. It invests them in
    alternative strategies in search of higher yield. In 2021,
    Blackstone paid $2.2 billion to American International Group
    (AIG) for a 9.9 percent stake in its life insurance and
    annuities unit. Initially, Blackstone will manage $50 billion
    of AIG's life insurance assets. In the coming years, this will
    rise to nearly $100 billion. Blackstone also struck a deal in
    2021 to buy a life insurance unit of Allstate Corporation. With
    these transactions, Blackstone's insurance assets under
    management will reach $150 million by the end of 2021. The
    insurance assets it controls account for a third of
    Blackstone's overall assets. \10\
    ---------------------------------------------------------------------------
         \10\ Miriam Gottfried and Leslie Scism. 2021. ``Blackstone Enters
    Deal To Manage AIG Life and Retirement Assets''. WSJ, July 14. https://
    www.wsj.com/articles/blackstone-near-deal-to-manage-aig-life-and-
    retirement-assets-11626294156?mod=markets-lead-pos2; Antoine Gara.
    2021. ``Blackstone Braces for Higher Inflation as Earnings Hit
    Record''. Financial Times, October 21. https://www.ft.com/content/
    10de97da-30e9-4c92-a3a7-5da251706c3e
    ---------------------------------------------------------------------------
        In July 2020, KKR announced it was buying life insurance
    and retirement income company Global Atlantic Financial Group
    for $4.4 billion and taking over management of about $70
    billion of Global Atlantic's assets. The deal raised KKR's
    assets managed on behalf of insurance companies from about $26
    billion to more than $96 billion. It increased KKR's total
    assets under management by 30 percent, from $207 billion to
    more than $277 billion. And it increased the share of permanent
    capital--capital that does not need to be replenished by fund
    raising--from 9 percent to 33 percent. \11\
    ---------------------------------------------------------------------------
         \11\ Miriam Gottfried and Dave Sebastien. 2020. ``KKR To Buy
    Global Atlantic Financial Group for $4.4 Billion''. WSJ, July 8.
    https://www.wsj.com/articles/kkr-to-buy-global-atlantic-financial-
    group-for-around-4-billion-11594207178?mod=article-inline
    ---------------------------------------------------------------------------

    Dangers Facing Policy Holders and the Challenges of Regulating PE
            Control of Insurance Assets

        Regulating private equity investments is difficult because
    there is little public information on how these firms invest
    insurance assets, making it difficult to gauge risk. But
    clearly, they are moving some of the assets out of plain
    vanilla corporate bonds and into private debt and asset-backed
    securities where they can earn high fees for managing the
    assets. Returns on private debt are usually higher than for the
    plain vanilla bonds. However, investments in private debt are
    riskier--they are less transparent and more difficult to trade,
    making them difficult to sell to meet death benefit and annuity
    obligations in case of an economic slowdown and cash crunch.
    This may endanger policy holders. The Fed has expressed concern
    that investments in difficult-to-sell debt and equity holdings
    may mean that insurers will lack cash in an economic crisis to
    pay a surge of claims. Not only do the assets lack liquidity,
    they may also go down in value in these circumstances. \12\
    Insurance regulators should require PE firms to hold higher
    reserves against these riskier investments. But assessing
    whether they are doing so will be hampered by the secrecy that
    shrouds PE firm activities.
    ---------------------------------------------------------------------------
         \12\ Alwin Scott. 2021. ``Chasing Yield, U.S. Private Equity Firms
    Nudge Up Risk on Insurers''. Reuters, June 1. https://www.reuters.com/
    business/finance/chasing-yield-us-private-equity-firms-nudge-up-risk-
    insurers-2021-06-01/
    ---------------------------------------------------------------------------
        Opportunities for corrupt self-dealing are widely available
    as PE firms can use the insurance assets to shore up the
    finances of failing or struggling funds they own. Such
    activities are difficult to detect, since there is no
    requirement for public disclosure of transactions. Banning the
    practice of PE firms investing insurance assets they control in
    their own debt and buyout funds would prohibit this activity.
    At a minimum, rules to prevent corrupt self-dealing by PE firms
    need to be put in place. Recent statements by SEC Chair Gensler
    indicating that the SEC will act to increase transparency of
    PE's financial dealings are welcome in this context as well.
        Caps on fees paid for investment in alternatives such as
    buyout or debt funds should be put in place so that fees paid
    to PE firms do not eat up higher earnings on these risky
    assets.
        National standards for reserves against more risky
    investments for any company managing life insurance and
    retirement benefits in the U.S. regardless of where the company
    is headquartered are needed to thwart moves to jurisdictions
    with lax reserve requirements.
        In general, steps need to be taken to prevent the
    possibility that billionaire PE firm partners will further
    enrich themselves at the expense of holders of life insurance
    and annuity policies.

