Defunding private equity
U.S. private equity funds are currently sitting on close to a trillion dollars in uninvested funds ('dry powder') earmarked for leveraged buyouts - taking companies private, loading them with debt, stripping their assets and selling them on. They continue to raise substantial sums, including from public and private employee pension funds, despite the shortage of investment opportunities relative to their cash pile. The fee racket ensures they rake in profits from simply sitting on the money. But their appetite is boundless, and the Trump administration's Labor Department has now offered them a new prize to feast on.
A June 3 guidance letter from Labor Secretary Eugene Scalia, a former corporate lawyer and lobbyist, clears the way for private equity firms to tap into workers' individual retirement savings. Individual employee retirement funds, known as 401(k) accounts, have swelled as companies have wound up their pension schemes. These accounts now hold some USD 6.2 trillion. Until now, investment in buyout funds has been off limits. Scalia's June 3 letter, timed for maximum distraction while workers struggle with mass unemployment and a public health emergency, removes the limits. "If just 5 percent of the money in these retirement funds were available to private equity", noted the U.S. Center for Economic and Policy Research, "it would be a windfall of $435 billion - real money even to private equity millionaires and billionaires."
Private equity funds have enriched a growing number of billionaires who have profited from the industry's high fees while unleashing serial bankruptcies and flooding financial markets with dubious, junk-rated debt. In the United States, over 1.3 million retail jobs have been wiped out in the private equity funded 'retail apocalypse' . The funds have powered decades of job destruction in the food industry, documented on the IUF's Private Equity Buyout Watch site. And the coronavirus pandemic has exposed their devastating impact on health and retirement services, in the U.S. but also in the UK and in Sweden.
A recent study by UK economist Ludovic Phalippou again demonstrates that over the past decade the high fees which have enriched the billionaire class have generated the same returns for investors as a low cost index fund tracking a basket of publicly traded stocks. "This wealth transfer from several hundred million pension scheme members to a few thousand people working in private equity", Phalippou told the Financial Times, "might be one of the largest in the history of modern finance."
It is, of course, worth asking if, regardless of the returns, worker retirement funds should be investing in financial engineering, job destruction and systemic volatility, all of which place future retirees at high risk. The Trump administration has an answer to that question. Following the June 3 letter, Labor Secretary Scalia announced a proposed rule which would restrict pension fund managers' authority to recommend investments based on environmental and social criteria, declaring that "Retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan." This chisels in stone fund managers' 'fiduciary responsibility' and takes it into new territory: investing in the future of the planet is now off limits.
It's time to defund private equity. For that, alternatives need to be on offer. The crisis has shown the horrific consequences of surrendering public health care to profit-seeking. Surrendering workers' retirement to financial markets is equally catastrophic - ask anyone with an individual pension scheme who retired in 2008, or the masses of people who took to the streets in Chile last year.
Private equity funds, which globally dispose of some USD 2.5 trillion in uninvested 'dry powder', are preparing to scoop up bankrupt firms and extract gain from the coronavirus wreckage. At the same time, many governments are tossing financial orthodoxy overboard in search of a path to recovery. Now is the moment for labour to push for public investment vehicles, backed by central bank guarantees, to support sustainable jobs and the transition to a low-carbon economy, and cut the umbilical cord linking workers' futures to junk bond billionaires.