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What's Wrong With Trumka's Op-Ed

    In a recent op-ed in The Wall Street Journal, AFL-CIO President Richard L. Trumka mischaracterizes private equity’s record in creating jobs, strengthening companies and benefiting workers.


    Read the truth about private equity investment

    Private Equity and systemic risk

    • Private equity relies on long-term capital commitments from limited partners, is not dependent on short-term financing, and primarily invests in illiquid assets and thus is not susceptible to the type of “run on the bank” that occurred with Bear Stearns, Lehman Brothers and other financial institutions.

    • Because private equity buyout funds do not provide redemption opportunities before the fund matures, they are not forced to sell companies into a down market to fund investor redemptions.

    • Private equity funds have little or no debt. Private equity buyout funds generally do not take on leverage at the fund level and the parent companies of private equity partnerships generally have little to no debt either. As a result, private equity buyout funds do not face margin calls from creditors or unsustainable debt burdens.

    • Private equity portfolio companies use dramatically less leverage than the financial firms that collapsed. The average gross leverage ratio of private equity deals is historically about 3:1 – while Lehman Brothers was leveraged at approximately 32:1.

    • Private equity-sponsored companies are not deeply interconnected with other financial market participants and are not in a position to trigger cascading losses that trigger systemic risk. Neither private equity funds nor portfolio companies are cross-collateralized, meaning the failure of one company would have no knock-on effects on the fund or the other companies held in portfolio.

    • Private equity-sponsored companies’ borrowing is a small portion of the overall credit market. According to the IMF, leveraged loans, collateralized loan obligations (CLOs) and high-yield bonds comprise about five percent of all U.S. credit market obligations outstanding. And borrowing by PE-sponsored companies is but a fraction of this number.

    • Private equity funds are diversified across multiple industries and thus lack concentrated exposure to any single sector. From 2000-2007 consumer-related companies accounted for 14.7 percent of total private-equity investment; industrial companies, including energy and semiconductor firms, accounted for 21.2 percent of the total investment; computer firms represented another 9.6 percent of total investment; and health care concerns accounted for 9.5 percent of investment.