September 17, 2019

Warren, Pocan Investigate How Private Equity Buyouts Exacerbate Problems Plaguing For-Profit Colleges

Student Outcomes Deteriorate While Firms' Profits and Reliance on Federal Student Aid Soars

Text of Letters (PDF)

Washington, DC - United States Senator Elizabeth Warren (D-Mass.) and Representative Mark Pocan (D-Wisc.) wrote to six private equity firms with current or recent holdings in for-profit colleges, KKR, Sterling Partners, Altas Partners, Vistra, Leeds Equity Partners, and Apollo Global Management, and requested information about the firms' management of colleges and universities.

Over the last two decades, private equity activity has exploded across the U.S. economy. Private equity funds purchased companies, stripped them of their assets and loaded them with debt, and extracted exorbitant fees while taking payouts for themselves and walking away from workers and investors when the bets went bad.

In July, Senator Warren and Representative Pocan, along with a number of their 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 jointly liable for the debts of companies under their control and by requiring greater transparency in private equity firms' practices.

In their letters, Senator Warren and Representative Pocan highlighted private equity's destructive role in for-profit colleges and asked the firms to provide information on their fees, returns, marketing, and other financial practices, as required under the Stop Wall Street Looting Act.

"The continued spread of private equity in the for-profit higher education sector, and thus the maximizing of short-term profits at the detriment of students, presents a serious concern for both students and taxpayers," the lawmakers wrote in their letters to the firms. "We have broad concerns about the effect of private equity firms on a variety of industries and have introduced legislation to address these concerns. But we have particular concerns about the effects of private equity takeovers in colleges and universities."

A recent National Bureau of Economic Research study found that private equity buyouts of for-profit colleges result in "higher tuition, lower education inputs, lower graduation rates, higher student borrowing, lower repayment rates, and lower wage earnings," all of which are accompanied by a ten to twenty percentage point increase in reliance on federal aid and a tripling of profits for the private equity firms. For-profit schools owned or formerly owned by private equity firms currently account for a significant portion - approximately 35 percent - of enrollment, and sustain themselves primarily through federal student loans, which on average, make up 80% of their revenue.

In their letters, the lawmakers also requested the firms explain their role in the tuition hikes, education quality declines, and the many other failures that plague the for-profit higher education sector, and asked that the firms respond to their inquiry by September 24, 2019.

"The students attending these colleges and the public deserve to know more about these firms' practices and the role they continue to play in an industry fraught with problems," the lawmakers wrote.

Senator Warren has been a vocal critic of private equity abuses throughout her time in the Senate and is fighting for reforms that protect students, workers, communities, and investors:

  • Senator Warren and Representative Dave Loebsack (D-Iowa) opened an investigation into private equity firms behind some of the country's largest manufactured housing communities to obtain information about their use of predatory practices to boost profits in the communities they own.
  • Senator Warren and Representative Alexandria Ocasio-Cortez (D-N.Y.) questioned Treasury Secretary Steven Mnuchin on his involvement in dubious financial engineering and other managerial decisions that enriched investment company executives while decimating Sears' long-term growth and sustainability -- ultimately resulting in Sears' bankruptcy and the loss of tens of thousands of jobs.
  • Senator Warren's demanded answers from Vornado Realty Trust and five major hedge funds on their role in the liquidation of Toys "R" Us, which resulted in 30,000 workers losing their jobs without severance pay, after the company went into bankruptcy as the result of a leveraged buyout in 2005.
  • In June 2015, she was an original co-sponsor of the Carried Interest Fairness Act, legislation to close the carried interest loophole that allowed private equity fund managers to pay lower taxes. The legislation was re-introduced in March 2019 and is included in the Stop Wall Street Looting Act.