Little-noticed articles in The New York Times and the Wall Street Journal in the past month disclosed that private equity firms – notorious for taking over companies and stripping them of jobs and investment to maximize profit for the private equity partners – are looking for a new source of cash: your retirement account.
“Carlyle, the Washington-based giant that Mr. [David M.] Rubenstein co-founded in 1987, is at the forefront of an effort to open the cloistered and risky world of private equity to doctors, lawyers, well-heeled entrepreneurs and others with a brokerage account or, one day, a robust 401(k),” the Times wrote.
The Wall Street Journal reported on the launch by Switzerland-based Partners Group of “a private equity investment product targeting the 401(k) industry, in an attempt to crack a source of capital that has been beyond the reach of private equity.”
Why do private equity companies want to tap 401(k) accounts? Eileen Appelbaum, senior economist at the Center for Economic and Policy Research and the author of “Private Equity at Work: When Wall Street Manages Main Street,” says it is in part a consequence of the virtual disappearance of private-sector pension funds, a one-time source of borrowing for private equity firms. Appelbaum will be speaking Wednesday night about the private equity industry in a Washington event co-sponsored by the Campaign for America’s Future.
Another reason is that getting individual 401(k) account holders to invest in private equity accounts “allows the already-giant private equity firms to collect more in management fees, a revenue stream prized by Wall Street analysts for its predictability,” the Times wrote.
Appelbaum points out in a commentary published in The Hill newspaper that this was contained in the Trojan horse called the Jumpstart Our Business Startups, or JOBS, Act, passed by Congress in 2012. Richard Eskow pointed out then that this was “introduced by the far-right Republicans in Congress and passed overwhelmingly by members of both parties” – and signed by President Obama – even though “basic protections for investors, including individuals and families, are being recklessly overturned in a deregulating frenzy.”
“The JOBS Act requires the Securities and Exchange Commission (SEC) to rewrite the rules to permit general advertising” of private equity fund opportunities. Appelbaum wrote. “This means that organizations that issue private securities or invite participation in a PE fund can advertise their offerings to individuals and solicit their participation. The rules that implement the JOBS Act do not incorporate basic investor protections. As a result, private equity funds are now able to advertise and solicit funds from anyone.”
It is true that the target of these solicitations, at least initially, will be people with a net worth in excess of $1 million. But that includes a potential market of at least 8.5 million people. Many are people who after two or three decades have managed to work their way into low six-figure incomes, and are perhaps a decade or so away from retirement.
Having a million-dollar net worth does not guarantee that a person has the financial sophistication to delve into private equity or to detect when a sales pitch is deceptive. You can bet that the sales pitches prospective investors will hear won’t include this assessment from Naked Capitalism’s Yves Smith: “Private equity returns, even for institutional investors, are exaggerated. These reported returns do not beat stocks on a risk-adjusted basis.”
The question for the SEC is whether it will write the strong disclosure rules and consumer protections, or will it take the hands-off approach that allowed investors to be fleeced by Enron and manipulated by the Wall Street institutions whose behavior tanked the economy in 2008.
Finally, there is the fundamental question of whether we should be encouraging individuals to invest retirement funds in financial entities, that, as Appelbaum writes in her book, “overall … destroy more jobs than they create relative to comparable publicly traded companies.”
If individuals want to put their money into funds that engage in the financial equivalent of strip-mining to extract what profits can be gotten from what they euphemistically call “creative destruction,” that is certainly their right. But perhaps there should be a public accounting of the nature of the “destruction” an equity fund has engaged in to obtain the returns they will advertise to prospective 401(k) holders. It’s doubtful that many people would be comfortable with the knowledge they are destroying other workers’ retirement dreams in pursuit of the promise of a few extra dollars for their own.
Eileen Appelbaum and Rosemary Batt will discuss and sign their book, “Private Equity At Work: When Wall Street Manages Main Street,” at 6:30 p.m. Wednesday at Busboys & Poets, 14th and V Streets NW in Washington. This event will be moderated by William Greider, National Affairs Correspondent for The Nation. The event is sponsored by the Institute for Policy Studies, Campaign for America’s Future and Americans for Financial Reform.