A Primer on Private Equity at Work: Management, Employment, and Sustainability

[Excerpt] Private equity, hedge funds, sovereign wealth funds and other private pools of capital form part of the growing shadow banking system in the United States; these new financial intermediaries provide an alternative investment mechanism to the traditional banking system. Private equity and hedge funds have their origins in the U.S., while the first sovereign wealth fund was created by the Kuwaiti Government in 1953. While they have separate roots and distinct business models, these alternative investment vehicles increasingly have been merged into overarching asset management funds that encompass all three alternative investments. These funds have wielded increasing power in financial and non-financial sectors – not only via direct investments but also indirectly, as their strategies – such as high use of debt to fund investments – have been adopted by investment arms of banks and by publicly-traded corporations. This primer focuses on private equity (PE) because this is the new financial intermediary that most directly affects the management of, and employment relations in, operating companies that employ millions of U.S. workers. However, as the boundaries among alternative investment funds have begun to blur, we will touch on hedge funds and sovereign wealth funds as their activities relate to private equity. To address the question of why these new financial intermediaries have become prominent in the last three decades, we begin by outlining the changes in financial regulation in the U.S. and the characteristics of labor market institutions that have facilitated the emergence and rapid growth of private equity and other alternative investment funds. We outline the changes in size and scope of the private equity industry; describe the generic PE business model, using examples from the retail sector where it has been particularly active; and examine the sources of gains for PE investors. We then review the impact of private equity buyouts on the sustainability of the operating companies and on workers and employment relations in these companies. In the period since the collapse of the housing and real estate markets and the onset of recession and financial crisis, the risk of financial distress and even bankruptcies among the highly leveraged operating companies in PE portfolios has increased. We examine this increased risk to operating companies in this period. In addition, we discuss the experience of private equity firms in the post-crisis period, noting the signs of recovery in the sector as well as the continuing challenges facing private equity investors. We illustrate our points – both positive and negative – with brief case examples to help clarify the issues. We conclude with proposals for regulatory changes that are needed to curb the destructive outcomes associated with some types of private equity activity

Testimony of Eileen Appelbaum Before the Commission on the Future of Worker-Management Relations

Testimony_Applebaum_011994.pdf: 107 downloads, before Oct. 1, 2020

Private Equity and the SEC after Dodd-Frank

A new report by Senior Economist Eileen Appelbaum of the Center for Economic and Policy Research (CEPR) shows just how much the recnt SEC investigations of private equity funds has revealed and why it remains important to continue to regulate the industry. The report reviews the widespread practices in the industry that have unfairly enriched some private equity firms at the expense of pension funds and other investors in their funds

Are Lower Private Equity Returns the New Normal?

U.S. private equity fundraising had its best year ever in 2015 -- raising $185 billion. But is the enthusiasm of investors warranted? Do PE buyout funds deliver outsized returns to investors and will they do so in the future? This report answers this question by reviewing the most recent empirical evidence on buyout fund performance; the answer is no. While median private equity buyout funds once beat the S&P 500, they have not done so since 2006 -- despite industry claims to the contrary

What's Behind the Increase in Inequality?

The focus of this paper is the increase in earnings inequality over the last 30-plus years. Economists have well-developed theories that explain differences in wage levels among different categories of workers. Differences in educational attainment and skills are a major source of these differences; large organizations typically employ workers with a wide range of skills and responsibilities and pay them accordingly. As a result, the level of wage inequality within organizations is quite large. This paper does not challenge these results. It argues, however, that these theories are not adequate to explain a relatively recent phenomenon: the increase in recent decades in wage inequality among workers with similar levels of education and similar demographic characteristics who are employed in similar occupations but in different firms or establishments. These differences in wages are how most people experience inequality. Yet much of the analysis by economists has focused on developments that have enabled leading firms in the U.S. to increase their ability to extract monopoly rents.This paper reviews a wide-ranging literature that examines the increased ability of leading firms to extract monopoly rents. It also reviews the more recent and still thin literature on the increase in inequality among workers with similar characteristics but different employers. The contribution of this paper is the identification of a mechanism that reconciles these two strains of economic research and explains how the increase in rent extraction is linked to the increasingly unequal pay of U.S. workers with similar characteristics. I draw on joint work with Rosemary Batt (2014) to identify new opportunities for rent seeking behavior, and on joint work with Annette Bernhardt, Rosemary Batt and Susan Houseman (2016, 2017) on domestic outsourcing, inter-firm contracting and the growing importance of production networks to establish a mechanism that connects the increase in rents with this new type of increase in wage inequality

