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Massachusetts Senator and presidential hopeful Elizabeth Warren released perhaps the most ambitious plan the country has ever seen with respect to regulation of the private equity and investment fund industry. She released her plan, dubbed the “Stop Wall Street Looting Act of 2019,” this summer. It takes aim at what Warren sees as private equity “vampires” in an effort to protect the millions of American workers who are employed by private equity-owned companies. In a lead-up to the release of the proposed regulations, Warren pointed to several prominent examples of now-defunct companies that were purchased by private equity firms and overleveraged before subsequently imploding, leaving their workforces unemployed and their suppliers and pensioners unpaid. These examples include former American mainstays like Toys R Us, Radio Shack, Payless Shoes, Sears, and Shopko.

Warren’s plan includes some proposals that have been frequently discussed in all corners of the political spectrum. Most prominently, Warren has included a provision that closes the much maligned carried-interest loophole. Her suggestion would be to force carried interest gains to be treated as ordinary income instead of capital gains. Additionally, her legislation proposes to reinstate a former Dodd-Frank Act requirement that required funds to arrange debt obligations to retain a certain amount of risk in investments.

Beyond those familiar provisions, Warren’s plan also includes some relatively novel ideas, specifically targeting some of the private equity industry’s behavior that Warren finds particularly distressing including how an individual fund's ultimate decisions can impact workers. For starters, Warren would more closely tie the fund's own financials and bottom line to the target company by requiring the fund to share liability for the target company’s debt—including things like legal judgments and violations of pension plans. Specifically, her plan would make private equity funds liable for all debts and obligations of a target company that they own more than a 20 percent in. By directly tying the fund's financials to the target company in this way, Warren plans to increase accountability by placing the fund and the target on the same financial ship. This, of course, would change over 100 years of corporate law and completely change the risk factors associated with investing in the private equity industry.  

Some of the other more novel suggestions by Warren include some heavy disincentives for funds, such as a 100 percent tax on monitoring and transaction fees commonly extracted from target companies post-transaction, as well as a prohibition on dividends from the target to the fund for a period of two years after the initial purchase of the target company. The proposed legislation would also move workers, consumers, and smaller suppliers up the bankruptcy proceeding priority ladder.

As alluded to previously, Warren’s plan represents an incredibly ambitious move to regulate private equity to a level not yet seen in the United States. At least one academic has even stated that the enactment of Warren’s plan would be “the end of private equity as we know it.” To be sure, Warren has an incredibly long road to enacting her proposed legislation, which includes beating the likes of Joe Biden, Bernie Sanders, and Kamala Harris for the Democratic nomination, as well as President Donald Trump in a general election. That said, it remains to be seen whether one of her current democratic opponents will incorporate some (or all) of her ideas into their own plan, much like how many of Bernie Sanders’ 2016 policy proposals were incorporated into some of his current opponents' policy platforms in the run up to the 2020 Democratic primary.

The bottom line is that many political populists now have their target set on ways to reign in private equity’s excess and protect employees of companies owned by private equity firms. Although the industry is certainly not immune to criticism—and we could imagine some of her proposals doing tremendous good for certain stakeholders in our economy—several of her more novel ideas seem not only overly burdensome but downright suffocating. Not to mention, the legislation does not target similarly situated non-private equity companies that also default on their obligations (sometimes at a higher rate than private equity-backed companies), borrow excessively, and play ruthlessly with employees, consumers, suppliers, etc., among other critiques. The goal should not be to make private equity such an unattractive alternative investment industry through regulation that investors do not want to invest or lend to the industry. Rather, the goal should be a more narrowly tailored regulatory proposal that attaches to private equity and non-private equity companies alike, and perhaps is a little less steeped in political rhetoric (changing the name of the legislation may be a decent start).

Although it remains to be seen whether the country as a whole is “Ready for Warren,” it may make sense for private equity to get ready for the possibility that at least some of her ideas on the regulation of the industry will gain steam as we move deeper into the primary cycle and onto the 2020 general election.

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