US wealth gap central focus at hearing

Witnesses at a US House committee hearing agreed the booming private equity industry is not at fault for America’s growing divide between the haves- and have-nots. Opinions diverged, however, as to how best to address this phenomenon.

Income inequality took centre stage Wednesday at the US House Financial Services Committee’s hearing on private equity.

The hearing’s purpose, said committee chairman Barney Frank, was to determine whether the booming buyout industry is “exacerbating what is already an unfortunate trend” in US income inequality.

“Private equity is not the reason wages are stagnating,” Douglas Lowenstein, president of industry lobbying group the Private Equity Council, told the legislators present.

“Profound forces unrelated to private equity are reshaping the American economy,” he said. “Private equity is not the reason American companies are being pressured to lower costs, restructure, and employ new strategies to better compete with China, India and other emerging economies. And private equity alone cannot confront the forces contributing to the growing incoming disparity.”

The Private Equity Council’s supporting members – which include some of the industry’s biggest firms – are prepared to engage in a national dialogue about how to reverse the wealth inequality trend, Lowenstein said.

The US’ largest labour union, Service Employees International Union, would like to see the buyout firms take proactive steps that will better opportunities for middle class workers, said its president, Andy Stern.

 “I’m not saying private equity is the cause [of income inequality], but it’s not been a solution,” Stern said. “I don’t think private equity has done anything to help Middle America.”

The claim was disputed with an example from the chief executive of private equity-owned Dunkin’ Brands, Jon Luther.

The financing expertise of the company’s private equity owners, he said, has led to better deals for its franchisees. The resulting increased franchise growth will likely create more than 250,000 new jobs in the next 10 to15 years at new Baskin Robins and Dunkin’ Donuts stores, he said.

Robert Frank, a professor at Cornell Universtity’s Johnson Graduate School of Management who has written extensively on the growing divide between the wealthy and middle classes, told the committee the private equity industry can’t solve income disparity issues and should not be expected to.

“The only lever we have is tax policy in this arena, if we’re not happy with the way income inequality is going,” Frank said. “I don’t think attacking the competitive forces [in the US capital markets] is the lever you want to pull.”

The overriding sentiment from committee members was that the issue – and the private equity industry in general – deserves further study.

In recent months, the same House committee held a hearing on the hedge fund industry.

Similar hearings have been called by its Senate counterpart, the US Senate Finance Committee.

Republican Senator Chuck Grassley, a ranking committee member, is reportedly leading a probe into private equity with regard to its tax structures, particularly the rate at which carried interest is taxed.

He has also introduced legislation that would require hedge funds to register with the Securities and Exchange Commission, arguing that pension holders are “in the dark” about hedge fund losses due to a lack of transparency.