Economics and Politics of Work-Family Policy: The Case for a State Family Leave Insurance Program

Highlights the lack of paid sick and family leave laws and the need for family leave insurance, an employee-paid program that provides partial wage replacement when workers take time off to care for an ill family member or newborn or newly adopted child

Documenting the Need for a National Paid Family and Medical Leave Program: Evidence from the 2012 FMLA Survey

The United States is the only high-income country that does not mandate paid family and medical leave. Instead American workers rely on a patchwork of employer-provided benefits, private insurance, state programs, public assistance, and savings to make ends meet during a leave event. About 30 percent of private-sector employees taking unpaid leave incur debt as result of their leave. More than 2.5 million employees cannot afford to take leave to care for self, a family member with a serious health condition, during pregnancy, to bond with a new child, or to care for an injured military service member every year.Our analysis of the Department of Labor's 2012 Family and Medical Leave Act (FMLA) Survey found that 12.6 percent of private-sector employees took family and medical leave in 2012, while 4.5 percent had unmet leave needs. This means that one-in-four employees needing leave had their leave needs unmet in the past 12 months. Not being able to afford unpaid leave (49.4 percent) and the risk of loss of job (18.3 percent) were the two most common reasons given for not taking needed leave. Employees with children living at home and female employees had the greatest need for leave, but also had the highest rates of unmet leave

Fees, Fees and More Fees: How Private Equity Abuses its Limited Partners and U.S. Taxpayers

The private equity industry receives billions of dollars in income each year from a variety of fees that it collects from investors as well as from companies it buys with investors' money. This fee income has come under increased scrutiny from investigative journalists, institutional investors in these funds, the Securities and Exchange Commission (SEC), the Internal Revenue Service (IRS), and the tax-paying public. Since 2012, private equity firms have been audited by the SEC; as a result, several abusive and possibly fraudulent practices have come to light. This report provides an overview of these abuses -- the many ways in which some private equity (PE) firms and their general partners gain at the expense of their investors and tax-payers. Private equity general partners (GPs) have misallocated PE firm expenses and inappropriately charged them to investors; have failed to share income from portfolio company monitoring fees with their investors, as stipulated; have waived their fiduciary responsibility to pension funds and other LPs; have manipulated the value of companies in their fund's portfolio; and have collected transaction fees from portfolio companies without registering as broker-dealers as required by law. In some cases, these activities violate the specific terms and conditions of the Limited Partnership Agreements (LPAs) between GPs and their limited partner investors (LPs), while in others vague and misleading wording allows PE firms to take advantage of their asymmetric position of power vis-à-vis investors and the lack of transparency in their activities. In addition, some of these practices violate the U.S. tax code. Monitoring fees are a tax deductible expense for the portfolio companies owned by PE funds and greatly reduce the taxes these companies pay. In many cases, however, no monitoring services are actually provided and the payments are actually dividends, which are taxable, that are paid to the private equity firm

Domestic Outsourcing, Rent Seeking, and Increasing Inequality

An increasing share of the economy is organized around financial capitalism, where, in contrast to the past, capital market actors actively assert and manage their claims on wealth creation and distribution. These new actors challenge prior assumptions of managerial capitalism about the goals and governance of firms. The focus on shareholder value is credited with increasing firm efficiency and shareholder returns. This lecture analyzes the changes in organizational behavior and value extraction under financial capitalism

A Primer on Private Equity at Work: Management, Employment, and Sustainability

Private equity, hedge funds, sovereign wealth funds and other private pools of capital form part of the growing shadow banking system in the United States; these new financial intermediaries provide an alternative investment mechanism to the traditional banking system.2 Private equity and hedge funds have their origins in the U.S., while the first sovereign wealth fund was created by the Kuwaiti Government in 1953. While they have separate roots and distinct business models, these alternative investment vehicles increasingly have been merged into overarching asset management funds that encompass all three alternative investments. These funds have wielded increasing power in financial and non-financial sectors -- not only via direct investments but also indirectly, as their strategies -- such as high use of debt to fund investments -- have been adopted by investment arms of banks and by publicly-traded corporations