Perhaps one of the most attractive perks of private equity is the relative lack of regulation and oversight, in contrast to publicly traded securities. One of the biggest deterrents for many younger companies seeking to raise capital through the issuance of public equity is the heightened level of government regulation and increased administrative costs associated with being listed on an exchange. Additionally, private equity firms are often criticized for their tendency to cut jobs in an effort to improve the enterprise’s margins and overhaul management following a buyout. However, allowing the companies that they acquire to operate without being constantly under attack from shareholders and analysts can create some room to make necessary changes without facing overwhelming blowback.
While private equity funds today are still able to avoid many of these regulatory nuisances, the industry was not exempt from much of the backlash towards the financial industry following 2008. Since its passing, the Dodd-Frank Act has added roughly $100,000 in annual costs associated with regulatory compliance, and for small and medium sized funds, this can be a sizeable bill. A ramping up of future regulations is also a real possibility which could further reduce the level of autonomy funds have over their investments. In recent news, the insolvency of everyone’s favorite toy store, “Toys R Us”, has led to a public relations disaster around a company now going bankrupt after being taken private by two of the biggest private equity funds in the world: Bain Capital and KKR. While the challenges faced by brick and mortar-based retailing companies in a world dominated by Amazon certainly played a role, a significant portion of the blame for the toy store’s failing has been placed on the overleveraging of Toys R Us with the takeover by these funds.
The decline of the household favorite retailer after being taken private certainly does not help the image of the private equity industry among the American population, especially since the average American has little other exposure to the industry. Many politicians are beginning to use this mistrust of financial institutions as a political tool which poses a risk to the future of private equity. For example, Senator Elizabeth Warren, which many speculate will make a presidential run in 2020, has publicly criticized the way the decline of Toys R Us has been managed. While her critique was pointed more at the creditors of the leveraged buyout, who back in March were pushing for liquidation of the retailing giant, Bain Capital and KKR are clearly aware of the optics of their failed investment and have pledged $10 million each to a fund set up for the former employees of Toys R Us. Even back in the 2012 presidential election, one of the major oppositional talking points against candidate and former president of Bain Capital, Mitt Romney, was his history in the private equity sector. In the post-2008 world, many remain skeptical about the motives and goodwill of financial institutions. This growing suspicion among Americans and the will of regulators and politicians to capitalize on this sentiment poses a risk to the future of the private equity industry, especially with the bankruptcy of everyone’s favorite childhood memory at the forefront of the discussion.