Massachusetts Senator Elizabeth Warren thought she would resurrect the Stop Wall Street from Looting Act (SWSLA), again, perhaps hoping it might stick this time. But with no bipartisan support, it is highly unlikely.
Warren has an axe to grind with private equity (PE) firms, investment management companies that provide financial backing to various other companies. PEs invest in startups or mature organizations by supplying additional capital and management services, and in turn, raising their value. The PE firm then sells these companies for a profit. The SWSLA would impose a separate set of tax, regulatory, and legal frameworks on the entire PE industry, giving more control over to Washington bureaucrats.
For sure there are some bad apples, or situations where the targeted company goes out of business. Warren is using the case of Steward Health Care, which bought out a number of hospitals and has since filed for bankruptcy, as the poster child for this round’s legislation. But a few bad situations do not warrant a complete overhaul of the system that would then make it impossible to even attempt to save companies in decline.
An alternative to PE’s taking on failing firms is government bailouts, which merely socializes the loss. Questioning the veracity of PE practices suddenly becomes surreal when taxpayers could instead be on the hook for subsidizing an insolvent company. Bailouts and subsidies not only cost the public significant funds but mask underlying problems such as incompetency and bad management, and only further serve to encourage reckless behavior.
The truth is PE firms provide much-needed capital and expertise to either get a company off the ground or keep it from running into the ground. Many entrepreneurs rely on this private capital to launch a business; entrepreneurship is a vital component to innovation and prosperity. Cutting off potential resources to this group would stifle job creation and economic growth.
PE firms manage roughly 20 percent of U.S. businesses, 85 percent of which are small, and it is estimated that PE contributes as much as $1.7 million to GDP. This bill would lead to a reduction in capital available, less competition, lower productivity and wages, and decreased innovation. The impact would be felt throughout communities from coast to coast. Certainly the 719 PE-backed companies and $55 billion of investments in Warren’s state of Massachusetts would be greatly affected.
In 2019 the U.S. Chamber of Commerce published Economic Impact Analysis of the Stop Wall Street Looting Act and found the following would be lost: between 6.2 and 26.3 million jobs, up to $475 billion annually in tax revenue, at least $329 million annually in public pension funds, and between $671 million and $3.36 billion in investment per year. The entire private equity industry could potentially be eliminated.
Public capital markets are in decline, decreasing by almost half over the past quarter century, due to regulatory burdens that have been placed on companies. Some postpone going public, others never do, while several that are already public go private. The regulations are costly.
An expert witness who testified three years ago in a Senate Finance and Banking Hearing on a former version of this legislation claimed such a bill would “erect a moat and high walls around failing companies” making it “economically unattractive, to take over failing companies and replace their management. . .. it is certainly not in the interests of shareholders, workers or consumers.”
SWSLA would only protect poorly managed companies and make it much more difficult for troubled firms to find equity investors. It would be quite challenging to replace failing management and turn around a company.
This bill is bad news for private equity, businesses, workers, and the economy. Government needs to stay out of these affairs and let the market handle the complicated task of helping new companies and overhauling struggling corporations.
