Democratic presidential candidate Elizabeth Warren's plan to crack down on the private equity industry would place stringent regulations on a source of funds that helped enrich her as a law professor at Harvard. The plan, which would heavily tax and regular private equity firms to stop what Warren has called Wall Street's "legalized looting," could also end up hurting her former Harvard colleagues and Massachusetts retirees.
The Harvard endowment and the Massachusetts state pension system invest a considerable portion of their portfolios in private equity, an asset class with the highest return of all investment types for both funds. Harvard used these returns to pay the six-figure salaries of Warren and her husband. Meanwhile, Massachusetts, the senator's home-base, leaned on private equity yields to buoy its struggling pension fund, which covers 300,000 state employees, teachers, and retirees. Those holdings could soon be threatened by the Democratic presidential contender's plan to overhaul the industry.
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"The benefactors of private equity are diverse," Adam Michel, senior policy analyst at the Heritage Foundation, told the Washington Free Beacon. "They're people that are invested in these funds through their pensions or large endowments at schools across the country that are funding tuition for students that otherwise couldn't afford to go to those institutions."
Private equity is an investment class composed of funds and investors that buy out struggling companies and enact drastic turnaround measures to shore up the firm's bottom line. While Warren acknowledged that some companies emerge better off as a result of private equity, she has pledged to heavily tax and regulate private equity to stop what she called Wall Street's "legalized looting."
"Sometimes the companies do well. But far too often, the private equity firms are like vampires—bleeding the company dry and walking away enriched even as the company succumbs," Warren wrote in a Medium post in July
Harvard welcomed Warren as the new Leo Gottlieb Professor of Law in 1995, an endowed professorship established by a donation. She remained in that position full-time until her election as Massachusetts senator in 2011, earning $430,000 in the last two years of her time at Harvard, according to Senate disclosures. Warren's spouse, Prof. Bruce H. Mann, continues to occupy an endowed seat in Harvard Law School.
The salaries of endowed professors are paid in part by investing donor dollars in the university's $38 billion endowment. Investment gains fund one-third of the university's operational revenue. Private equity played a significant role in securing returns for Harvard's endowment and paying the salary of Warren and her colleagues. It is the third-largest asset class in the university's portfolio and represents about 17 percent of all money invested, according to the endowment's latest disclosure.
The Harvard endowment's private equity holdings have provided critical buoyancy to the struggling fund, which placed second-to-last in return rate compared to other Ivy League institutions. Private equity raked in the highest return rate of all asset classes, 21 percent, while shares in publicly traded companies placed at a distant second place at 14 percent.
"The [endowment's] gain was primarily driven by private equity and public equity exposures," the endowment's 2018 report read.
Some of those gains have returned to Warren since she launched her political career. Harvard employees are the third largest donors to the senator's political efforts, collectively donating $70,000 since 2015 according to the Center for Responsive Politics. The endowment fund did not return a request for comment.
Private equity has provided financial benefits to Warren's constitutents beyond Cambridge. The Massachusetts public pension system earns a disproportionately large part of its return from such investments, which comprises about 10 percent of the fund's portfolio.
Massachusetts Pension Reserves Investment Management (Mass PRIM), which serves roughly 300,000 state and municipal employees, teachers, and retirees, has been struggling for some time, failing to reach its benchmark rate in 2018. The fund's underperformance has contributed to the state's "skyrocketing" unfunded pension liability that has increased from $13 to $40 billion between 2003 and 2017—a 196 percent gain—according to the Pioneer Institute, a Boston-based think tank.
The private equity portfolio of the Massachusetts pension system had the highest return rate—14 percent—of all public pension funds in the country in 2018, according to a study by the American Investment Council. In fact, Mass PRIM has topped the list four times since the annual study was first published in 2012 and has always made the top five highest return rates, shoring up the finances of the troubled pension fund.
"Our Top 5 ranking in each year of the AIC study’s history reinforces the importance of our PE portfolio to Mass PRIM’s overall performance," Michael G. Trotsky, executive director and chief investment officer of Mass PRIM, said in a press release. "Our long-term commitment to this asset class enables us to partner with the industry’s top investment managers – allowing our team to access the most attractive opportunities in PE on behalf of our member plans and beneficiaries."
Warren's policy proposal, if enacted, would heavily restrict the operation of private equity firms. It would amend the tax code to drastically increase tax burden, curtail private equity's ability to take on debt to purchase companies, and prohibit them from charging "huge monitoring fees."
But by heavily restricting the operations of private equity, the senator's policy might affect not just a few investors in Wall Street, but also universities and retirement funds, according to Michel, the Heritage analyst.
"[Warren's policy] is really a backward way of thinking about how private exchange operates. To claim that an investment in a business is sucking anything out of that business is the opposite of what's actually going," Michel said. "When an investment is made in a business, that's trying to make it sustainable, more profitable, employ more people and increase the wellbeing of everyone involved."
The Warren campaign did not return request for comment.