Private equity, hedge funds get unlikely foe in GOP think tank

A new conservative think-tank in Washington is launching its first campaign Wednesday with what could be a long-shot goal -- persuading pro-business Republicans that they should cast a more skeptical eye on Wall Street’s private equity firms and hedge funds.

American Compass, the brainchild of former Mitt Romney campaign staffer Oren Cass, wants to re-direct Republican policies to support businesses that make things and contribute to the real economy. The finance firms, the group worries, are engaging in “Coin-Flip Capitalism,” where their complicated, high-fee investment strategies gobble up money and business talent while generally performing worse than basic market indexes. That enriches fund managers, but does little to benefit society, American Compass says.

“The buying and selling of companies, the mergers and divestments, the hedging and leveraging, are not themselves valuable activity,” the group warned in a bluntly worded primer laying out its Coin-Flip project. “They invent, create, build and provide nothing.”

Along with its primer, American Compass is releasing a “Return Counter” that will measure the performance of private equity, hedge funds and venture capital against industry benchmarks. “Hedge funds and venture capital have long underperformed public markets,” the group noted, while buyout funds have kept pace with the S&P 500 over the past 10 years.

The critique of investment firms sounds straight out of the Elizabeth Warren playbook: They move money around without benefiting workers, their returns are subpar, and the lavish salaries of their executives are effectively paid through exorbitant fees charged to pension funds and university endowments.

But Cass is no ally of the Massachusetts progressive senator. He’s a Harvard Law School graduate and former management consultant at Bain & Company, who served as domestic policy director for Romney’s 2012 presidential campaign. He is pro-business and pro-finance, he says. American Compass, which isn’t identifying its donors, has close ties to a handful of GOP senators, including Romney, Tom Cotton, Marco Rubio and Josh Hawley.

It’s an open question how much impact the report will have since its private equity and hedge fund targets have long been among the top contributors to the Republican party. That point is underscored by the strong access to the White House that leading finance executives such as Blackstone Group Inc.’s Stephen Schwarzman and Elliott Management’s Paul Singer have enjoyed in recent years, despite President Donald Trump’s populist leanings.

Yet the U.S’s growing wealth chasm and public scrutiny of how buyout firms have run companies that are failing amid the coronavirus crisis is exposing private equity to fresh attacks in Washington. The sluggish economy -- combined with contentious presidential and congressional elections -- will likely have both political parties hunting for scapegoats in the months leading up to November, a threat that private equity isn’t taking lightly.

Cass is pushing conservatives to re-think some of their bedrock economic principles, including the belief that the free market is always the right way to make decisions. There is a role for the government in shaping the market, he noted, especially in areas like finance.

“It’s this kind of huge gravitational force within the economy,” Cass said in an interview. “It’s not clear what is going on besides a bunch of money being moved around in circles, and the people moving the money doing well.”

Cass said he hasn’t run his project past the senators American Compass is friendly with, a group who have all touted the think tank. Those lawmakers include Arkansas’ Cotton, Florida’s Rubio, Missouri’s Hawley and Utah’s Romney, who notably made millions of dollars as a co-founder of private equity firm Bain Capital before entering politics.

While American Compass just opened its doors this month, its existence and policy objectives could herald something Wall Street has long feared: a common ground between anti-finance Democrats and Republicans willing to challenge the party’s established economic views. That kind of broad voter coalition helped Trump win the White House in 2016.

Private equity firms in particular have been worrying about their reputations on Capitol Hill during the coronavirus pandemic. Just this month, iconic retailers J. Crew and Neiman Marcus, both private equity owned, collapsed under staggering debt loads and were forced to file for bankruptcy.

The industry was also dealt a blow when Congress and federal agencies largely left it out of massive rescue packages. That included restricting buyout firms’ portfolio companies from accessing the Small Business Administration’s $670 billion Paycheck Protection Program and the Federal Reserve’s Main Street Lending Program.

Private equity’s main lobbying group, the American Investment Council, said it is no longer pushing to obtain federal stimulus money and noted that the industry not only supports millions of workers at portfolio companies, but its investment funds benefit pensioners and endowments.

“Our industry directly employs over 8 million people, supports thousands of businesses, and strengthens local pension retirees,” a spokesperson for the council said in a statement. “We are committed to working together to restart the economy, now is not the time to advance a narrow political agenda that hurts workers and retirees.”