November 18, 2019

Warren, Colleagues Criticize Ernst & Young for Misleading "Sham Study" on Private Equity Impact on U.S. Economy

Private Equity-Funded Report Includes "Misleading Conclusions and Glaring Flaws" Designed to Protect the Industry

Text of Letter (PDF)

Washington, D.C. -  United States Senators Elizabeth Warren (D-Mass.), Tammy Baldwin (D-Wisc.), and Bernie Sanders (I-Vt.), along with Representatives Mark Pocan (D-Wisc.), and Pramila Jayapal (D-Wash.), sent a letter to Ernst & Young (EY), sharply criticizing a misleading report the firm released in partnership with the American Investment Council (AIC), a trade group for the private equity industry, about the scope of private equity's influence in the economy.

The letter concludes that the report "employs analytical tricks and slights of hand and omits key facts and context, painting a dishonest picture of the effect of the industry on the American economy," raising additional questions about the private equity industry and about EY's role as an industry-funded consultant.

Joining the lawmakers in sending the letter are Representatives Jesús "Chuy" García (D-Ill.), Rashida Tlaib (D-Mich.), and Ayanna Pressley (D-Mass.), members of the House Financial Services Committee, and Representative Jan Schakowsky (D.Ill.).

In July, Senators Warren, Baldwin, Brown, and Representatives Pocan and Jayapal, along with a number of Democratic colleagues, introduced the Stop Wall Street Looting Act, a comprehensive bill to bring greater responsibility to the private equity industry by holding private equity firms responsible for the liabilities of companies under their control and requiring greater transparency in private equity firms' practices.

"We are not surprised that the private equity industry is fighting this legislation at every turn - and we have questions about the role your firm is playing in providing rigged reports and conclusions as part of this effort," the lawmakers wrote.

Over the last two decades, private equity activity in the economy has exploded. Private equity firms have purchased companies in all sectors of the economy - from nursing homes, to newspapers, to grocery stores - laying off hundreds of thousands of workers and ruining thousands of companies in the process. The private equity industry claims that it earns high returns for investors by leveraging their capital to buy companies, using private equity firms' management expertise to make the companies' operations more efficient, and then selling the companies at a profit. In reality, private equity funds often load up companies with debt, strip them of their assets, and extract exorbitant fees, while guaranteeing payouts for themselves and walking away from workers, communities, and investors if the bets go bad.

In response to the lawmakers' legislation, AIC, the trade group representing the private equity industry, partnered with EY to issue a report defending the private equity industry and its practices.  But the lawmakers' nine-page letter revealed that the EY analysis cherry-picked estimates, distorted context, and omitted key facts and basic analyses.

"One way [corporate interests wield their influence] is by funding sham research - by consultants and researchers who receive big bucks for their work - to back up their views," the lawmakers continued. "These studies are distorted and biased and misused in the regulatory and legislative and regulatory process, lending an air of legitimacy to corporate special pleading. The new EY report, prepared with and for a trade group for the private equity industry, appears to be a picture-perfect example of such sham study."

The lawmakers outlined several analytical tricks, sleights of hand, and omissions of key facts employed by EY to paint a dishonest picture of the effect of the private equity industry on the American economy, including:

  • Misleading Claims on Wages and Employment: The report includes the compensation of highly-paid corporate executives and the highly paid staff and executives at the private equity firms when calculating average wages. If, for example, this type of calculation were done for Toys 'R' Us before its private equity owners took it into bankruptcy, it would average the earnings of sales associates who made approximately $9 per hour with its senior executives who made millions annually, even as they drove the company into the ground.
  • Methodological Flaws and Missing Baselines: The report claims that the private equity industry "generated $1.1 trillion of value added" to the U.S. economy in 2018, and the "5% of US GDP is supported by the US private equity sector." However, the report provides no baseline to establish what the value of a company would be with or without private equity investments.
  • Misleading Findings on Tax and Spending Effects of Private Equity: The report asserts that the private equity sector generates significant tax revenue. This assertion did not consider the tax benefits and loopholes that private equity firms use and abuse, such as deducting the debt used in their acquisition and drastically lowering their tax burdens when compared with their pre-acquisition tax bill. The report also ignored the impact of the 2017 Tax Cuts and Jobs Act, which cut the corporate tax rate and other business taxes. In addition, the report does not account for the increase in government expenditures due to massive layoffs caused by private equity, and ignores the impact of industries where the federal government is a large customer, like education and health care.

"It is unfortunate and troubling that your report on the private equity industry cherry-picks estimates, distorts context, and omits key facts and basic analyses," the lawmakers wrote. "The substandard quality of this analysis raises more questions than it answers - about the private equity industry and about your consulting work with the American Investment Council."

To better understand the firms methodology and findings, the lawmakers asked EY to provide additional, specific information about the private equity industry's impacts on wages, benefits, and economic activity in the United States; their misleading figures on the value added by private equity and the taxes paid by the industry; and the terms and conditions of the contract between EY and AIC in commissioning the report. They requested a response by December 6, 2019.