The Trump administration put a private equity exec in charge of the Pentagon and drafted a rule that could jeopardize workers' retirement accounts – a long-sought goal of the industry. These moves are gifts to an industry that could be facing a reckoning, thanks to risky investment strategies that might be failing. This month’s edition of the BUYOUTS newsletter takes a look at some of the headlines – and what lawmakers are doing to fight back. |
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The Long Awaited Private Equity 401(k) Regulations: Now What? |
As has been expected for months, the Trump Labor Department finally unveiled its rules to promote the inclusion of risky private investments in retirement accounts. The industry, as Eileen Appelbaum notes, has had its sights on the $14 trillion in retirement funds for over a decade. The timing of the new regulations could hardly be worse, though, as fears about potential meltdowns in the private credit market are making headlines and prompting regulators to ask serious questions. All in all, it remains unclear whether employers will want to actually place their workers’ funds in jeopardy – and face the legal repercussions for doing so. The Chicago Tribune and Los Angeles Times, among other outlets, cited CEPR’s expertise on the matter.
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PE Takes Over the Military |
Former private equity executive Stephen Feinberg left Cerberus Capital Management to join the Pentagon, and the Wall Street Journal recently published a revealing piece about his strategy to dramatically increase military spending – which includes the government taking equity stakes in several defense contractors. This highly unusual maneuver left one observer noting, “This is a Cerberus takeover… Private equity has just acquired its largest organization.” Feinberg’s former company was deeply involved in the military contracting business, so he certainly knows the terrain. Cerberus also figured prominently in the collapse of the Steward Health Care company. The PE-military story is not a new one; CEPR was on the case last fall with a piece called “Private Equity Meets the Pentagon” that looked at Feinberg’s history, as well as private equity’s interest in dual use military and surveillance technologies that are of keen interest to the Trump Pentagon.
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The Problem of Overvalued Portfolio Companies |
“It is widely acknowledged within the private equity industry that many firms’ estimated values of their holdings are too high.” So writes the Wall Street Journal, which noted that regulators are starting to show real concern about the lack of transparency that is common in the industry. The Journal quotes CEPR’s Eileen Appelbaum saying that PE firms “are still not willing to face the music” and price their holdings appropriately, which they chose not to do four years ago as stock prices fell. Pitchbook also noted CEPR’s research on the subject as well. As Appelbaum wrote one year ago,
“It is PE firms’ misleading estimates of the value of companies in their portfolios during the stock market crash of 2022 that have caught up with them.
“At that time, the share value of public companies declined close to 20 percent. But PE firms maintained that their funds had suffered little to no losses. This was a convenient myth for everyone – PE firms looked good, pension funds did not have to write down the value of their private assets at a time when their public assets were declining, and financial managers responsible for a pension fund or company’s PE investments got their bonuses. But that did not change the fundamentals.”
The result? $3 trillion tied up in aging companies that aren’t worth what investors insist they are. |
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Lawmakers Probe Private Equity Landlords and Child Care Providers |
Several politicians have spoken up recently about the threats that private equity poses to different sectors of our economy. Sen. Jeff Merkley (D-Oregon) sent letters to two major child care companies, KinderCare and Learning Care Group, that are owned by private equity. As the Washington Post noted, Merkley is concerned that PE-owned providers “have an incentive to maximize profits by paying workers less, raising tuition and investing in higher-income and high-population centers. He cited studies indicating that for-profit child care centers are more likely to experience staffing and operational problems and listed alleged safety and labor issues at facilities owned by each company.”
Meanwhile, lawmakers have been zeroing in on private equity’s role in the nation’s housing crisis. Sen. Raphael Warnock (D-Georgia) recently highlighted a new study showing the impacts of Wall Street investment in Atlanta’s housing market. Senator Elizabeth Warren (D-Massachusetts) continues to press for national legislation to rein in private equity and corporate landlords – see her recent video, “Private Equity's Housing Takeover. We Need to Get Them Out.”
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Stranger Than Fiction: Private Equity is Coming for… Bagels? |
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Under the headline “Big Money is Betting on Bagels,” the New York Times reports that private equity investors are spending real money to bring high quality bagels to locations around the country. The founder of the Manhattan Bagel Equity Fund tells the paper that it is “acquiring, rebranding and scaling high-performing bagel shops” – with an eye toward selling $15 sandwiches.
Are consumers really looking to spend that kind of money on a bagel? That remains to be seen, but the Times does note that private equity recently tried the same strategy with Sprinkles, which sold high-end cupcakes. The result? The company’s shops were suddenly closed at the end of last year. As author Megan Greenwell put it to the Times, “The play is always to take the thing that made it unique and try to universalize it…. It’s a move that can pay off and put you on every Main Street in America, or it can collapse spectacularly.”
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The Center for Economic and Policy Research (CEPR) is an independent, nonpartisan think tank that was established to promote democratic debate on the most important economic and social issues that affect people's lives. |
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