Buyout investors: Heroes or pirates?
Private equity says it's good for America, but its data raises questions
Those vast buyout funds, which have made their managers and owners rich, tend to get in the news when they buy familiar employers in search of vast profits, or shut them down to sell off the ruins; or when their billionaire owners (like Apollo Global's Josh Harris and his sometime deal partner Sun Capital's Marc Leder) buy pro sports teams (like the NBA 76ers) and get tax breaks to move their operations out-of-state (as in Camden), sometimes after donating to politicians.
So it's not surprising the buyout lobby (they prefer the term "private equity") is seeking good PR, as well as influence in Washington, DC, to protect the high-fee industry's special low-tax status, for example. The Private Equity Growth Capital Council, an industry group, has just put out a report titled Private Equity: Top States and Districts, which tells us that Pennsylvania companies rank third after Texas and California as top targets of buyout financiers (the report notes Pa. is also a major investor and fee-payer for buyout funds, through the underfunded State Employees' Retirement System (SERS)).
PEGCC ranks America's "top Congressional Districts by private equity investment" and reports that two Philadelphia-area districts ranked in the Top 10 last year. I asked for a list of the buyout deals in both districts. Here's the local districts and the biggest private equity deals in each, from the council's survey:
#8 is the at-large Delaware seat represented by Rep. John Carney (D), mostly due to Carlyle Group's $4.9 investment in DuPont spin-off Axalta Coating Systems;
#10 is the suburban Philadelphia seat held by Rep. Jim Gerlach (R-6th), which jumped the list based on the $3.74 billion buyout of formerly King of Prussia-based industrial-pumps maker Gardner Denver by Kohlberg Kravis Roberts.
Do those investments really represent "long-term capital at work" in those districts, as council CEO Steve Judge says in a statement introducing the numbers? Do private-equity recipients truly use the money "to expand their businesses, develop new innovations and hire workers" in the districts where their targets are based?
Not much, if the Philly-area examples the council cites are a guide:
Gardner Denver took KKR's money, shut down its Wayne, Pa. headquarters, and moved far away from Gerlach's district, to Wisconsin, where the company has factories. "Gardner Denver is no longer headquartered in Wayne and the HQ has now officially moved to Milwaukee," vice president Vikram Kini confirmed to me in an email.
Similarly, Carlyle's first act as owner of Axalta was to move its headquarters offices out of Carney's Delaware district and up to Pennsylvania.
The council also cites a second large private equity investment in Carney's Delaware district: Trian Fund Management's $1.3 billion stake in DuPont itself. But that move was viewed by stock analysts, not as a way to "develop new innovations and hire workers," but an attempt by Trian's activist investor boss, Nelson Peltz, to prod DuPont CEO Ellen Kullman into splitting up the company again as a way of enriching shareholders. Which she did.
The council says the #2 congressional district in all the U.S. for private-equity investments last year was also in Pennsylvania -- Rep. Mike Doyle (D)'s, around Pittsburgh.
That's mostly on the strength of the Warren Buffett-led, $23 billion acquisition of H.J. Heinz, which was promptly followed by layoffs axing more than 1,000 Pittsburgh-area Heinz staff and workers.
I'm not arguing whether these corporate job-kilings or city-disrupting relocations are a fiduciary necessity from the owners' point of view. What's clear is they have not benefited these congressional districts the way the buyout lobby want us to think they have.
Do private equity apologists really think these billionaire-led dislocations and layoffs will endear them to the Congressmembers whose districts are losing jobs and corporate headquarters? Or to their voters?