History repeating: a new battleground

History repeating: a new battleground

Private equity is being slammed by politicians once again. Could the solution to its most recent bashing lie in a storm that has already been weathered?

In July 2019, presidential hopeful Senator Elizabeth Warren put forward her ‘Stop Wall Street Looting’ proposal bill, aimed at reforming private equity. The proposal comes off the back of high-profile PE-backed retail collapses, resulting in major job losses.

Four years previously, in August 2015, Dutch Labour MP Henk Nijboer put forward a private members’ bill entitled ‘Private equity: end to the excesses’, which followed a high-profile PE backed retail collapse in the Netherlands, and which also resulted in major job losses.

Despite the years and distance between these two events, the current attack on private equity in the US bears a striking resemblance to the Dutch situation in 2015. In the Netherlands, work by the Dutch Private Equity and Venture Capital Association (NVP) reshaped negative media into better informed and fairer coverage, while the proposals designed to truncate private equity were eventually voted down by the Dutch Parliament.

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A precursor to the current situation in the US was the collapse of Toys R Us in September 2017, which resulted in the loss of around 30,000 jobs. In recent years, there have also been a number of other high-profile PE-backed retail failures, including Payless ShoeSource, Sports Authority and ShopKo.

In the Netherlands, the spark that caused the fire was a similar string of well-known failures in 2014 and 2015, including HEMA, NRC Media, Van Gansewinkel, Attero and Estro, all of course backed by private equity.

The publication of articles written by ambitious politicians is where the two cases really align. On July 18th 2019, Warren published ‘End Wall Street’s Stranglehold on our economy’. In the Netherlands, on January 29th 2015, Dutch Labour MP Nijboer wrote: ‘Tame the predators of the financial sector’.

The articles are almost identical. They chastise private equity for ‘loading up companies with debt’ and putting the onus of repayment on the underlying business. They both denunciate fees charged by managers, as well as rewards gained through dividends – regardless of the portfolio company’s profitability, or in these cases indebtedness. They both critique the use of ‘OpCo PropCo’ structures – selling off the portfolio company’s property assets for a quick glug of liquidity and then renting the buildings back.

The similarities continue with the subsequently proposed legislative bills. Nijboer’s private members’ bill sought to limit tax deductibility, financial rewards (excessive fees, dividends, bonuses) and the level of company debt. It also aimed to prevent asset stripping and the use of portfolio companies as a means of securing debt, as well as boosting the rights of works councils, together with additional transparency over fees and cost structures.

Warren’s proposal has five main prongs: to make private equity firms liable for portfolio company debt and pension obligations; eliminate the ability to collect monitoring fees and dividends; change tax and bankruptcy rules; prevent lenders loaning high amounts to PE-backed businesses, as well as increasing transparency of performance. The similarities are striking.

Open for business

In the Dutch case, NVP and its members were quick to react. “After Nijboer’s article was published, we approached him and explained private equity on a broader basis. But, he told us that he wanted to take on private equity and that he had a majority on the left in the House of Representatives for that,” says Marc van Voorst tot Voorst, deputy director of NVP.

A few months later, in April 2015, a Parliamentary hearing was called as a means of investigating Nijboer’s claims against the industry. Upon announcement of the hearing, journalists were demanding to speak with NVP. “Our advisers had told us to ignore the media attention and not give any comments; that we would only lose. But we disagreed with that advice. We felt the financial sector had been silent for too long and we want to be open and explain. We let the camera team in and publicly welcomed the hearing,” recalls Van Voorst.

Looking to the US, the equivalent industry trade body, the American Investment Council (AIC), was quick to publicly react to Warren’s attack. On the day Warren’s article was published, the AIC issued a statement in response, providing key stats including the number of people employed by PE-backed companies (5.8 million across 35,000 businesses), as well as average returns for public pension funds (8.6% over a 10 year period). By the end of that day, the AIC was the second most quoted source on all related coverage.

Back to the Netherlands, and for the Parliamentary hearing itself, NVP encouraged key members to speak, including KKR, 3i and Dutch pension scheme PGGM. “A hearing is a great moment to explain how the sector works, so we encouraged people who really know the sector to attend; we saw this as a great opportunity to talk about private equity and the positive impact it has,” says Van Voorst.

“The risks were high. There was a lot of media there and they could have got the wrong message or spun the story. But we took the risk and thankfully the great work of the participating members paid off,” he adds.

This open approach is being replicated by the AIC, which has, since the Democratic Party won the House of Representatives in 2018, ramped up its efforts to educate congress members on the nuances of private equity. The trade body has armed itself with vast amounts of data regarding job creation and returns received by pension funds, which it has been able to deploy at speed during this latest attack.

Neutral tones

Indeed, this level of engagement and openness led to media coverage post hearing being far more neutral in its assessment of private equity. 

Prior to the hearing, Dutch newspaper headlines read: ‘V&D skilfully torn down by private equity’, and ‘Stop raiding Dutch companies’. Post hearing, the headlines included ‘Private equity wrongdoings, are they excesses?’ and ‘Curbing private equity is unnecessary’.

Events appear to be moving much faster in the US, and already press coverage is balancing. Examples of recent headlines include: ‘Elizabeth Warren’s private equity plan gets one big thing wrong’, Bloomberg, and ‘Sen. Elizabeth Warren’s plan for private equity has good aims but misses the mark’, The Washington Post.

In an ear of ‘fake news’ and intense corporate lobbying, eroding public trust in politicians, business and media, the enormous efforts of NVP and its members, spanning almost four years, saw tangible results. They provide a salutary lesson on what can be achieved through open communication as a means of improving wider understanding.


About the Author

The team serves private equity and venture capital funds with banking services and customised financing. Gavin has more than 25 years of specialist commercial banking experience, of which 11 years were focused on funds finance and seven years on structured finance. Gavin joins Silicon Valley Bank from Barclays, where he led the European private equity funds team. Before that, Gavin was a founder member of WestLB’s Funds Finance group in New York. SVB banks businesses such as Momondo, Darktrace, ReceiptBank and Made.com as they pave the way towards further growth. Gavin was awarded a BA(Hons) in Philosophy, Politics & Economics from Oxford University and an MBA from Columbia Business School in New York