Congress hints at regulating private equity

WASHINGTON — Unions are hoping that pressure from Congress on private-equity funds will lead to better pay and benefits for workers, including more unionization.
“We’re in the early stages of starting a national debate about income inequality in this country, and the special responsibility that private equity has [is] to address greater opportunity for workers in this country,” Stephen Lerner, assistant to the president of the Service Employees International Union in Washington, said in an interview last week. He is the director of the 1.8-million-member union’s private-equity campaign.
House Financial Services Committee Chairman Barney Frank, D-Mass., made clear at a hearing held by his committee May 16 that he is looking at unspecified legislation to regulate private-equity funds more stringently.
“When a small number of individuals benefit from a particular deal in the tens and sometimes hundreds of millions of dollars, and concurrently, workers are laid off, we have a situation which [is] wrong,” he said at the hearing, which dealt with private equity’s effects on workers and firms.
Mr. Frank cited as an example a news report that $19-an-hour union janitors at the Tommy Hilfiger Corp. recently were replaced with $8-an-hour non-union janitors as a consequence of the $1.6 billion buyout of the company last year by private-equity firm Apax Partners Inc.
Both companies are based in New York.
The laid-off workers later were rehired by a different contractor.
Company founder Tommy Hilfiger will receive at least $14 million a year through 2010 from the sale, “while workers in their 40s and 50s have been laid off with one day’s notice,” Mr. Frank said.
“If we have a situation in private equity where enormous values are created, and the workers are either no better off or worse off, then from the public-policy standpoint, that seems to me to be undesirable,” Mr. Frank said.
The committee is focusing on whether there is such a pattern and whether the government should do something about it, he said, adding: “It could have [an] effect on policies involving unionization [and] taxation.”
‘No specifics’
Committee spokesman Steve Adamske said in an interview that “there are no specifics” on what legislation the committee might consider.
But a Republican staff aide, who asked not to be identified, suggested that “one of the issues they might look at is disclosure,” specifically more disclosure required for investors by the Securities and Exchange Commission.
Congress also is looking at changing the way hedge fund and private-equity fund managers are taxed.
At a meeting with reporters in Washington this month, Senate Finance Committee Chairman Max Baucus, D-Mont., said that he and the committee’s ranking minority member, Sen. Charles Grassley, R-Iowa, are looking at such changes.
Blackstone not representative
“The fundamental question is the degree to which income gain is ordinary income or cap gains,” Mr. Baucus said.
The issue that members of the Senate committee are trying to determine, he said, is how performance fees charged by private-equity and hedge fund managers should be taxed.
Currently, they are taxed at lower capital gains rates.
Although large firms such as The Blackstone Group LP of New York have attracted much public attention, “they’re not representative of the typical private-equity firm,” Jeffrey Jay, the managing partner of Great Point Partners LLC of Greenwich, Conn., said in an interview.
“The typical private-equity firm is providing growth capital for businesses, not involved in massive cost-cutting and debt-pay-down-type strategies,” he said. Individual investors and advisers who work with high-net-worth clients and family offices have “always been meaningful players in private equity and venture capital,” Mr. Jay said.
The AFL-CIO in Washington recently asked the SEC to require Blackstone, a private-equity and hedge fund group, to register as a mutual fund in light of the company’s offering its shares as a publicly traded limited partnership. Blackstone’s offering is one of the first major public offerings by a private-equity and hedge fund firm, and the SEC is reviewing it.
“If Blackstone LP can avoid coverage under the Investment Company Act of 1940, it appears to us only a matter of time before other investment companies rely upon the devices used by Blackstone LP to avoid regulation under the act,” AFL-CIO secretary treasurer Richard Trunka wrote in a May 15 letter to Andrew “Buddy” Donohue, director of the SEC’s division of investment management, and John White, director of its division of corporation finance.
Although officials associated with private-equity management firms argue that most of their profits go to institutional investors such as mutual funds and public pension funds, as well as financial advisers who serve wealthy clients, some advisers say that such investments may not be appropriate for investment advisory firms.
“In many of these cases, [advisers who invest in private-equity funds] are breaching their fiduciary duty by using some of these funds, because they are so non-transparent,” said Charles Stanley, a certified financial planner and chartered financial consultant with Capital Financial Advisors LLC of San Diego.
“There’s no way of knowing really what it is that they are doing with clients’ money when they put it into some of these funds,” he said. “That’s very questionable activity to be doing as a fiduciary adviser.”