[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\
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     \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
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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\
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     \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.
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    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.
---------------------------------------------------------------------------
     \10\ https://isps.yale.edu/sites/default/files/publication/2017/
07/surpriseoutofnetwrokbilling-isps17-22.pdf
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    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.
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     \11\ https://isps.yale.edu/sites/default/files/publication/2017/
07/surpriseoutofnetwrokbillin-isps17-22.pdf
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    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.
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     \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.
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     \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
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    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.
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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.
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     \18\ https://www.investmentcouncil.org/wp-content/uploads/trends-
2021q1.pdf Figure 4.
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    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.
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     \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\
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     \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.
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     \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/
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    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\
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     \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
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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
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    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.
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    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
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    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
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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.
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     \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/
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    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\
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     \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.
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    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.
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