Private equity firms have been under fire recently from high-profile political figures over their “predatory business practices” and their subsequent influence on society. The firms are being criticized for problems such as overloading their portfolio companies with debt, price gouging practices, overcharging for ambulatory care from health care firms they own, and providing extremely poor living conditions in the private prisons they operate. Legislators have been encouraged to introduce bills that specifically target their actions and help regulators get a handle on the situation.
This negative press is having an impact on investors. A survey from Eaton Partners concluded that nearly 70% of institutional investors they canvassed are growing concerned from the recently publicized anti-private equity criticism from US lawmakers.
Sen. Elizabeth Warren recently introduced the “Stop Wall Street Looting Act of 2019” that would publicize private equity firms’ fees and returns, and institute measures that would hold them accountable for illegal activities executed by their portfolio. She also criticized private equity firms for running their privately owned prisons in subpar conditions, accusing them, among other things, of serving meals “which included not only maggots but also ‘crunchy dirt’ in potatoes,” she said in a joint statement with Rep. Alexandria Ocasio-Cortez.
Warren has likened private equity firms to vampires, “bleeding the company [they acquire] dry and walking away enriched even as the company succumbs…Costing thousands of people their jobs, putting valuable companies out of business, and hurting communities across the country.”
The implications of the bill could have a serious impact on the return profiles of institutional investors who allocate towards private equity. Over half of institutional investors surveyed by Eaton Partners (55%) believe private equity will be the best-performing private market fund class over the next six months.
The American Investment Council recently reported that private equity has been the top-performing asset class for some of the largest public pension plans in the United States for the past seven years. The asset class generated annualized returns of 10.2% over a 10-year period in 2018, compared to an 8.5% return for public equity, and a 4.8% return for fixed income and real estate, respectively.
Eaton Partners’ survey also concluded that more than four in 10 institutional investors are allocating less direct investments in the United Kingdom, due uncertainty stemming from Brexit. Investors also reported in the survey that they are adopting a more defensive approach to portfolio allocation, in reference to the potential of an international drag on macroeconomic growth.
private equity, institutional investors, warren, survey, law, presidential candidates