Private Equity’s Next Leveraged Buyout Might Be the Oval Office

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Charlie Neibergall/AP Image

Former Vice President Joe Biden speaks in Des Moines. 

This week's debates are likely to feature explicit attacks on some of America's most well-known and universally hated corporate villains, from Big Pharma and Big Tech to Big Oil and more. As Democrats are forced to pick sides in these fights, however, one other extremely consequential dividing line may be left out of the conversation: the one between candidates fighting to stop private equity and candidates taking the industry's money.

A handful of presidential hopefuls are leaving no doubts about where they stand. Earlier this month, Elizabeth Warren, joined by co-sponsors Bernie Sanders and Kirsten Gillibrand, introduced a comprehensive bill that would bring private equity to its knees. The week prior, Sanders joined a rally protesting a private-equity firm’s decision to close Philadelphia’s Hahnemann University Hospital. Even without legislation, the next president will have many tools to combat the private-equity threat.

We have not heard a peep from the other candidates; some appeared in public comments to not know what private equity is. Taken alone, this silence is puzzling. Combine it with the fact that many of those silent presidential hopefuls are raking in cash from private equity’s biggest actors, however, and it starts to look a lot more worrisome. Private-equity bigwigs’ support for candidates like Joe Biden, Cory Booker, Pete Buttigieg, and Kamala Harris raises worries that these presidential hopefuls would not make use of the tools at their disposal should they accede to the Oval Office. Worse yet, it suggests that private equity might have a place within their administration.

Private equity has savvily avoided being listed in the same breath as other corporate bogeymen. Nonetheless, the industry represents an enormous, multipronged, and rapidly growing threat to everyday Americans. Private-equity firms buy companies with borrowed money and extract value from them to enrich themselves and their investors, whether the company survives or not.

Earlier this month, one private-equity firm drew particularly acute outrage when it announced it was closing Philadelphia's Hahnemann University Hospital in order to extract value from its well-located real estate. That, however, is just the tip of the iceberg. When private-equity firms are not closing hospitals, they are acting as a driving force behind surprise medical billing. Or they might be putting you out of a job. According to a new report from the Center for Popular Democracy and the Private Equity Stakeholder Project, PE is responsible for destroying over 600,000 retail jobs in the last ten years, triggering bankruptcies for iconic brands like Toys “R” Us and Sears.

Private equity could also be your landlord, having bought up 200,000 single-family homes during the foreclosure crisis. Unsurprisingly, these firms have made for terrible landlords, failing to perform basic maintenance, aggressively increasing rents annually to deliver returns for their investors, and evicting frequently.Private equity might also be driving up your college tuition costs and lowering the quality of your education. A new study found that for-profit colleges acquired by private-equity firms see falling graduation rates, earnings, and loan repayment rates. That means more students saddled with debt they cannot repay.

Given its villainous profile, it should hardly come as a surprise that the industry is also incredibly close to Trump.While private equity’s exploits began long before Trump became president, the industry has found a close and lucrative ally in this administration. Numerous former private-equity titans have been tapped to fill powerful roles throughout the executive branch, including Wilbur Ross as Secretary of Commerce and Kenneth Juster on the National Economic Council. Stephen Schwarzman, CEO of Blackstone, the world’s largest private-equity firm, is a massive Trump donor and was accordingly appointed chairman of the president’s Strategic and Policy Forum. Schwarzman was among those who tagged along for Trump’s first overseas trip to Saudi Arabia, and it was while standing in the royal palace in Riyadh that Blackstone announced it had been picked to manage the country’s new $20 billion fund for chiefly American infrastructure investments. These relationships are paying off domestically as well as overseas by way of looser regulations that make it even easier for private equity to reap enormous profits off the backs of others.

Happily, the future president will have broad powers to reverse the Trump administration's actions and to rein in this exploitative industry. That effort would likely start with appointing financial regulators who would impose more stringent rules on leveraged lending, a key piece of what makes the private equity model profitable. Executive branch appointees could also target private-equity firms by homing in on the sectors in which they operate. For example, appointees within the Department of Education could require for-profit colleges to demonstrate that the education they provide is of some value, a standard that would close up many private equity–run shops. Motivated and creative appointees throughout the executive branch would undoubtedly find still other ways to limit private equity’s predatory exploits.

Although a handful of candidates, like Sanders and Warren, seem ready for the confrontation, other candidates have been much quieter about the threat posed by private equity. In the meantime, they have been happily accepting the industry’s cash.

In the second quarter, Joe Biden, Cory Booker, Pete Buttigieg, and Kamala Harris have all received donations from one or both of the leaders of the country's top two private-equity firms, Blackstone and the Carlyle Group. Buttigieg received max donations from 11 high-level Blackstone employees, as well as money from Bain Capital and Neuberger Berman. Biden, Booker, and Gillibrand nabbed donations from employees at at least three of the top 15 private-equity firms.

Admittedly, even 11 max donations seems like chump change when top candidates' total fundraising hauls are anywhere from $12 million to $25 million. Many of these donors, however, are not just writing checks, but also collecting them from others on the candidates' behalf. The figures they raise are often consequential. For example, Tony James, executive vice chairman at Blackstone, bundled over $100,000 for Hillary Clinton in 2016. This time around, he hosted a fundraiser for Buttigieg in June. Another $100k-plus Clinton bundler (more precise information on Clinton bundlers is sadly unavailable), Carlyle Group managing director James Attwood, gave to Biden, Booker, Buttigieg, Gillibrand, and Harris this quarter.

It is possible but unlikely that candidates won the industry's support by offering explicit assurances that they will not undermine the private equity business model. It need not amount to such a clear quid pro quo, however, to be concerning. Candidates' silence on what ought to be a primary target for Democrats is worrisome enough.

That is because private equity can get its way through executive branch personnel, an area in which candidates have been asked to make very few public promises, and thus where they face next to no accountability. Private equity could continue to thrive without any changes to the status quo; all they need is confidence that a candidate will not appoint financial regulators intent on rocking the boat. In 2016, for example, Tony James's name surfaced frequently as a potential Treasury secretary. Maybe he’s hoping for another shot at the seat?

Luckily for these candidates, they can address our worries through a couple of simple actions. First, each must end their silence on private equity. Senator Gillibrand, to her credit, has done so by co-sponsoring Warren's bill. Second, just as candidates are expected to address how they will combat the threats posed by Big Tech, Big Pharma, and others, they must do so for private equity. That must include being clear about the types of people they plan to appoint to their executive branch and being explicit that private-equity executives will not be among them.

If candidates neglect to take these essential steps, however, we will be forced to expect the worst of their future administrations.