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Wealth Debt and Inequality:

Role of Private Equity

Eileen Appelbaum
Center for Economic and Policy Research
Hill Briefing
April 10, 2018
Roadmap to Presentation

• Private Equity and Leveraged Buyouts

• Private Equity and Single Family Rental Housing

• Private Equity and Payday Lending

Private Equity Leveraged Buyouts of
Main Street Companies
The house always wins

Case: Toys ‘R US
• July 2005 LBO: 3 funds of PE firms Bain & KKR and Vornado
– Before:
• Debt = $1.86 B, Equity = $4.30 B, Enterprise value = $6.16 B
• 30% debt, 70% equity – typical of publicly traded companies
– After:
• Debt = $5.2 B, Equity = 1.4 B, Enterprise Value = $6.6 B
• 78% debt, 22% equity – vulnerable to financial distress
• Each fund put in $433 M; Bain $43 M, KKR $10 M, Vornado (??) ~10M
• September 2017 – Toys ‘R US declares bankruptcy
– Losers:
• Hundreds of stores closed, thousands of workers lost their jobs
• Pension funds, other PE investors wiped out; lenders take haircut
– PE firms? Each collected $61M monitoring fees; KKR shared 58% to LPs
• Bain made $61 - $43 = $18M; KKR netted $24 - $10 = $14M
What Can Public Policy Do Now?
• Limit the excessive use of debt
– Bank regulators limit amount of debt banks can put on company
– But need to limit debt from all sources
– Limit tax deductibility of interest (Tax bill took step in this direction

• Tax carried interest as ordinary income

– It is performance pay, like worker’s profit sharing or salesperson’s
commission – should be taxed like other performance pay

• National severance pay law so workers who built business can’t

so easily be discarded
• PE firm as joint employer (WARN Act, ERISA pension rules)
Private Equity and
Single Family Rental Homes
Black, Latino Homeowners More Likely to
Lose Homes in Housing Market Crash
• Housing market crashed in 2007-2008
– More than nine million homeowners - disproportionately
low/middle-income and often situated in communities of
color - lost their homes over next few years
– Black and Latino homeowners were more than 70 percent
more likely to be foreclosed upon during the housing crisis
than non-Hispanic whites

• Wall Street institutions got billions of dollars in govt.

bailouts to see them through financial crisis; few families
got loan modifications to help keep their homes
What to Do with Those Vacant Homes?
• 2012: FHFA introduced pilot - investors could buy foreclosed
homes at steep discount if they turned them into rental units
– Govt. stamp of approval made single family rentals legit for investors
– PE giant Blackstone created Invitation Homes to buy up houses
• 2013: Blackstone, other Wall St firms bundled rents together
– Created new securities: bonds backed by single-family rent payments
– Sold to investors, similar to scandalous mortgage-backed securities
• 2016: >100,000 mortgage loans sold to investors
– 98% to PE firms; nearly 1/3 to Blackstone affiliate, Bayview
• 2017: Fannie Mae agreed to back a $1-billion loan to Invitation
Homes to buy up more single-family homes to become rentals
– No demands to limit rent increases, maintain property, avoid evictions
What Can Public Policy Do Now?
• Federal government has transferred massive amounts of wealth
from local communities to Wall St.
• Federal & local govts. can still take steps to aide renters and
– Federal agencies can pave way for local realtors & community
orgs to buy newly foreclosed homes in their neighborhoods
– State/local governments can impose common sense
requirements that limit rent increases
– State/local govrnments can change eviction rules
• Tenant rights in some locales do no apply to single family rental homes
• Some Wall St. landlords have uniquely high eviction rates
Private Equity and Payday Lending
Payday/Subprime Loans Are Long-Term Debt Trap

• Lenders charge triple digit, 300+%, annual interest rates

• Loans are structured to create a long-term debt trap
– Interest rates are unaffordable
– No underwriting to see if borrowers can repay
– Access to borrower’s checking acct or car title
– Can’t pay? Lender re-ups loans, drain borrower’s checking acct
– Leads to difficulty paying rent/mortgage, delinquency charges
– Eviction/foreclosure, bankruptcy

• Borrowers may default, but will have paid hundreds or

thousands of dollars in fees
Private Equity and Payday/Subprime Loans
• PE firms active in payday/subprime loans in last few years
– Many: including Blackstone, Warburg Pincus, Sequoia Capital
– Now have 5,000 retail locations in US

• Are investing, along with venture capital firms, in online loans

• PE firm JLL bought out ACE Cash Express in 2005
– 1,000 locations in 23 states, tens of millions of customer visits
– CFPB: ACE’s tactics trap borrowers in long-term debt

• Lone Star Funds acquired DFC Global in 2014

– 1,200 retail locations in 9 countries
– CFPB: Cheated 50,000 servicemen & had to make restitution

• Current CFPB chief scrapped lawsuit against payday lender

Golden Valley Lending, alleged it charged 950% interest
What Can Public Policy Do Now ?

• Federal and state governments can pass laws that regulate

interest rates, limit usury by payday lenders

• Consumer Financial Protection Bureau is main government

agency protecting people against predatory lending by
payday lenders
– Should be strengthened
– But current CFPB chief is undermining agency, going light
on misbehavior by payday lenders, other financial services
• Current ‘rules of the game’ distribute income up from
working people, communities of color to wealthy
• Public policy, not some immutable effect of ‘markets,’
shapes these rules
• New policies, new laws, new regulations – can stop this
upward redistribution of income from hard working
families and communities of color