Congress Hears Case For, Against Buyouts

A top-ranking congressional Democrat this month decried the profits generated by the buyout business, sending a shudder down the spines of LBO pros worried that carried interest could lose its favorable tax properties. But a prominent Republican sounded a far more conservative note, and it’s hard to say how much stomach Congress will have for rocking the status quo.

During a May 16 hearing hosted by the House Financial Services Committee, U.S. Rep. Barney Frank, D-Mass. made it clear that he’s not an unadulterated fan of private equity. He called the income gap between buyout pros worth billions and janitors pulling down $8 an hour “wrong.” And, in his most provocative statement from the meeting, Frank said that Congress must play a role in bringing about greater economic equality. “To the extent we see gross imbalances, we have to act,” Frank said.

That said, Frank, who leads the committee that holds regulatory sway over hedge funds and private equity firms, showed a willingness to let LBO pros make their case during the meeting, designed to examine the effect of buyout deals on workers. Frank gave equal air time to the Service Employees International Union, the 1.8 million member organization that is demanding that buyout partners share more of their riches with workers, and the Private Equity Council, a lobbying and trade group assembled by a handful of the biggest LBO shops.

Andy Stern, the SEIU’s leader, got ample opportunity to air his grievances, including his contention that the leverage they apply to companies induces LBO firms to cut jobs. Stern also noted that, given their prominent position in the economy, buyout firms have an opportunity to have a real impact on social responsibility. Stephen Lerner, who heads the union’s “Behind the Buyouts” initiative, said that SEIU isn’t necessarily trying to get legislation passed. Rather, he said, the union wants to get its point of view out to the public. “We’re not asking for a regulatory regime,” Lerner said.

For his part, Douglas Lowenstein, the Private Equity Council’s executive director, used his appearance at the hearing to try to demystify private equity. He pointed out that since many limited partners are pension funds and college endowments, buyout fund profits actually help pay for rank-and-file worker pensions, as well as support college scholarships. In his testimony, Lowenstein also said he was open to starting a “dialogue on issues of mutual interest” with groups like SEIU.

The committee also heard from Jon Luther, the CEO of Dunkin’ Brands, who sang the praises of his bosses, buyout shops Bain Capital, the Carlyle Group and Thomas H. Lee Partners, as proponents of growth rather than slash-and-burn management. “They’ve opened doors to things we never imagined,” Luther said. Unlike his former multinational parents, whom Luther described as indifferent masters who swept away the company’s cash every night, the trio of LBO firms seeks to reinvest revenue to generate growth. “Our new owners ask how they can support our goals.”

The hearing made clear that private equity is, at least for now, a partisan issue. The committee’s Democrats lined up behind the SEIU, while the Republicans sounded caution on reining in the capital markets. “We need to go slow. We need to go real slow,” said Rep. Richard Baker, R-La, speaking about potential regulation. “Maybe we don’t need to go at all.”—J.H.