                   RESPONSES TO WRITTEN QUESTIONS OF
                SENATOR VAN HOLLEN FROM EILEEN APPELBAUM

    Q.1. The Atlantic recently published an article on October 14th
    that examines Alden Global Capital and its handling of the news
    outlets it owns. The author, McKay Coppins, summarizes Alden's
    corporate model as: ``Gut the staff, sell the real estate, jack
    up subscription prices, and wring as much cash as possible out
    of the enterprise until eventually enough readers cancel their
    subscriptions that the paper folds, or is reduced to a
    desiccated husk of its former self.''
        Are you familiar with Alden's corporate model and, if so,
    do you agree with McKay Coppins's characterization of it?
        What kind of conditions can be set to prevent private
    equity from engaging in such predatory ownership?
        Dr. Appelbaum, your testimony points to the size and
    influence of private equity in the United States. Many of the
    funds are registered offshore in the Cayman Islands, Bermuda,
    and other countries.
        What are the practical effects of foreign ownership in
    terms of accountability for these funds, and do you anticipate
    national security implications?

    A.1. Thank you, Senator Van Hollen, for this very timely
    question about Alden Global Capital's ownership of newspapers.
    On Monday, September 22, Alden-owned Digital First/Tribune--the
    second largest owner of newspapers in the U.S.--announced its
    intention to acquire Lee/BH Media, the third largest. Gannett,
    formerly backed by private equity firm Fortress Investment
    Group which is thought to continue to have a stake in the
    company since it became publicly traded, is the largest owner
    of newspapers since its 2019 merger with Gatehouse. Gannett/
    Gatehouse owns 613 newspapers, Digital Media/Tribune owns 207,
    LEE/BH Media owns 170 for a total of just under 1,000
    newspapers. The next seven largest newspaper companies together
    own a total of 500 newspapers. When the deal goes through,
    Gannett/Gatehouse and Alden will create a duopoly with an
    ownership between them of two-thirds of U.S. newspapers. \1\
    ---------------------------------------------------------------------------
         \1\ Penelope Muse Abernathy. 2021. ``News Deserts and Ghost
    Newspapers: Will Local News Survive''. University of North Carolina--
    Chapel Hill, Center for Innovation and Sustainability in Local Media.
    Cislm.org.
    ---------------------------------------------------------------------------
        This is very concerning from the point of view of workers
    at the newspapers Alden Global Capital owns and from the
    perspective of residents in the communities the papers serve.
    McKay Coppins description of Alden's business model is correct.
    Alden views the newspaper industry as already in decline with
    many newspapers in distress. The investment firm sees an
    opportunity in buying up newspapers and consolidating the
    industry that will allow it to extract the still sizable ad
    revenue while cutting positions and costs to maximize profits
    in the short run before discarding what is left of the papers
    over a longer time horizon.
        At a general level, Congress may need to grapple with the
    question of whether there are industries where it does not make
    sense for investment funds to own companies. The key role that
    newspapers play in a democracy suggests that ownership by
    investment funds, with their short time horizons and single-
    minded drive for profits, make them unsuitable owners.
    Ownership of health care providers is another questionable
    situation: the drive for profits by investment funds may
    conflict with the health care mission of providers.
        In the short-run, passage of legislation proposed by
    Senator Ron Wyden to provided an economic lifeline to the
    newspapers not already owned by Digital First/Tribune and LEE/
    BH Media can be very useful in enabling some community
    newspapers to resist the siren call of investment firms. But
    this is not a permanent solution.
        Perhaps the most promising answer is to rethink the current
    application of antitrust regulations. Under the current
    application of antitrust regulations, there is nothing to stop
    Alden from acquiring LEE/BH Media. The newspapers acquired in
    this way are likely to be approved by regulators because they
    don't compete with other Alden-owned papers in local markets.
    Current interpretation of antitrust has allowed private equity
    and hedge fund investors to build national powerhouses in a
    variety of fragmented industries because of the focus of
    regulators on competition and prices in local markets. This
    interpretation was established by antitrust regulators during
    the Reagan administration, when they chose to abandon the
    measure of market share as a red flag in mergers and
    acquisitions. A new reinterpretation by the Biden
    administration's Department of Justice might be able to restore
    market share as a factor to be considered before approving a
    merger such as the one Alden proposes between Digital First/
    Tribune and LEE/BH Media. The merger will give the combined
    company ownership of one-quarter of all newspapers and likely
    would not pass muster if market share is a factor to be
    considered.
        Your second question about the implications of PE
    investment funds locating their headquarters in the Cayman
    Islands and similar offshore locations is also an important
    one. You have put your finger on the main issue--lack of
    transparency and accountability. They are tax havens that allow
    PE firms and their investors to avoid some U.S. taxes.
    Financial regulation also tends to be more lax. In the latest
    twist, PE firms are buying up life insurance companies that
    provide annuities. Insurance regulations in some offshore
    locations have more lenient reserve requirements, making them a
    preferred location for the headquarters of these investment
    funds. But the implications beyond these observations, and
    national security implications in particular, are not my area
    of expertise.
                  Additional Material Supplied for the Record
      STATEMENTS SUBMITTED IN SUPPORT OF THE STOP WALL STREET LOOTING ACT
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      LETTERS SUBMITTED IN OPPOSITION TO THE STOP WALL STREET LOOTING ACT
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